eCedi or CBDC in Ghana, adoption and benefits

Worldwide, money and payments are changing fast with growing interest in the use and adoption of cryptocurrencies, mostly unregulated. As a result, central banks have adopted a more proactive stance toward the introduction of CBDCs and CBDCs has become top of the global policy agenda in recent times leading to the research and development work on the future of money by Central Banks towards adoption.

Nigeria became the first country in Africa to launch a CBDC in October, 2021. The Bank of Ghana (BoG) announced in November 2019 its plan to explore a Central bank digital currency (CBDC or eCedi) and has selected Gieseke+Devrient (G+D) as the CBDC partner, as at 2023 its being piloted in select regions in Ghana.

In this post, we will discuss CBDCs, benefits and adoption issues and Risks

Quick Overview
What is CBDC?
Benefits of CBDC
How will the eCedi be Issued?
Difference: CBDC Vs Mobile Money
Difference: CBDC Vs Cryptocurrency
Is the eCedi on the Blockchain Technology?
Will eCedi transactions attract a levy or tax?
Some concerns on introduction of eCedi
Factors that affect demand/ adoption of CBDCs
Will the eCedi be widely accepted in Ghana?

What is CBDC?

A central bank digital currency (CBDC) is digital money denominated in the national unit of account and a liability of the central bank (BIS (2021)). The Ghanaian eCedi or CBDC will improve the speed, efficiency of payments, cost effectiveness, anonymity, privacy while promoting innovation and ultimately broaden financial inclusion. The overreaching goal is to facilitate payments among consumers on a day-to-day basis as an alternative to cash, both domestically and across national borders.

The eCedi will be a retail token-based CBDC from the point of the CBDC taxonomy, thus considered to be a digital version of the Ghana Cedi notes and coins that are issued by BoG. Accordingly the eCedi is a legal tender and convertible to Ghana Cedi in the form of cash or deposit money in the 1:1 ratio.

Benefits of CBDC (eCedi)

#1. Payment Facilitation : Accepting and processing domestic payments using online and offline channels. with the offline channel, the is no need for internet access or telecommunication and the security of funds are assured.

Also, Efforts to accelerate integration of the economies of African economies under the African Continental Free Trade Area (AfCFTA) makes this a key consideration in the eCedi design. The eCedi will take into consideration CBDC standards making it possible for Ghana to participate in international projects on cross border CBDCs. also, CBDCs will facilitate of cross border payments and reduce the pricing monopoly enjoyed by SWIFT in the transfer and payments accross borders.

#2. Programmability of payments : The eCedi will also support automated programmable use cases to enable innovation and new business models while maintaining the trust of the users in the Ghanaian digital payment space

#3. Offline and Online Accessibility : With this feature, regardless of the availability of internet connectivity of smart phones, individuals, merchants ,businesses and government can be able to access their wallet and transact. offline wallets can be on smart cards, fob devices, wearable devices or special devices.

#4. Interoperability : To forestall the disruption of the existing payment rails in the ecosystem, eCedi will be integrated to the existing interbank payment systems and mobile money interoperability platforms operated by GhiPSS. This is to ensure that customer is not made worst inconvenienced to allow for adoption.

#5. Reliability, Resilience and Availability of Infrastructure : The eCedi is developed to meet the highest standards of cyber security against fraud and cyber attacks with no single point of failure. Clearly defined policies have been developed to address fraudulent payments if any. One of the eCedi’s technical solutions addressing cyberattack prevention is the separation of the issuance and distribution modules of the core infrastructure.

#6. Reduction in costs involved in printing and distribution : eCedi will also reduce the cost involved in printing/issuing and distribution of paper notes and currency in the financial services space and reduce the pricing monopoly of big private players.

#7. Make banks innovative to maintain customer interest : the CBDC will propel innovation in the payment system space, with the programmability of payments, and alternative channels to serve customers, digital financial service providers who will place customer delight a top most priority else, they end up loose out to deposits or cheap source of credit.

#8. Efficient monetary policy transmission and improve transparency : The eCedi will improve the efficient allocation of private sector credit to households and the financially excluded. Individuals in remote areas will be able to access funding (credit) easily and at affordable rates without the need for a formal bank account as well as remittances to cater for daily and unforeseen circumstances. The wallet of individuals can be used as a way to access their credit worthiness.

Also, it can serve as a way to efficiently mobilize cheap deposits which will be used for financial intermediation, especially individuals using the online wallets or hosted wallets.

How will the eCedi be issued?

According to the eCedi white paper, Bank of Ghana will be the only issuer of the eCedi, also, they will own and operate the core eCedi infrastructure. The eCedi will be a direct claim on the Bank of Ghana.

Commercial Banks will also offer value-added services and also be in charge of the primary distribution of the eCedi. Banks, non-bank financial institutions and Fintech institutions will provide services, such as wallet custody, mobile applications, and user-friendly presentation of information on customer transactions.

Merchants, thus businesses selling goods and services will accept payments in eCedi from hardware (offline) and hosted wallets(online) in the same way they accept debit and credit card card and mobile payments today. Once a payment is received, a merchant can store the eCedi in a wallet, or convert it into deposit money right away to store it in a bank account. The eCedi as legal tender should be accepted in all sorts of payment scenarios widely known today.

Given that the eCedi will be a digital equivalent of the the Ghanaian Cedi or fiat by design. The eCedi will have a zero interest rate, just as cash. Another cedi-like feature of the eCedi is its convertibility to Cedi in a 1:1 ratio. Like cash today, the eCedi transactions will be free of charges to the consumers. However, institutions providing value added services such as banks, SDIs and payment service providers who facilitate access to and use of eCedi may introduce charges to compensate for such value added services accordingly.

BoG will not interfere with the business models of banks, FinTech companies, and merchants regarding fees for eCedi related services, as stated in the eCedi design paper. This promote competition in the payment market and facilitate the provision of innovative value-added services on the back of the eCedi ecosystem. However, BoG will ensure that the consumers are given fair treatment in every aspect of eCedi transactions by ensuring that banks, SDIs, payment service providers and merchants comply with relevant consumer protection regulations and norms.

Difference: eCedi/CBDC Vs Mobile Money

eCedi and Mobile money are both digital currencies, whereas eCedi is issued by the central bank or regulator, mobile money is issued by private electronic money issuers or financial service providers. Also, the eCedi is a legal tender with government backing which makes it widely acceptable whereas mobile money is not a legal tender but its acceptance is based on the credit worthiness of the issuer.

Difference: eCedi/CBDC Vs Cryptocurrency

eCedi and mobile money are both digital currencies, whereas eCedi is issued by the central bank, cryptocurrencies is issued by private individuals or code, it uses cryptography to secure transactions and it is not subject to regulation and public oversight, which makes it convenient for individuals to use it to commit illegality. Cryptocurrencies allows you to transfer value from one individual to another without going through a financial intermediary.

Closely connected to a cryptocurrency is a token. A token is a non-native digital assets on the blockchain, tokens are built on top of other blockchain networks. Most digital tokens are built on top of the Ethereum blockchain and do not have a main blockchain like bitcoin or Ethereum.

Is the eCedi on the Blockchain Technology?

The eCedi is not developed using blockchain technology. At the 2022 mobile money stakeholders forum, the assistant director of fintech and Innovation at Bank of Ghana, Clarence Blay reiterated the fact that the eCedi will not be developed on the blockchain technology.
A CBDC need not be developed using blockchain technology even though it is feasible.

Will eCedi transactions attract a levy or tax?

Ghana passed the Electronic Transfer Levy Act (Act 1089) into law, which makes certain categories of electronic transfers attract a levy. Given that the eCedi is just like cash or bank transactions, eCedi to eCedi transfers may not attract charges. However, where it is transferred to or from other privately issued digital wallet or currencies, a levy may apply.

Some concerns on Introduction of CBDCs

Researchers are not unanimous on the potential impact of a CBDC on bank deposit funding but many note impacts on competition and innovation that will drive down price in the market.

Most literatures share the opinion that a CBDC would structurally decrease deposit funding available to commercial banks because they will behave just like normal deposits and would much preferable. Chiu et al (2019) and Kumhof and Noone (2018) argue that in an imperfectly competitive deposit market, the existence of CBDC as an alternative to cash usage will force banks to match the CBDC deposit rate offering (thus if CBDC will attract interest on deposit), in order to retain their deposits, this would eventually boost the saving earnings of depositors.

Competition from CBDCs may also prompt banks to increase deposit rates. In Keister and Sanches (2019), higher deposit rates lead to lower lending or disintermediation or inefficient allocation of resources to sectors most needed. Piazzesi and Schneider (2020) argue that the introduction of a CBDC by the central bank could cause a reduction in commercial bank deposits which would consequently translate into more expensive credit lines, hence a decline in welfare if the benefits of the CBDC are outweighed by higher cost of access to credit.

Will the non-interest earning model of the eCedi be enough to prevent the shift in the deposit mobilization base of Commercial banks, or the limits on eCedi wallet be adequate to prevent such shifts?

Factors that affect Demand/adoption of CBDCs

Just like CBDCs, the demand for eCedi would be dependent on the perceived importance to users.
Some considerable factors include:
• Perceived safety versus insured or uninsured alternatives
• Ease of access/financial inclusion
• Interoperability with and speed of alternative means of payment
• Technological innovation, eg programmability
• Remuneration/Incentives eg. interest
• Cost of use
• Privacy and anonymity and
• Ease of switching between CBDC and alternatives.

A remunerated CBDC would be an even more attractive substitute for cash, low interest-bearing deposits or other cash-substitutes. According to Li (2021), remuneration is one of the most important attributes that affects the potential demand for CBDC. The magnitude of the demand would still though depend on a range of factors, including safeguards, and convenience factors such as the ease of use via digital wallets. Businesses might also wish to transfer some of their uninsured balances to a CBDC. That said, demand inertia might limit or slow sizable shifts to any CBDC, unless it were very competitively remunerated and/or offering better functionality.

However additional risks to financial stability might arise if changes in the structure of the financial system due to the adoption of a CBDC were to be abrupt. Impacts would also depend on the extent of the offsetting increase in lending to the real economy by non-bank financial intermediaries. CBDC and certain new forms of digital money could also increase the latent risk of systemic bank runs. This risk is reduced in the existing system through effective banking regulation, deposit insurance, and resolution frameworks. Central banks are exploring safeguards that could be built into any CBDC to address financial stability risks;

Will eCedi or CBDC gain widely acceptance in Ghana?

The Technology Acceptance Model(TAM) was developed by Fred Davis (1989) is one of the most popular research models used widely to predict use and acceptance of information systems and technology by individual users.
In the TAM model, there are two factors, perceived usefulness and perceived ease of use that is key in determining the acceptance of a technology. Davis defines perceived usefulness as the prospective user’s subjective probability that using a specific application system will enhance his or her job or life performance.

Perceive ease of use (EOU) is also defined as the degree to which the prospective user expects the target system to be free of effort.

With the technology still in the pilot stage in Ghana, one can only predict and not say with certainty whether CBDC will be widely accepted.

Conclusion
The above benefits and concerns on CBDCs are worth considering by policy makers. The author believes the inclusion of transaction limits is good to maintain the stability of the financial system. However, considering the fact that eCedi may compete with commercial banks' products and strategy, will they actively promote or market the product? Unless demand for the eCedi is overwhelming and there is a way to profit from it, some player might stagger the adoption with poor education and promotion (as its being speculated to be the case with Nigerian eNaira amongst other issues).

REFERENCE:
Bank of Ghana, eCedi Design White paper, 2019
Davis, F., 1987. User Acceptance of Information Systems: The Technology Acceptance Model (TAM)