Central banks across the developed and developing world have begun considering the possibility of implementing a Central Bank Digital Currency (CBDC) to enhance drivers for economic growth and financial sector development such as financial inclusion, digital financial services and national payment system (NPS) efficiency. CBDC is a digital representation of sovereign currency, and in its retail form is most similar to physical cash. It can be accessed via an e-wallet or an account for frequent and used for low- to medium-value transactions.

Although economic and financial inclusion benefits may stem from CBDC, its introduction may not be without risks. If hastily applied, CBDC could open the NPS to cyberattacks, financial instability and even NPS failure if pre-requisites such as enabling infrastructure and regulation are not meticulously assessed and ensured. It is thus in the interest of any country considering CBDC to conduct a country diagnostic study as the first step towards its potential implementation. These assessments aim at uncovering the motivations and contextual readiness of countries for CBDC and offer regulators a framework in which to make an informed decision.

In 2019, the Central Bank of Eswatini (CBE) became one of the first Central Banks in sub-Saharan Africa to consider the potential and feasibility of CBDC through the application of a country diagnostic. Together with Cenfri, the CBE embarked on the first part of a three-part diagnostic. This study aimed to investigate and understand whether use cases existed for the implementation of a CBDC in the region, either as a retail or wholesale variety. Our primary research questions were: 1) what value would this instrument contribute to the Eswatini financial system? And 2) is there sufficient evidence to justify further exploration into its potential pilot-testing?

The first phase of the study found that three use cases motivate for further exploration into CBDC in Eswatini:

• Payment use case: CBDC can improve NPS efficiency by increasing the efficiency, ubiquity and speed of current retail payment clearing and settlement processes along with enabling channel and instrument interoperability as well as real-time payments.
• Consumer use case: CBDC could potentially deepen customer demand and increase the usage of digital financial services by focusing on the mobile money rails and widening its use cases by lowering provider costs.
• Economic policy use case: If coupled with a robust identity system, CBDC may strengthen the effectiveness of fiscal policy in terms of tax collection and combatting illicit financial flows through tracking.

This policy note distils synthesised key findings from Phase 1 of the CBDC country diagnostic. Phases 2 and 3 of the country CBDC diagnostic will be conducted at a later stage.

Country diagnostics aimed at determining the value of CBDC  and the readiness of respective countries for their implementation are essential to understanding usefulness as well as their risks. These diagnostics inform the need for bespoke CBDC designs that are context-specific and help ready financial systems for implications of their introduction. If you are a central bank seeking insight on how to approach CBDC for your own jurisdiction, please reach out to us.

For more information on this initiative, feel free to contact Antonia Esser.