Rwanda is looking to develop its own national Central Bank Digital Currency (CBDC) in the next two years, as part of the country’s efforts to streamline its financial system and position itself as an important player in the future of the global economy.
The national digital currency, according to the National Bank of Rwanda (BNR), would offer Rwandans a safe, free, and easy alternative to physical cash. It would also expand financial inclusion by enabling more unbanked population to participate in the formal economy.
And, as digital currencies enter wider global use, it would enable the government and private companies to participate in international trade more seamlessly.
But to many Rwandans, as is around the world, the concept of a CBDC remains theoretical.
In an exclusive interview, The New Times’ Edwin Ashimwe caught up with Soraya Hakuziyaremenye, the Deputy Governor at Rwanda’s Central Bank, who unpacked the necessary steps to adopt a national currency, and the potential benefits for the public.
Already, she said that Rwanda’s main trading partners like China are testing the digital Yuan, and the European Union (EU) plans to adopt a digital currency in 2025.
Below are excerpts;
The National Bank of Rwanda recently published a feasibility study on the proposed central bank digital currency (CBDC). How relevant was the study? And what did you learn from the findings?
First, I will start by going back to what a CBDC is and why we think the Rwandan digital franc is important for the local market.
The CBDC would be a digital form of cash. In the same way, Rwandans use banknotes, coins to buy things, or even electronic payments to send money, the central bank digital currency would do the same.
And it was important because of developments in other countries as well.
We know now that close to 11 countries have issued CBDCs. The first one was the Bahamas, and we have a number of countries in Africa, including Nigeria, Ghana and South Africa that are either in the piloting phase or issued their CBDC.
With Rwanda positioning as an ICT hub, with the ambition to become a cashless economy, and an international financial hub, we needed to understand whether there would be benefits for Rwanda as well to embark on that technological journey.
The first step was conducting research (feasibility study) and we didn’t do it alone. We worked with the Ministry of Finance, and the Ministry of ICT and Innovation to form a task force that would look at those developments in other countries and start looking at a CBDC for Rwanda.
That started in 2022, and what we learned is that it was important as a central bank to understand not only the technology behind a CBDC, but also the potential risks that would come if we were to issue a digital currency.
Equally important was the need to consult banks, fintech, payment services providers, as well as other government institutions to collect their feedback on the CBDC.
What do the early findings show?
The findings show that there are multiple opportunities for a national digital currency in Rwanda.
We identified four that we wanted to test. The first one is that a CBDC would be more resilient to the current payment systems and would actually sort of be a better payment tool in case of disasters.
The CBDC would also boost innovation and competition among payment system providers, as well as an accelerator to the cashless agenda that our country has embarked on. Equally beneficial is a CBDC that would improve cross-border payments.
What are the next steps and when does the Central Bank plan on introducing the CBDC? And if you could also speak to the expected outcomes.
Ours is a cautious approach and it would even require a cabinet decision because this is Rwanda’s currency.
We have seen that one of the risks of CBDC is lack of adoption. If a central bank issues such a digital currency but the population doesn’t see the benefits, then there is no work done. And we don’t want to issue a national digital currency for the sake, but rather a CBDC that has benefits for the Rwandan population.
This is why we published the research paper and opened a public consultation process, where we expect to receive feedback from the general population including concerns.
And, from the feedback we have received it is clear that some of the concerns are around data privacy, around resilience, and also around the fact that we need assurance that a CBDC would not destabilize the financial system.
When can we expect it?
We are mindful of our region. For instance, when we look at countries that have undertaken research or piloting, currently we have close to 86 countries that have formally started piloting or are at the same level with us in research.
And secondly, deciding to launch a CBDC is not something you take lightly.
You must work closely with your trading partners, for instance, if you are to validate that cross-border payments will be faster, and cheaper, that our main trading partners also can receive CBDCs that have developed their own.
We still have four weeks until the public consultation process is closed, and then we embark on a proof of concept.
That will allow us to test the technology, the design, and the speed on a small scale. But there is also an aspect of cases where we want to test the technology in other countries, particularly in cross-border payments, this exercise will roughly take six months.
That will be followed by taking a sample of individuals and companies who will be mapped out to test the digital currency, and see whether the technology works seamlessly, if it is resilient, and see that all the risks have been mitigated.
Given that pace, we look to have everything on the table within the next two years.
One of the challenges most central banks face in rolling out a digital currency is the design. What kind of design are the early findings pointing towards?
There are different options. Rwanda’s preferred option is to have a retail CBDC. That means a CBDC that is distributed through banks the same way you can make deposits and have accounts with your bank.
Another option is to have an indirect CBDC. There are in, literature, cases where people would have direct accounts with their central banks, but we don’t think this would be the right approach because we want to still have banks playing their role of intermediation.
Lastly is to look at should whether we should have a CBDC that is also accessible offline, especially in areas that don’t have internet access or even smartphones. That would also play a crucial role in the events where we have power outages in the country.
So, it is going to be a retail form of CBDC?
This is our preference.
You also recently opened up a public consultation, what is the feedback so far?
We have received various positive feedback, but also concerns. But the most important thing is that there is optimism about the CBDC for Rwanda, which is encouraging.
The majority indicate that that this would not only fast-track financial inclusion but also the population having access to digital financial services quicker.
The concerns revolve around privacy and whether the technology will be secure.
Other concerns raised include how the monetary policy is going to work and be transmitted if it’s now in digital form. Others are adopted from financial institutions such as Banks.
These are very valid questions that play a crucial role in informing the next steps before the CBDC is launched.
To say that there are no risks would not be true because even the research shows that there are potential risks, especially around the stability of the system, cyber security within the years of the technology, and then of course adoption by the public.
But why not concentrate on improving the existing electronic payment methods? Why is it important for a country like Rwanda to launch a national digital currency?
This is a debate that we also internally had. But one of the main drivers is seeing our major trading partners testing or using the tech.
One example is China, they are now in the pilot phase. But also, international communities like the European Union (EU) are set to launch its CBDC in 2025.
Imagine instances where trading partners adopt a national digital currency and Rwanda fails to trade because we don’t have the technology.
This will negatively impact the private sector for both countries.
But there is also an imperative for the Central Bank to make sure that we are ready for innovations that are also experimented in other countries where we have trading relations and partnership, so that we are not at the tail end of that of such developments.
The Central Bank has continuously pursued efforts to promote financial technology services through initiatives such as the NBR fintech sandbox. How has this evolved?
Maybe going back to why BNR introduced a regulatory sandbox, we could see several fintechs coming to the market, thanks in large part to the efforts by the Kigali International Financial Centre (KIFC).
We continue to attract major fintech firms including unicorns in Africa such as Flutterwave, and Chipper Cash among others.
The sandbox is a platform that allows such innovations to be able to test their solutions without being licensed, but it’s in a controlled environment where they are incubated for 12 months.
During that period, we can assess whether that project doesn’t pose a risk to the country’s financial stability, but also to work with innovators and entrepreneurs to make them understand all these licensing requirements.
Since it was launched in 2022, we currently have eight fintechs in the sandbox, three are in the payment space, and we have one in crowdfunding solution, others in insurance brokerage, and digital lending.
The sandbox has also been a bridge between the innovators and existing financial institutions, one example is SPENN and I&M bank in the digital payment space.
We are very happy with the progress, and I think it has created trust between startup entrepreneurs and the Central Bank.
For us to also acknowledge that we are not tech experts and of course innovators are always a step ahead.
Similar to this is the proposed regional single currency, is this a development that is still relevant for the EAC market? Who is to blame for the dawdle?
I think we can understand that people are impatient because the East Africa Community (EAC) single currency has been delayed and the 2024 deadline extended.
Last year the Monetary Affairs Committee which is a committee of Central Banks in the region decided to extend the deadline because the prerequisites were not ready.
We still need to harmonise a regulatory framework, we still need conventional criteria because the levels of development of EAC member states is still different.
We also need to create the EAC monetary institute which will work towards having a single currency, it was supposed to start in 2023, but it is still subject to approval at the Heads of State level.
There are several steps that are still needed before we get a single currency.
But I don’t think we should despair.
When you look at other international communities, for instance, the European Union, it took more than 40 years to have a Euro.
I think the new deadline which is 2031 is ideal.