Central Bank Digital currencies, which are a digital form of central bank-issued money, are being studied globally for their potential benefits ranging from preserving monetary sovereignty versus private currencies to potential financial inclusion gains.

In line with the country’s ambition towards a digital economy and its digital transformation journey, the National Bank of Rwanda (BNR) has released a feasibility study on introducing a Central Bank Digital Currency (CBDC) in Rwanda.

Initiated in September 2022, the feasibility study examined the potential benefits, risks, and practicalities of implementing a retail CBDC in Rwanda. The analysis covered economic, functional, legal, and financial aspects, identifying key challenges in Rwanda’s financial Sector and payment systems. This study also assesses possible opportunities for a CBDC and other alternatives, laying a solid foundation for Rwanda's future digital financial landscape.

While opportunities and challenges are numerous, the study enabled an offsetting of these in order to identify what is feasible, suitable and better positioned if a CBDC is introduced in comparison to other alternative solutions. As a result, pin pointed four sweet spots being primary motivators backed by stronger evidence and higher achievability. The four Sweet Spots for CBDC, within the Rwandan context, are the following:

1. Enhancing resilience by offering capability to conduct secure consecutive offline payments,
2. Stimulating innovation and competition within the financial sector,
3. Supporting the national cashless economy initiative,
4. Improving the efficiency and transparency of cross-border remittances.

There are, however, potential challenges involved with introducing a CBDC in Rwanda. The research has identified risks arising from the issuing and implementation of CBDC in Rwanda that warrant careful consideration by the BNR.

Despite Rwanda’s financial ecosystem constantly modernizing and actively pursuing innovation, the main challenge of the CBDC introduction is its adoption by the public, financial service providers and merchants which warrants the need for deep user research on how users would treat an offering of CBDC and will therefore be carefully investigated prior to decision-making.

To address these challenges, shifting existing consumer habits to an innovative instrument such as CBDC would require additional investments to its promotion and education. CBDC should be clearly articulated and explained to people in a simple manner (even now, many adults in Rwanda have felt or experienced a lack of transparency from financial service providers, including lack of clear information on financial products and services).

The BNR plans a cautious and step-by-step approach to the potential implementation of a CBDC. This will include stages of Proof of Concept (PoC) and pilot programmes, each with clear timelines. The PoC will enable BNR to test CBDC in a controlled, small-scale environment to become familiar with the technology and potential use cases.

This will generate various benefits for the BNR in terms of building the knowledge base, skills, and experiences in this new but rapidly evolving domain. This would strategically position the BNR in a favorable condition in terms of readiness, to determine how to go forward with CBDC in the future.

The identified Sweet Spots constitute a solid starting point for initiating formal CBDC experimentations in Rwanda.

This process could also lead to identifying more opportunities and possibilities feeding back into the decision-making process as the BNR moves forward. This will also align the BNR with other central banks actively exploring CBDC in Africa and other regions of the world, so that it could engage with them at joint CBDC projects, for instance in experimenting cross border CBDC transactions.

A public consultation process whose purpose is to gather input on the feasibility study and will allow BNR to begin conducting user education and research to validate whether a CBDC in Rwanda, according to the proposed design, addresses user needs and would be actively used as a complement or substitute to existing payment methods, is underway.

Marvin Karenzi is an Analyst in the Payments Department at the National Bank of Rwanda.