The National Bank of Rwanda (BNR) says it has completed an initial feasibility study that is expected to serve as a basis for deploying its Central Bank Digital Currency (CBDC), a move that has seen the regulator also open up a public consultation process.

The development aims at, among others, creating an additional option to use money and it is not very different from the currently-issued banknotes, only that the digital currency is expected to be transacted digitally and facilitate ease of use.

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With an increasing number of Africans turning to cryptocurrencies in place of local currencies to preserve their purchasing power and make cross-border payments, many central banks including Rwanda’s have laid out plans to issue their own digital currencies.

The plans are at various stages of crypto regulation and issuance of CBDCs. It is debatable whether CBDCs will be able to replicate the utility of cryptocurrencies on the African market.

Ordinarily, crypto investors resort to cryptocurrencies owing to hard currency scarcity, galloping inflation, and high costs of making cross-border payments.

The context

Monetary authorities around the world are seeking more guidance on how best to pursue digital forms of central bank money, according to the International Monetary Fund (IMF) 2023 report.

In Rwanda, the study initiated in 2022, examined the potential benefits, risks, and practicalities of implementing a retail CBDC on the local market.

The analysis covered economic, functional, legal, and financial aspects, identifying key challenges in Rwanda’s financial Sector and payment systems.

"Based on the assessment of the current payments landscape in Rwanda, the study has identified fifteen CBDC opportunities,” the report reads in part.

Among them, however, there are four "Sweet Spots,” which are considered to be CBDC opportunities with high potential benefits and limited alternative choices to obtain similar advantages.

"They include; Increase resilience against possible network outages, power failures and natural disasters, improve innovation and competition, as well as contribute to achieving the cashless economy.”

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The proposed design

According to the study, the design of CBDC should take the occurrences of power outages into consideration, and plan for failover systems that can ensure continuity of service.

The extent to which power outages affect CBDC systems would depend on the specific design and implementation of the system, BNR says in the latest report.

One of the possible features of a CBDC solution that the report points out is the capability to conduct secure consecutive offline payments in which both the payer and payee are offline, with no mobile network, no internet connection and – to a limited extent – even without power supply.

This is enabled by the possible design of CBDC as a bearer instrument (tokens), allowing for the immediate transfer of value without the need to process the transaction through clearing and settlement systems.

James Ndekezi, a crypto enthusiast based in Kigali echoed similar sentiments, citing that, to achieve its financial inclusion objective, a CBDC must operate as seamlessly as possible in areas with limited or no internet infrastructure as it would in more ideal digital circumstances.

"A CBDC would preserve the co-existence of sovereign and private money in a digital world. This is not an abstract benefit — it is the basis for financial and monetary stability, ensuring competition and efficiency in payment markets,” he told The New Times in an interview.

But a CBDC, Ndekezi argues, could generate even more benefits for users by, for instance, improving the confidentiality of digital payments.

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The digital currency has made people constantly worry about cybersecurity and facing many threats due to less secure methods to store this form of money. Cyberattacks are probably increasing and can also threaten digital currency users with virtual theft.

However, according to the study, "a CBDC is a legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only that its form is different.”

But a CBDC can’t be exactly compared to cryptocurrencies. Unlike cryptocurrencies, a CBDC isn’t a commodity or claims on commodities or digital assets. Cryptocurrencies have no issuer.

For Norbert Haguma, the CBDC is the digital avatar of paper currency issued by central banks like BNR and should be exchangeable with cash.

The CBDC, he explained, will be a legal tender, which means you can use it to buy what you want.

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The bigger picture

With the recent popularity of a cashless or digital financial framework, governments and central banks are exploring (some of them have also implemented) the possibilities of digital currency.

With blockchain technology, the CBDCs are expected to increase efficiency and transparency.

In countries where the CBDC has been launched, the payment system is available to wholesale and retail customers 24/7.

Rwandan buyers could soon pay without a middleman and at a lower transaction cost. Individuals are also not required to open a bank account to transact with CBDCs.