Digital Currencies and the

Challenges for Central Banks: Case

of Tanzania

Dr. William Mng’ong’ose

 Introduction

Digital currency refers to a medium of exchange that is generated,

stored and transferred electronically.
Types
1. Crypto Assets/Currencies
2. Central Bank Digital Currencies(CBDC)
Introduction of Cryptocurrency
What is Cryptocurrency?
 Originated from “Cryptography” an art of hiding information. It uses cryptography
to secure the transaction

 Digital asset working as a medium of exchange e.g., Bitcoin, etherium, etc .

 Designed to avoid CBs monopoly and facilitating peer to peer transfers

 Are peer to peer currency that allows processing of transactions without a central
intermediary and a value guarantor.
 Generally are termed as non stable coins although there are some called stable
coins
 A stablecoin is a new class of cryptocurrencies that attempts to offer price stability
and are backed by a reserve asset such as a national currency or a gold.
Perceived Advantages of Cryptocurrencies
• Loosening of Government Currency Monopolies
• Self-Interested, Self-Policing Communities
• Cryptocurrencies are virtually immune from regulators
• Fewer Barriers to International Transactions.
• Support transfers without involvement of banks (eg. Paxful and Remitano)
• Low transaction cost (for Local and cross border) due to peer-to-peer
operational approach, making settlements faster
 Since 2008, the Tanzanian shilling has lost 50%
of its value against the dollar
High short term returns in cryptocurrencies
investment.
Why do people in Growing appetite among Young Tanzanians in
crypto investments due to misinformation, and
Tanzania have anticipation to win lotteries associated
been interested cryptocurrencies
in Cryptos? Preference of cryptos for Cross-border
payments and remittances over foreign
currencies.
Avoid limits and visibility due to lack of
regulation
Emergence of affordable altcoins
Technological Challenges
The system removes the control of banks and financial
institutions on money, financial products, and financial
services.
It is not compatible to the existing systems and there are no
monitoring tools.
Cryptocurrency transactions cannot be reversed once
committed, increasing risk to investors.
Ease of losing value associated with cryptocurrency once
someone loses his/her private keys as no mechanism to
regenerate the key or to regain value.
General Challenges
Their existence is outside the control of governments and regulatory
authorities, leaving the role of risk management to users
High frequency of volatility and Its value is set by the market
Currencies lack guarantor of value and vulnerable to cyber-attacks.
Tax Evasion: Limited capacity to tax transactions, income and wealth
generated from cryptocurrencies.
Loss of investments due to data loss.
Illegal uses of cryptocurrencies in terrorism financing and money
laundering
Lack of regulatory framework to govern the cryptocurrency operations
Uncertainty in redemption of value especially in Decentralized finance
 Measure taken to address challenges

1 2 3 4

Continue with Capacity Prohibit Conduct

the current Building. facilitation of awareness
stand that Find viable cryptocurrency session to
involvement monitoring operations public and
of individual solutions. through other
in Cryptos is regulated FSPs. stakeholders
at own risk. Collaborations
Bitcoins volume in Tanzania
 Tanzania position in Global Index
Tanzania has dropped Country
Overall
index
ranking
Centralized
service value
received
P2P
exchange
DeFi value
received
ranking
trade
from 19th position to 47th ranking volume
ranking
China 10 2 144 6
Kenya dropped from 5th Nigeria 11 18 17 20

to 19th Morocco
Kenya
14
19
19
43
21
5
33
9
Measures taken Egypt
South Africa
24
30
15
29
110
81
57
41
 Decrease in trust. Somalia
Algeria
44
45
75
34
7
100
131
50
Volatility Tanzania 47 81 9 61
Ghana 49 66 14 68
Illicit transactions Tunisia 50 63 22 64
Mozambique 60 36 125 63
Other investment Democratic
Republic of the
Congo
opportunities. Rwanda
79
81
80
103
98
18
46
107
Uganda 100 89 91 105
Malawi 137 127 142 140
 2022 Global Crypto Adoption Index
 Adoption has decreased
compared to last year
 Ten are lower middle
income: Vietnam,
Philippines, Ukraine,
India, Pakistan, Nigeria,
Morocco, Nepal, Kenya,
and Indonesia
 Eight are upper middle
income: Brazil, Thailand,
Russia, China, Turkey,
Argentina, Colombia, and
Ecuador
 Two are high income:
United States and United
Kingdom
 Introduction to CBDCs

Central Bank Digital Currency (CBDC)

is a digital form of a fiat currency that is issued and regulated by central banks.

CBDC issued exclusively by a central bank and can perform the same function
as traditional fiat currency; each unit can act as a mode of payment, a store of
value, and unit of account.
 Why CBDC?

• CBDC was driven by emergence of private Stable coins

and cryptocurrencies most notably Libra/Diem (2019)
and bitcoin (2008).
• Uncertainty on the future of private currencies.
• Potential erosion in the central bank role in oversight
and management of money.
• Increase efficiency in cross-border payments, Increase
financial inclusion and reduce uses of cash.
 What problem or market failure CBDC will solve?
CBDC case for
Tanzania
1. Improve competition and
adoption of digital
payments in rural areas.
2. Eliminates the need of
trust accounts.
3. Paves the way to real
time cross boarder
payments
4. Assist to counter other
forms of digital money
5. Integrity (KYC and AML)
Cross border

15
Direct CBDC

16
Intermediated CDBC

17
Hybrid CBDC

18
CB roles

19
 •Technological Challenges
Challenges •From domestic use of
for CBs from own CBDC
CBDC •From domestic use of
foreign CBDCs.

20
 • Gap in CBDC knowledge and
resources
• A need to deploy new
Technological infrastructure to support CBDC.
Challenges • Payment System Infrastructure
is needed to support
interoperability among FSPs
after adoption of CBDC

21
Challenges from domestic use of own CBDC

•CBDC challenges the definition of money and the

role of central banks in formulating and
implementations of monetary policy
•Lack of regulatory framework to govern the CBDC
operations (Recognition, compliance with
AML/CFT)
•Rapid adoption of CBDC by other Central Banks
and trading partners creates pressure.

22
CHALLENGES RECOMMENDED MEASURES
• Protect privacy without impairing integrity by limit size of
Balance Privacy anonymous transaction.
and Integrity • Appropriate customer due diligence.
• Transaction recorded but identity revealed only when there is
suspected illicit transaction

• CB need to facilitate FI without affecting Integrity through the use

Balance Integrity of digital IDs
• Providing access to CBDC without full documentation while
and Inclusion
Setting limits in conducting transactions

• Set limit of holding CBDC incase of direct CBDC

Disintermediation • Design two tier CBDC which accommodates intermediation

• Choose appropriate technology, design taking to

Cyber risk and Resilience account resilience and security
 Challenges:
• Currency substitution
• Loss of monetary independence
Use of • Faster transmission of global financial
conditions
foreign • Shift of reserve configurations
CBDC Recommended measures:
• Limit foreign CBDC in circulation.
• Impose restrictions on the use of foreign CBDC.
• Strong Local currency and robust monetary policy.
24
Take Away
1. CBs including Tanzania are Increasing exploring to
understanding the problem to be solved and the expected
solution (Construct economy wide use cases).
2. Understanding and clarifying objectives, pros, cons, and risks
of issuance and guiding design options (Business Case)
3. Foundational capacity assessment (legal, regulatory in place,
risk management, technology, governance etc). Engage
stakeholders early and broadly
4. Address the foundational requirements for CBDC through
appropriate design (operating model, degree of privacy,
platform to be used, policy and technical principles), regulation
and policies could mitigate some challenges
5. Recognize and replicate cash model issuance and distribution.
6. Must be interoperable Domestic and Cross border
7. Cooperation among central banks is paramount

25
Apart from CBDC what else can be done to achieve
similar objectives

26
ASANTE SANA