Digital ID, KYC infrastructure critical for digital currency rollout, says IMF
An international agency is urging central banks to help strengthen national digital ID systems and make KYC requirements easier to enforce. The International Monetary Fund (IMF) says in one of its latest reports that the rollout of digital currency is gradually gaining traction in Sub Saharan Africa, but countries must have to build the required digital infrastructure and legal framework to facilitate the process.
Nigeria introduced a digital currency — the e-Naira — in October last year, while the Central Banks of Ghana and South Africa are conducting pilots for a Central Bank Digital Currency (CBDC).
The IMF report as noting that while there are risks and advantages that come with a digital currency, countries which have rolled it out or are planning to do so “will need to improve access to digital infrastructure such as a phone or internet connectivity.”
In the case of Nigeria, which has already rolled out a digital currency as a legal tender, greater digital ID adoption and improved KYC approval rates have been identified as a way to improve the economy more broadly, such as in a report commissioned by VerifyMe and released earlier this year. The country plans to complete its digital ID registry by 2025.
While this happens, the Fund advises that the Central Bank of Nigeria as well as those of other countries trialing or considering a digital currency will need to also put in place the necessary systems to manage data privacy risks arising from cyber-criminal activities.
Although the CBDC could negatively impact banks’ ability to lend in countries with unstable financial systems, the IMF also sees likely positive results. “The first is promoting financial inclusion. CBDCs could bring financial services to people who previously didn’t have bank accounts, especially if designed for offline use. In remote areas without internet access, digital transactions can be made at little or no cost using simple feature phones,” a portion of the report states.
According to the report, the CBDC, among other things, is more secure and stable, can be useful for government-to-person welfare payments, as well as facilitate international money transfers and payments especially to Sub Saharan Africa which is rated by the IMF as the most expensive region of the world to receive or send money.
In a similar article by Business Day, the deputy governor in charge of economic policy at the Central Bank of Nigeria, Kingsley Obiora, underlines the importance of digital identity for a digital currency rollout, adding that a country must also have the appropriate legal framework and must carry out adequate sensitization on the importance of a digital currency.
Apart from Ghana and South Africa which are running pilots for different digital currency models, research on adopting it is ongoing in Uganda, Kenya, Rwanda, Mauritius, Madagascar, Zimbabwe, Eswatini, Namibia, and Zambia.
On the e-Naira, a recent Global CBDC Index report by PricewaterhouseCoopers (PwC) and quoted by Business Day mentions that “the digital currency is expected to support the country’s target to raise the level of financial inclusion from 64 percent to 95 percent. By making the E- Naira platform part of the financial ecosystem, the CBN hopes to grow new private-sector use cases to support the uptake of the CBDC.”