Feature : Zimdollar: RBZ seeks crypto solution

By The NewsDay | May. 4, 2022 | 6 Min read

Since the reintroduction of the Zimdollar back in June 2019, the currency has continued to depreciate as it continues to lack adequate support levels from foreign currency earnings, minerals or the market itself.

BY TATIRA ZWINOIRA THE Reserve Bank of Zimbabwe (RBZ) plans to launch a new digital currency as an alternative to cryptocurrency, amid the rapid depreciation in value of the Zimdollar

As a result, both monetary and fiscal authorities are scrambling to restore the value of the Zimbabwe dollar which is now being rejected in both the formal and informal markets.

The central bank is now working on introducing digital currency as part of the basket of solutions to stabilise the local currency.

“We are saying as central bankers, we need to give people an alternative digital currency. And central banks have settled on what we call a central bank digital currency (CBDC)…” RBZ deputy governor Kupikile Mlambo said during a zoom meeting last week on cryptocurrency hosted by the Zimbabwe Economics Society.

“A central bank digital currency — I can tell you today that almost 86% of central banks are pursuing this venture of a central bank digital currency, 60% are experimenting, 14% are at a pilot stage and in Africa we have one who has actually launched a CBDC, that is Nigeria with the ‘eNaira’.

“Ourselves in Zimbabwe, we have also decided to adopt a CBDC. We are at the research stage right now and we shall be moving to the design stage in the next few weeks. We have within the central bank a team of young people who form what we call the ‘Think Tank Unit’ which is operating right now. They are both in technology, economics and in legal because we want to cover all these areas of the CBDC.”

He said the local CBDC was moving to the design stage and that they were going to decide whether to make the digital currency a retail or wholesale unit of account.

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According to American financial and economic literacy website, Investopedia, a CBDC is a digital token, similar to cryptocurrency, issued by a central bank that is pegged to the value of a country’s fiat currency.

Investopedia reports that the main goal of CBDCs is to provide businesses and consumers with privacy, transferability, convenience accessibility, and financial security.

“CBDCs could also decrease the maintenance and complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money transfer methods with lower-cost options. Central bank digital currencies would also reduce the risks of using digital currencies in their current form,” says Investopedia.

“Cryptocurrencies are highly volatile, with their value constantly fluctuating. This volatility could cause severe financial stress in many households and affect the overall stability of an economy. CBDCs, backed by a government and controlled by a central bank, would provide households, consumers and businesses with a stable means of exchanging digital currency.”

This means the central bank grants an institution an account to deposit funds or use to settle interbank transfers.

“Central banks can then use monetary policy tools such as reserve requirements or interest on reserve balances to influence lending and set interest rates,” explains Investopedia.

“Retail CBDCs are government-backed digital currencies used by consumers and businesses. Retail CBDCs eliminate intermediary risk—the risk that private digital currency issuers might become bankrupt and lose customers’ assets.”

There are two types of retail CBDCs

The first one is the ‘token-based retail CBDC’ that is accessible with private/public keys.

With this system, according to Investopedia, the method of validation allows users to execute transactions anonymously.

The second type of retail CBDC is the “account-based retail CBDC”, which requires digital identification to access an account.

With the local currency starting to show signs of waning with the introduction of bond notes in November 2016, inflation started to spike as the legal tender did not have adequate support systems. The lack of support stemmed from severe shortages of foreign currency at the time and a significant lack of market confidence in the bond notes.

As a result, in the following year, consumers turned to bitcoin trading as a solution leading to a boom in the usage of the world’s largest cryptocurrency in Zimbabwe.

However, by May 11 2018, the RBZ had had enough of bitcoin, and cryptocurrency in general, and issued a circular banning all financial institutions in the country to immediately stop trading or transacting in cryptocurrencies.

Currently, the Zimdollar is trading at $150,21 and $400 against the US dollar on the official and parallel forex markets, respectively, from about $108 and $200 at the start of the year, a meltdown that has alarmed the market and led to a spat between the central bank and businesses last week.

The Confederation of Zimbabwe Industries wants urgent action to stabilise the Zimdollar, including suspending the auction market and allowing banks to set the rate while the RBZ wants to maintain the status quo that has failed to work.

Thus, with CBDC, the RBZ is trying to save the local currency as the proposed digital currency would be pegged by the fiat currency, in this case, either the Zimdollar or US dollar.

Thus, experts said the CBDC is similar to bond notes as even those were pegged against the US dollar though it quickly did not remain so due to shortages of foreign currency in the country.

“What are we trying to do with this CBDC? One, is that it will have a legal tender status unlike bitcoin so it will be public money. It won’t be private money and the liability will sit with the central bank as it is the case now with fiat money. We will have to work out how we distribute it eventually, is it through the banks or is it directly to the public,” Mlambo said.

“But this has got a lot to do with the intermediation of the banks. It will have a finality of settlement. In other words, when someone pays you with a CBDC the settlement is final at the point of time, it is a real time settlement which is not always the case with bitcoin because there is uncertainty of settlement.”

He said the CBDC would also promote financial inclusion that remained an important point for the RBZ.

“Safety and efficiency will also be one of the issues because if you lose your keys with the bitcoin that is lost forever but with the CBDC we are designing ways of making sure when you lose your wallet you have ways of recovering it. We are working on that technology,” Mlambo said.

“Finally, there is no need for an intermediary or a RTGS system today when you want to pay to another, let me say, a business partner outside the country that goes through our RTGS system. There are delays in the payment so there is always a settlement and credit risk involved because an RTGS system is open from one particular time to another particular time.”

He continued: “But, the CBDC will be available 24/7.

In other words, you can settle payments even at midnight, in real time, or 1am or whatever time it could be. So that is the sort of way we are going right now”

“We are not concentrating on the cryptos because we see them as asset investments, we are concentrating on the CBDC because that is the currency which ticks all the boxes,” Mlambo said.

He said the challenge with cryptocurrency as a central bank was that it existed outside “the margins of regulatory overview or purview” and that the CBDC would grant the central bank more oversight as well as control.

Some of the challenges of CBDCs are its financial structure, financial system stability, monetary policy influence, privacy and protection, and cybersecurity.

Meanwhile, issues that the CBDC addresses are credit and liquidity risk, cross-border payment improvements, supports the international role of fiat currency, financial inclusion, and expands access to the general public.