The looming launch of Central Bank Digital Currencies (CBDC) could undercut commercial banks, mobile money transfer services and card payment companies in Kenya, the central banker has revealed.

Central Bank of Kenya (CBK) says in a discussion paper on Central Bank Digital Currencies published last week that while technology will be useful in areas such as cross-border payments, it could also put the regulator on a coalition course with banks and mobile money transfer firms.

For instance, the regulator points out in the paper that CDBD’s could reduce bank deposits as retail users would choose to keep their money in the central bank infrastructure rather than with commercial banks. This, the regulator says, move could also affect the cost and availability of credit as banks will have less money to lend out.

Deposit balances

“If significant deposit balances are moved from bank deposits to CBDC, banks’ ability for credit creation could get constrained. Since central banks cannot provide credit to the private sector, the impact on the role of bank credit needs to be well understood,” adds CBK.

“Further, as banks lose a significant volume of low-cost transaction deposits, their interest margin might come under stress leading to an increase in the cost of credit. However, these could potentially be mitigated by an instance where the CBDC is not interest-bearing,” says the regulator. The International Monetary Union (IMF) points out that the Bahamas, China, and the Eastern Caribbean Currency Union (ECCU) do not pay interest on CBDC holdings currently. In all three cases, the reason is to limit CBDC competition with bank deposits.

“If there is no interest, CBDC can still be attractive as a means of payment, even while its attractiveness as a store of value diminishes,” IMF said in a paper published last week. CBDC-enabled cross border payments will also threaten the fate of forex bureaus and cut commercial bank forex revenues, leaving huge losses in its wake while cutting costs for everyone else as exchange rate fees plummet.

The regulator also points out that retail payments by CBDC would be in direct conflict with existing payment infrastructures such as mobile money, card payments and bank transfers.

Financial systems

Kristalina Georgieva, IMF chief said the history of money is entering a new chapter. Countries are seeking to preserve key aspects of their traditional monetary and financial systems while experimenting with new digital forms of money.

“Our research shows that for those experiments to succeed policymakers need to deal with many open questions, technical obstacles, and policy tradeoffs,” she said in a statement.

CBDCs mimic digital currencies with the exception that they have a central authority. They have lower transaction costs compared to regular money transfer services.