The central bank in Kenya has been working on its central bank digital currency (CBDC) called the digital shelling for quite some time.
The International Monetary Fund (IMF) recently warned the central bank in Kenya to ensure that the existing digital money in the private sector should not be harmed by the CBDC.
The global lending institution said that the CBDC should not stifle developments in digitalization by stealing customers of banking institutions and digital finance providers.
Complement the private sector
According to the global lender, the CBDC that has been proposed by the Kenyan central bank should be aimed at complementing the existing digital money in the private sector, and not threaten it.
The IMF said that if they do not put any safeguards in place, then it is possible that transaction costs can be potentially reduced by the CBDC that the Central Bank of Kenya (CBK) will introduce.
The costs could be reduced to such an extent that they will push mobile money operators out of business, such as M-Pesa.
A report indicated that the IMF wants the digital shilling document from the CBK to highlight just how the central bank is planning on keeping its payment system competitive and open.
The lending institution said that the paper should outline that the purpose of issuing the central bank digital currency is to complement the existing payment solutions in the digital sector, rather than substituting them.
Moreover, it should also reiterate the commitment of the Kenyan central bank of creating a competitive and open payment system.
The IMF further added that it is important to note that there is no set balance between the CBDC and payment instruments in the private sector and it is not fixed.
Not only does the proposed central bank digital currency of the CBK pose a threat to the fintech companies in the country, but it is also a threat to banks.
This is because banking institutions have made a great deal of progress in coming up with digital solutions or their clients.
The IMF said that the digital shilling paper of the CBK should clarify that their CBDC will not do any harm and will not eradicate the welcome digital developments that have been made by financial institutions.
In addition, the IMF said that the CBK should ensure that banks do not have to deal with higher costs of financing because of the digital shilling.
Furthermore, the CBDC should not deny banks with access to essential information that they accumulate through their customer relationships.
Kenya is not the only currency working on developing a central bank digital currency (CBDC). There has been a rise in monetary authorities that have taken an interest in this project.
Some are doing so in order to provide a replacement for private cryptocurrencies, which are considered a threat to financial stability.
These include the Russian central bank as well as the Reserve Bank of India (RBI). Others are just looking to introduce a digital currency of their own.