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Central bank digital currency in Tanzania

CDBC in Tanzania

What is CDBC?

CDBC stands for Central Bank Digital Currency. It refers to a digital form of a country's fiat currency that is issued and regulated by the country's central bank. Unlike cryptocurrencies like Bitcoin, which operate on decentralized networks, CDBCs are centralized and typically issued and managed by a central authority, such as a central bank or monetary authority.

CDBCs are seen as a potential evolution of traditional cash, offering benefits such as increased efficiency in payment systems, lower transaction costs, and potentially greater financial inclusion. They also have the potential to enable new forms of digital payments and innovations in financial services.

However, the implementation of CDBCs raises various considerations and challenges, including privacy concerns, cybersecurity risks, implications for monetary policy, and the potential impact on the broader financial system.

Bank of Tanzania released a notice on January 14, 2023, about progress on central bank digital currency(CBDC).

In recent times, there has been a rapid increase in financial innovation globally due to technological advancement. One of the innovations dominating contemporary policy discussions is the central bank digital currency (CBDC). Albeit defined in a variety of ways, CBDC is a digital or virtual form of a country's fiat currency issued and regulated by a central bank. Therefore, when issued, CBDC becomes a legal tender, analogous to physical notes and coins. Based on the literature, CBDC is thought to offer a range of benefits to the economy.

Mindful of the fact that CBDC can only be issued by the central bank, therefore, falling under its jurisdiction, the Bank of Tanzania has been researching and exploring the potentiality of issuance of its CBDC. At this research stage, the Bank of Tanzania formed a multidisciplinary technical team to examine practical aspects of CBDC and build the capacity of the team in various ways. Also, to enrich the understanding of CBDC, the Bank of Tanzania organized the 20th Conference of Financial Institutions in Tanzania in 2021 with a thematic topic on CBDC and crypto assets. Furthermore, the Bank of Tanzania has organized sessions with stakeholders in the country on this subject and obtain their views. It has also benefited from various international forums such as the Committee of Central Bank Governors of the SADC Secretariat, the Monetary Affairs Committee of the EAC Secretariat, the IMF through IMF AFRITAC, and the Association of African Central Banks. The Bank of Tanzania also had several sessions with international private firms that are involved in providing technical infrastructure and solutions to CBDC.

The key considerations during this research stage involve choosing a suitable approach to CBDC adoption based on Tanzania's context. This includes the type of CBDC to be issued (wholesale, retail, or both), models for issuance and management (direct, indirect, or hybrid), form of CBDC (token-based or account-based), instrument design (remunerated or non-remunerated), and degree of anonymity or traceability. Particular attention also is paid to risks and controls associated with the issuance, distribution, counterfeiting, and usage of currencies.

The outcome of the research at this point revealed that more than 100 countries in the world are at different stages of the CBDC adoption journey with 88 at research, 20 proof of concept, 13 pilot, and 3 at launch. Analysis of these findings indicates that the majority of central bankers across the world have taken a cautionary approach in the CBDC implementation roadmap, to avoid any potential risks that can disrupt the financial stability of their economies. Further, it was observed that 6 countries have canceled their CBDC adoption mainly due to structural and technological challenges in the implementation phase. The structural challenges include the dominance of cash in making transactions and existence of inefficient payment systems, high implementation costs, and the risk of disrupting the existing ecosystem.

In this consideration, the Bank of Tanzania has adopted a phased, cautious, and risk-based approach to the adoption of CBDC. The Bank of Tanzania will continue to monitor, research, and collaborate with stakeholders, including other central banks, in the efforts to arrive at a suitable and appropriate use and technology for the issuance of Tanzanian shillings in digital form. Upon conclusion of the research phase, the Bank will provide information to the general public on the way forward, which may include a roadmap for the transition to the adoption of CBDC.

-Bank of Tanzania(BOT)

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