How the government’s “MPESA” works

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The Central Bank of Kenya (CBK) recently announced the exploration of a virtual version of the Kenyan shilling. It is a digital currency similar to cryptocurrencies, but issued by the central bank and pegged to the fiat of the country. If there was a spectrum for currency formats, it would be just above MPESA but just below Bitcoin.

Sound confusing? Here is a brief explanation.

CBK digital currency (CBDC): what is it and how does it work?

According to a CBK working paper, their digital currency will still be a sovereign fiat currency, but only in electronic form. The digital Kenyan shilling token will be exchangeable on an individual basis with the printed shilling.

These forms of digital currency enable near-instantaneous transactions over the Internet and reduce the costs associated with printing and distributing notes and coins.

Using this virtual currency, individuals, private sector businesses and non-bank financial institutions can settle directly in central bank money, rather than depending on the banking system. The payment chains will be greatly simplified here.

The central bank will essentially compete directly with the banks and payment service providers it regulates. All deposits, including those accessible at low cost, will be easily processed from the phone to the central bank. So in simple terms, “MPESA” but via the CBK. In fact, the intense and robust and very active adoption of mobile money in Kenya seems to be a good sign for the CBDC.

“Therefore, consideration of introducing a CBDC into the payment system in Kenya would not primarily focus on improving access to financial services given the existing and growing penetration of mobile money. “, CBK.

As cryptocurrencies are decentralized, CBK will reserve and deposit funds to back up digital currencies. Therefore, there will be paper money that will have a corresponding electronic version. As a centralized form of money, they may not anonymize transactions like some cryptocurrencies like Bitcoin do.

More than 100 countries around the world and their central banks are already exploring their versions of digital currency, with some having already implemented it. Last year, Nigeria became the first African economy to launch its CBDC known as eNaira.

Kenya joins a list of others in Africa like Zambia and Ghana who are developing and monitoring their releases ahead of launch.

Audience participation

The Central Bank of Kenya has invited the public to comment on the applicability of this digital currency.

“In its quest to answer the above questions, CBK reiterates that people must be at the center of the evaluation of any innovation. The usefulness of technology lies not in its uniqueness but in its ability to solve a societal problem. urgent.

Written submissions or representations must be sent to CBK no later than Friday, May 20, 2022, at 5:00 p.m.

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