Bank of Uganda’s Consultation Paper on Digital Currency: A Move Towards Financial Inclusion and Efficiency.
Imagine a future where Uganda embraces cutting-edge technology, allowing its citizens to transact with a blockchain-based national currency. The Bank of Uganda (BoU) is exploring this high-tech possibility, where a central bank digital currency (CBDC) could revolutionize how money moves throughout the country. The Bank of Uganda (BoU) is moving towards that vision. Recently, it released a Consultation Paper on Central Bank Digital Currency (CBDC), exploring the potential of a digital currency for Uganda. The paper seeks public and stakeholder input on issues related to financial inclusion, regulatory changes, and the future of the country’s financial system. Like many central banks worldwide, BoU is evaluating how a CBDC could add value to Uganda’s economy while managing the associated challenges.
Why is Uganda Considering a CBDC?
The main driver behind the BoU’s interest in a CBDC is financial inclusion. Many Ugandans, especially in rural areas, remain underserved by traditional banks. While mobile money has expanded financial access, many still lack adequate financial services. A CBDC could bridge this gap by providing a secure, government-backed digital payment method accessible to all.
Another key motivation is improving payment efficiency. Uganda’s financial system currently faces high transaction costs, delays, and fraud risks. A CBDC could help streamline payments, reduce costs, and enhance security. This would benefit both consumers and businesses, especially those involved in cross-border transactions.
CBDC Design and Functionality
The BoU’s paper outlines key design questions: Should the CBDC be retail-focused for public use or wholesale, limited to financial institutions? A retail CBDC would function like digital cash for everyday transactions, while a wholesale CBDC would facilitate transactions between financial institutions, boosting efficiency at scale.
The BoU also considers whether the CBDC should be account-based, requiring identity verification, or token-based, where ownership is determined by possession of the digital token. Each model has implications for privacy, security, and ease of use.
Legal and Regulatory Framework
To introduce a CBDC, Uganda’s legal framework must adapt. Current laws, such as the Bank of Uganda Act and the National Payments Act, would need updates to recognize digital currencies. The BoU also emphasizes compliance with anti-money laundering (AML) and counter-terrorism financing (CFT) regulations. Given the cyber risks associated with digital currencies, strong KYC (Know Your Customer) processes and transaction monitoring will be essential.
Balancing Financial Stability and Innovation
A CBDC could impact traditional banks by leading to “disintermediation”—a process where deposits shift from commercial banks to digital wallets backed by the central bank. This means individuals and businesses might prefer keeping their money in central bank digital wallets, reducing the funds available for commercial banks to lend. The BoU aims to introduce a CBDC while minimizing disruptions to the banking sector.
Monetary policy could also be affected. A CBDC might require adjustments in managing money supply, inflation, and interest rates. It could offer new tools for monetary intervention, such as programmable money, but also introduce complexities in controlling the money supply.
Opportunities and Challenges
A CBDC presents both opportunities and challenges. On the positive side, it could improve financial inclusion by reaching unbanked communities, lower transaction costs, and enhance transparency, making transactions easier to track and reducing fraud.
However, challenges exist, including cybersecurity risks that require robust protections against hacking and fraud. Significant updates to Uganda’s legal and regulatory framework will also be necessary. Additionally, widespread adoption of a CBDC could lead to reduced deposits in traditional banks, affecting their liquidity and profitability. The BoU must carefully navigate these risks to maintain financial stability.
A Forward-Looking Initiative
The BoU’s consultation on CBDC is a proactive step towards understanding the role of digital currency in Uganda’s future. By involving stakeholders across various sectors, the BoU seeks to ensure that any decision aligns with Uganda’s economic goals. Successfully addressing the legal, regulatory, and financial challenges of a CBDC could lead to greater financial inclusion, enhanced payment efficiency, and a stronger position for Uganda in the digital financial landscape.
Alice Namuli Blazevic
Partner – Head Tech and Innovation
