Microsoft founder Billy Gates was certainly ahead of his time when he coined the phrase “Banking is necessary, banks are not” back in 1994. While the statement, followed by the notion that people need banking and not banks, would have appeared misplaced in the early 90s, the same could not be any truer today. The banking industry has been forced to adapt rapidly to keep up with the emergence of new technology and alternative means of offering financial services in order to maintain relevance in a post-traditional era of faceless banking.

The upheaval of the banking industry by notable technological advancements have paved the way for transformation through novel innovations that reshape the concept of what it means to be a consumer of banking services in a contemporary age. Leading the charge in this transformation is the Central Bank Digital Currency (CBDC) which has signaled a vital moment in the worldwide evolution in the banking and finance sector. Kenya has been a forerunner in the East African region in tackling i  financial exclusion by embracing a digital-first economy through innovations such as M-pesa.


What is a CBDC?

A CBDC is a form of digital currency issued and regulated by a country’s central bank and serves as a digital representation of a country’s fiat currency. Fiat currency is simply a form of money which derives its value from and is preserved by the Government depending on its stability. A CBDC from the name, proposes a substitute to physical cash. It is a monetary value stored electronically which represents a liability of the central bank and can be used to make payments.

How do CBDCs work?

CBDC works in the same way as coins and banknotes do, save for being a digital representation of the same in the form of digital tokens, It is similar to a digital payment system allowing users to send and receive money instantly anywhere. A CBDC provides a direct, autonomous way for both consumers and businesses to participate in ordinary everyday banking including saving, lending, and other like transactions.

There are various forms of digital currencies and it is important to distinguish between the CBDC and other digital currencies such as the popular cryptocurrencies.

Distinguishing between CBDCs and cryptocurrencies

Cryptocurrencies refer to virtual forms of currency that use coding mechanisms to ensure secure financial transactions, control the creation of new units/tokens and verify the transfer of digital assets. CBDCs are issued by central banks whereas cryptocurrencies are notorious for being volatile as they are decentralized. This means that they are not controlled by a national financial  institution and as a result they have escaped regulatory scrutiny.  Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE) are examples of mainstream cryptocurrencies.

Nonetheless, CBDCs and cryptocurrencies have various similarities such as the use of blockchain as a modern technology which is a distributed ledger maintained by a network of computers that enables secure and transparent recording of transactions. Further, both exist wholly in digital form and share the goal of fostering efficient money transactions.

The case for introduction of a CBDC in Kenya

In February 2022, the Central Bank of Kenya (CBK) issued a Discussion Paper on Central Bank Digital Currency and sought views from the public on the potential applicability of a CBDC in Kenya. In May 2023, CBK published the comments received from the public in relation to the feasibility of a CBDC in Kenya. From the responses received, the CBK has established that CBDC is a complex and multidisciplinary topic requiring active analysis and deliberate engagement of various stakeholders, which further has high implementation costs, cyber risks and can only be operationalized under a robust legal framework.

Additionally, the respondents noted that adoption of a CBDC would result in the following advantages:

  1. Increase of financial inclusion

As of 2021, 76% of the adult population had ownership over a bank account, the World Bank reports.[1] Adoption of a CBDC would provide a wide array of financial services to individuals who do not have traditional bank accounts through creation of digital wallets that can be easily accessed using basic smartphones.

  • Lower transaction costs

The transaction costs associated with transfer of funds (be it through SWIFT or RTGS) are relatively high and the proposition tabled by a CBDC would be to lower the transaction costs involved by reducing the payments made to various intermediaries/players.

  • Safer and faster cross-border payments

There is a consensus that a CBDC will improve cross-border transactions by shortening the duration it takes to undertake such transactions. Currently, a SWIFT transfer can take anywhere between 2 to 5 days. However, the introduction of the CBDC shall significantly reduce the time to effect such transactions by providing instantaneous settlements. For a CBDC to improve cross-border payments, central banks across jurisdictions must allow for foreign access and interoperability of CBDCs due to the various currencies across different countries.

  • Efficient and transparent transactions

A CBDC shows great promise to streamline payment systems while at the same time securing its transactions through  transparency in the form of an immutable ledger technology. Additionally, CBDCs may streamline transactions with minimal errors through utilization of smart contracts and digital IDs and 24/7 availability offering continual round the clock transactions. The efficiency is brought about by real-time settlement which circumvents authentication, verification and data-sharing, usually undertaken by different intermediaries.

  • Reduction of illicit and illegal activities

Since CBK shall be the sole issuer of the CBDC, instances of fraud and other illegal activities will be easily identifiable. For example, experts believe that a CBDC has the potential to dent circulation of counterfeit notes. Further, due to the use of blockchain technology, payment of monies relating to illegal activities will be reduced as the regulatory authority monitors how and where money is spent hence reducing instances of tax evasion, financing of terrorist activities, money laundering, purchase of restricted substances among other vices. The anonymity afforded by cryptocurrency is a far cry under the fiat currency of a CBDC.

  • Environmental suitability

Introduction of retail CBDCs may contribute significantly to environmental suitability by reducing the need for paper money which largely contributes to logging. By reducing logging, Kenya may significantly reduce the carbon footprint associated with printing paper currency. With the current trends globally in taking responsibility for climate change, the CBDCs would provide a sustainable option in the financial sector.

Potential challenges faced by introduction of a CBDC in Kenya

While the prospects of a CBDC are evident, the country will undoubtedly have to grapple with some of the following challenges.

The first is the oxymoron of financial exclusion. This digital currency requires access to digital literacy and technology in the form of smartphones and/or computers, lack of which will further exclude many from this financial system.

Further, the CBK will also contend with having a competing role in the financial services sector. The regulator supervises clearing, payment and settlement systems, while on the other hand, pitting it in direct competition with other banks by being the institution that will issue a CBDC. This is a conflicting position as the CBK, which should be a regulator, shall also be a direct stakeholder in the CBDC. Further, when the CBK issues the CBDC, individuals are more likely to bank directly with the CBK as opposed to the other banks leading to bank disintermediation which may result in system-wide bank runs and adverse ramifications on the financial services sector.

Current payment systems will have to contend with disruption of existing payment systems. For example, the mobile money transfer service by Mpesa which as at March 2023 had an estimated 38.4 million users However, the introduction of the CBDC may provide a cheaper alternative payment system. This is in turn would disrupt the positive strides that Mpesa has made in increasing financial inclusion in the country as individuals may opt to use CBDC as opposed to Mpesa hence resulting in losses to Mpesa, reduced revenues and/or taxes from Mpesa and the potential collapse of Mpesa.

According to the discussion paper published by the CBK, stakeholders have expressed legitimate concerns over data privacy and cybersecurity. The use of blockchain technology which creates room for some level of anonymity or pseudonymity means that its systems may be compromised through hacks and cyber-attacks. However, establishment of a centralized CBDC which does not incorporate safeguards to individual rights of privacy could create a potential exposure as the CBK may be able to monitor all transactions that occur on the blockchain hence infringing on an individual’s right to privacy.

Additionally, the lack of a comprehensive and systematic legal and regulatory framework would further hamper the adoption of a CBDC in Kenya.

Lastly, interoperability is a significant challenge to operationalization of CBDC in Kenya as different countries may develop their CBDCs using various technologies and regulatory standards. It also noteworthy that cooperation with other countries and bodies such as the World Bank and the International Monetary Fund shall be required due to cross-border transactions.

Countries making headlines in digital currency

This article would be inept if it failed to credit the Bahamas which marked a historic milestone in 2020 by becoming the first country in the world to launch its CBDC known as the “Sand Dollar” which is an equivalent of Bahamian dollar. Derek Sean Rolle the Governor of the Central Bank of The Bahamas, in an interview with The New Times published on 19th June, 2024 had this to say…

‘The Sand Dollar took twenty years of work to solve financial exclusion. It’s about financial inclusion – expanding access to individuals and communities with limited or no access to traditional banking services. Secondly, it’s about providing a safe and efficient means of payments for individuals and businesses, particularly MSMEs (micro, small and medium enterprises). We aim to improve payment system efficiency and stability by reducing the reliance on physical cash and payments intermediaries, and enhance payment system resiliency by providing a centralized alternative to traditional banking platforms. Finally, we want to reduce the risk of money laundering and terrorist financing through a more transparent digital financial system.

We are focused now on addressing the logistical issues of making the connection between mobile wallets and merchants a more seamless experience. A big part of that, we believe, will be providing the core infrastructure, some of the tools that matter for merchant services, and then also beginning to bring our commercial banks into the space so that they can provide their customers with direct access.’

Much closer home, Nigeria became the first African country to roll out a CBDC known as the “E-naira” in 2021 which is issued and regulated by the Central Bank of Nigeria, and is the digital equivalent of the fiat naira. Ghana has designed “e-cedi” and the digital currency is being tested and developed before it is issued by the Bank of Ghana. The South African Reserve Bank, through “Project Khokha 2x” is progressing with pilot implementation of a wholesale CBDC only available to financial institutions.


The exploration of a CBDC and its potential applicability in Kenya reveals a complex landscape marked by various advantages and challenges. Central Bank of Kenya (CBK) has sought public input, acknowledging CBDC’s multidisciplinary nature. Despite recognizing the potential of a CBDC, the CBK expresses caution, emphasizing the need to address existing payment system shortcomings through alternative solutions. The CBK’s stance aligns with global trends where major central banks have deferred CBDC adoption, emphasizing a continued monitoring approach.

Recommendations for the CBK include collaborating with central banks with CBDC implementation experience, promoting public awareness and ensuring a secure and efficient implementation of a CBDC tailored to Kenya’s needs.

With the inevitability of technological advancements and staying relevant amidst growth of the digital world, CBDCs remain a subject of interest for future assessment in Kenya. The delicate balance between harnessing the benefits of a CBDC and mitigating associated challenges underscores the importance of informed decision-making and strategic planning for the financial future of the nation.

[1] accessed on 23rd June 2024.

Mungai Kamau, Nalianya Ian Smith , Sheilla Kamau