BoT considers further study on digital currencies

Dar es Salaam. The Bank of Tanzania (BoT) plans a second study on Central Bank Digital Currencies (CBDCs) to assess their potential benefits and challenges for the country.

This move suggests a cautious shift in Tanzania's monetary policy, following an initial study in 2021 that identified roadblocks to implementation.

A CBDC is a digital form of a national currency, aiming to promote financial inclusion and streamline monetary policy. In contrast, cryptocurrencies like Bitcoin are independent digital assets not backed by any government.

A recent study by the Governance and Economic Policy Centre (GEPC) highlights the mixed approach taken globally towards cryptocurrencies, ranging from bans to cautious regulation.

The report emphasises the need for Tanzania and other East African countries to regulate cryptocurrencies to manage risks and adapt to future monetary trends.

The document says policy trends have been mixed, ranging from caution and outright bans to steps towards regulation and new monetary policies covering digital currencies.

“In Tanzania, there are no specific regulations governing digital currencies, and the use of cryptocurrencies remains largely banned. The Tanzanian shilling is the only accepted legal tender,” reads part of the document.

In January 2023, the Bank of Tanzania adopted a phased, cautious, and risk-based approach to CBDC adoption, indicating a potential shift in the country's monetary policy.

However, Governor Emmanuel Tutuba acknowledges challenges identified in a previous study. The new study aims to learn from other countries' experiences with CBDCs.

The governor stresses the importance of secure and traceable transactions, a concern not currently addressed with cryptocurrencies due to their unregulated nature.

He reiterates the potential use of cryptocurrencies for illegal activities.

"Money is a valuable medium of exchange; therefore, it is supposed to bring convenience instead of disturbances," he said.

He emphasised that no country currently regulates cryptocurrencies due to unresolved concerns, including the financing of terrorism and other illegal activities.

Mr Tutuba reiterated that the Central Bank needs to track the origin, destination, and purpose of money transactions to provide security assurance.

"We have repeatedly declared that it is an illegal business, and the public should avoid it. Those involved are doing so at their own risk, as some of the money could be fake or used to obscure the true value of transactions," he stated.

A senior lecturer at the Dar es Salaam University College of Education (DUCE), Prof Abel Kinyondo, said cryptocurrencies like bitcoin cannot be accepted as legal tenders because they are not backed by any country.

“Traditional currencies are legal tenders because they are supported by their respective countries of origin," he noted.

However, the GEPC report suggests that governments, through ministries of finance and Central Banks, should map existing crypto platforms and assess their penetration.

“Kenya and Tanzania reportedly have the highest number of crypto entrepreneurs and transaction volumes in East Africa, although these statistics are unofficial,” reads another part of the document.

Furthermore, the report highlights the need for governments to evaluate the potential economic contributions of cryptocurrencies, including financial inclusion, employment, and investment facilitation.

The document calls for clear regulations to prevent fraud, money laundering, tax evasion, and disruption of formal financial systems, and that world institutions like the International Monetary Fund (IMF) can support governments in the EAC in building secure platforms and enhancing regulatory capacities.

“The institutionalisation of CBDC trading and clearing houses for cryptocurrencies is seen as a positive step for Tanzania. However, this must be accompanied by supportive infrastructure, policies, and platforms for trading and exchange,” reads another part of the document.

According to the study recommendations, a robust monetary policy can help address the current challenges faced by both the government and digital currency entrepreneurs.

Additionally, the document recommends exploring blockchain and crypto technology opportunities in sectors such as health, education, and governance.

For instance, the document suggests blockchain technology was used to secure voting and election results systems in Kenya's 2022 general elections.

As global cryptocurrency penetration increases, the study report suggests that the need for regulation to mitigate risks and prevent criminal abuse becomes more pressing.

The document says collaboration between the public and private sectors is essential to ensuring safe transactions and preventing misuse of these new assets.

“Existing regulatory frameworks can serve as a foundation for new monetary policies and proper regulation of digital currencies,” the document reads.