Do we need hard currency in digital era?

The Central Bank of Kenya is about to spend Sh10 billion annually to print the new-look currency.

Which raises the question: Do we really need hard currency when most Kenyans now use mobile (digital) money?

I have asked that question for months but last week International Monetary Fund (IMF) managing director, Christine Lagarde, gave credence to our quest at the Distributed Ledgers and Artificial Intelligence Task Force to have Central Bank consider simply issuing digital currency in Kenya where majority of people are already using some form of digital currency.

While speaking at the Singapore Fintech Festival, Ms. Lagarde asked central banks to consider the possibility of issuing digital currency. In her view, “That currency could satisfy public policy goals, such as financial inclusion, and security and consumer protection; and to provide what the private sector cannot: privacy in payments.”

She lauded central bank-issued digital currency as capable of improving financial stability by reducing the risk of bank runs. Bank runs are critical events when customers withdraw their money in cash from their accounts for fear that that the cash may run out, especially after perceptions emerge that the bank may become insolvent.

In what could be seen as taking a swipe at excessive regulatory regimes in central banks, Lagarde said a central bank should focus “on its comparative advantage back-end settlement—and financial institutions and start-ups are free to focus on what they do best—client interface and innovation. This is public-private partnership at its best.”

These comments touch on raw nerves for macro economists especially around the regulatory framework. Yet technology positively impacts the productivity of a country. Greater productivity leads to higher output for the same resources, hence the growth of an economy.

Since the advent of Financial Technology (fintech), not much has been done with respect to the relationships between Information and Communication Technology, macroeconomics and economic growth. Economists see technology as an exogeneous (originating from the outside) variable to their work.

Technologists complain about macroeconomic policy that stands in their way. But with so much technological impact from mobile money on macrocosmic environment, we should by now be analyzing the impact of technology advances on future economic growth.

If we did for example with digital currency, the economy will grow exponentially. Here is how.

Digital currency, as has been evidenced by mobile money, creates greater inclusivity and perhaps that is why Ms. Lagarde pointedly said that “We know that banks are not exactly rushing to serve poor and rural populations.”

Indeed, the term inclusivity in financial services emerged with the many Fintech start-ups across the world employing ingenious methods to solve the problem of poverty and positively changing the lives of millions of people.

Digital currency gives the country the fastest way to demonetise the currency and disrupt that crop of citizens who have stashed cash in their homes. The immediate benefit will be increased liquidity in banks and a dramatic rise in tax collection. The country will have a real opportunity to effectively deal with corruption that has dogged the country for a long period of time.

The added benefit of people not carrying cash would likely reduce crime significantly.

Perhaps the greatest benefit is the fact that a cashless economy has better traceability mechanisms to deal a major blow to illegal transactions including.

If the implementation is done well, virtually every citizen and organisation will have a bank account. This in itself will be a major disruption given the fact that the informal enterprises will be formalised and instantly become visible in national statistics as well as with tax authorities.

Although a great number of Kenyans have had experience with some form of digital currency, there is a risk that digital currency will be vulnerable to cyber-attacks where hackers may steal money from unsuspecting citizens.

These, however, are risks that can be mitigated through use of technologies like blockchain. Adoption of a cashless economy is a chance in a lifetime to reshape the economy for a more prosperous future.

The writer is an associate professor at the University of Nairobi’s School of Business.

The views expressed in this article are of the author.

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