Comments on Central Bank Digital Currency (CBDC) by Ong’anya Ombo Advocates

We commence with a brief look at the obligations of the Central Bank of Kenya based on the structural provisions under the Constitution of Kenya (Constitution) followed by the Central Bank of Kenya Act.

What is the role of Central Bank of Kenya?

The Central Bank of Kenya's (CBK) purpose is to formulate monetary policy, promote price stability, issue currency, and perform other functions conferred on it by an Act of Parliament. Our key focus is on "issuing currency" and "performing other functions conferred on it by an Act of Parliament."

Avoiding any confusion and considering the trajectory of the advancement of technology, currency, as envisioned under Article 213 (2) of the Constitution, includes the intended CBK’s issuance of digital currency considering that banknotes and coins were, as then, the known currency model. Further, should there be a challenge on how to define what a currency is, CBK may consider the following:

  1. the purposive interpretation of the Constitution in line with the goal of Financial Inclusion, the CBK may present an argument to establish that digital currency is equally a currency as per the meaning of Article 231 (2) of the Constitution; or
  2. in a combination of the purposive interpretation of the Constitution, the CBK may engage the National Treasury to front legislation that considers the digital currency as part of the currency under Article 231 (2) of the Constitution on matters "performing other functions conferred on it by an Act of Parliament.”

Performing other functions conferred on it [(CBK)] by an Act of Parliament is a broad phrase that further develops the law if it synchronizes with the Constitution. Justice Isaac Lenaola, as he then was, in Isaac Aluoch Polo Aluochier v Uhuru Muigai Kenyatta & Another [2014] eKLR noted that Article 156 (4) (c) of the Constitution stating “shall perform any other functions conferred on the office by an Act of Parliament or by the President” is quite an interesting mandate to the already mentioned mandates.

We understand that an Act of Parliament may give the CBK the necessary authority, not limited to what is provided under the Constitution, if it achieves the bare minimum of constitutionality. References to similar provisions were considered in Raila Amolo Odinga & another v Independent Electoral and Boundaries Commission & 2 others [2017] eKLR.

Republic v Cabinet Secretary for Transport, Infrastructure Housing, and Urban Development & another Ex parte Kenya National Union of Co-operatives Staff & another [2017] it was pronounced that the roles proffered under Article 156 (6) (c) are constitutional, which entails similar terminologies as Article 231 (2) of the Constitution.

The CBK may consider the amendment of s 4A of the Central Bank of Kenya Act – or have an entirely new Act of Parliament and Regulations – to introduce CBDC and have an applicable policy. Further, the CBK, while working with other stakeholders, may adopt the strategies that Calgene Inc. used when working with Food and Drug Administration (FDA) to develop clear and practical regulations to approve gene-altered tomatoes for consumer consumption (Baron, 1995). While CBK is the introducer of the CBDC, a collaborative engagement with PSPs will be a more straightforward model to develop the required policies – however, this does not front a proposal whether the CBK will adopt a rule-based or discretionary remuneration policy towards CBDC.

Considering that the Sustainable Development Goals (SDGs) are critical elements of international human rights law that Kenya has appreciated and working towards achieving the set SDG targets, we believe that the SDGs anchor on matters Bill of Rights in the Constitution that applies both vertically and horizontally. The United Nations Capital Development Fund (UNCDF) provides that Financial Inclusion features in at least eight of the seventeen SDGs.

These include SDG1, on eradicating poverty; SDG 2 on ending hunger, achieving food security, and promoting sustainable agriculture; SDG 3 on profiting health and well-being; SDG 5 on achieving gender equality and economic empowerment of women; SDG 8 on promoting economic growth and jobs; SDG 9 on supporting industry, innovation, and infrastructure; and SDG 10 on reducing inequality. Additionally, in SDG 17 on strengthening the means of implementation there is an implicit role for greater financial inclusion through greater savings mobilization for investment and consumption that can spur growth.


In considering SDGs as per the Constitution, some of the key provisions of the Constitutions include Article 21, 24, 27, 29(d) & (f), 31(c) & (d), 32 (1), 36(1) & (2), 38, 39, 40, 41(1) & (2)(a), 43(1)(e) & (3), Article 46 (1), among others.

We have assessed the objectives of the Central Bank of Kenya (CBK), which results in concluding that the CBDC will influence or be influenced by the following laws (and their regulations) or entities, among others:

National TreasuryThe Constitution of Kenya
Capital Markets AuthorityThe Central Bank of Kenya Act
ICT AuthorityThe Computer Misuse and Cyber Crime Act
Office of the Data Protection CommissionerThe Data Protection Act
SACCO Societies Regulatory AuthorityKenya Deposit Insurance Act, 2012
Insurance Regulatory AuthorityKenya Information Communication Act
Kenya Bankers AssociationSacco Societies Act, No.14 of 2008
Kenya Fintech AssociationThe Capital Markets Act
Association of Fintechs in KenyaNational Payment Systems Act
Kenya Revenue AuthorityThe Banking Act
Financial Reporting CentrePublic Procurement and Asset Disposal Act
Ethics and Anti-Corruption CommissionProceeds of Crime and Anti-Money Laundering Act
Association of Microfinance InstitutionsAnti Corruption and Economic Crimes Act
 Ethics and Anti-corruption Commission Act
 The Microfinance Act

In proffering our response to the twelve (12) questions, our views will also consider the above laws/regulations and other authoritative sources to help the CBK develop a clear work plan on formally considering, adopting, and implementing CBDC.

We proceed to contribute to the Discussion Paper on CBDC as follows:

  • Which institution/group do you believe is responsible for tackling financial exclusion in any given domestic market?
    1. Central Bank
    2. National Government
    3. Commercial Banks
    4. Non-Profits/Third Sector
    5. The individual
  • How important do you believe the topic of financial inclusion to be in relation to the development of domestic retail CBDC?
    1. Vital (It won’t develop without)
    2. Important
    3. Somewhat important
    4. Not important
    5. Completely unrelated (no bearing whatsoever)
  • How would a CBDC impact financial inclusion, either as part of a wider strategy or in isolation?

Our understanding of financial inclusion is as per the remarks of the World Bank that provide as follows:

Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.

Being able to have access to a transaction account is a first step toward broader financial inclusion since a transaction account allows people to store money and send and receive payments. A transaction account serves as a gateway to other financial services, which is why ensuring that people worldwide can have access to a transaction account is the focus of the World Bank Group’s Universal Financial Access 2020 initiative.

The CBK believes that the introduction of the CBDC will be essential in Financial Inclusion as it is a legal tender from a reliable entity, not to mention it will be stable. Our view is that CBK’s proposal will excite Kenyans, but it does not arouse the interest to engage en masse as envisioned – Kenya has at least two hundred thousand people engaging in token-related activities, and about ten percent of them are active users.

The regulatory factors that surround the operations of CBK will make most individuals find it hard to engage with the CBK's CBDC. However, when the CBDC is interoperable with other jurisdictions’ CBDC, there will be high interactions based on the time factor and costs involved.

If CBK may consider adopting a narrow model (see our response to question seven under “Opportunities”) of introducing CBDC to the Kenyan market, it will easily enable and strategically force the use of CBDC among most of the Kenyan population. Our opinion is that if the strategy takes the model of how water flows from springs to form a river, it will be easier to have Kenyans engage and progressively accept CBDC as a preferred digital currency compared to other private currencies/tokens.

Therefore, CBDC should be implemented through the Hybrid Model, directly involving the PSPs or using the Government Procurement Systems for financial inclusion to take effect. The former is a broader strategy, while the latter is a narrow/isolated model.

A strategic approach to marketing/public awareness on CBDC and its implementation will result in Financial Inclusion. As earlier mentioned, Financial Inclusion forms a significant part of SGDs. These SDGs have a direct impact on the Bill of Rights. In developing an argument that the Hybrid Model of CBDC will not experience holding of funds during bank runs, people will try to trust the financial institutions, resulting in CBDC account opening. Therefore, achieving Financial Inclusion through CBDC will result in CBK achieving some or most of its targets, and the government benefits in enabling its citizens to access more Constitution Rights under the Bill of Rights.

  • How would CBDC affect cross-border transactions, either as part of a wider strategy or in isolation?

The launch of CBDC will result in parallel systems of cross-border transactions. Essentially, through other tokens like Bitcoin, Ethereum, Binance Coin, and Solana. There are several Blockchains used in transacting on a cross-border level, which means that CBDC will be competing with these forums/exchanges.

According to the data shared by CBK via the Discussion Paper on CBDC, CBK highlights the Bank for International Settlements (BIS) on its pilot projects on CBDC and Blockchain Technology that has reduced cross-border transactions from 3-5 business days to merely 10 seconds. It is essential to mention that the two hundred thousand Kenyans already in the token space have equally experienced that kind of speed; therefore, it is not something new. However, there are areas that the CBK, through its CBDC, will benefit if the costs of multi-layered correspondent bank systems are reduced.

The current costs for engaging in a token transaction are equally high as the conversions occur and fees are applied. Therefore, if CBK can capitalize on that loophole, it can leverage the use of CBDC on cross-border transactions.

Also, though controversial, CBDC should be integrated with other reputable exchange platforms to allow users to convert their tokens to KES digital currency. In doing so, CBK will enable skeptical individuals to try out CBDC quickly. Considering that interoperability between countries is a matter of discretion, it will be easy to allow users to seamlessly transact from CBDC to other platforms based on their preferences. Our opinion is that locking out the other reputable exchanges will reduce the chances of interaction between CBDC with potentially interested users.

The emphasis on considering how to work with other platforms is because:

  1. there has been slow uptake of SWIFT GPI that has a higher advantage compared to the standard SWIFT. Therefore, the aspect of innovation does not necessarily mean that everyone will be onboard.
  • the poor performance of the Kenya Shilling against other major currencies is a drive to hold cryptocurrency. Our opinion is that the CBDC will have – nearly – similar characteristics to the banknotes.

It will be essential for CBK to reconsider its advisory/cautionary notice issued in December 2019. It will allow the progressive adoption of the Hybrid Model.

  • How would a CBDC affect the financial sector? What tools could be considered to mitigate any adverse impact to CBDC on the financial sector?

Banking Sector Revenue Streams

Generally, in a simplistic approach, CBDC will hamper the revenue streams of retailer financial institutions and PSPs upon its acceptance in the market. The impact will be towards specific areas of dealing that the retailer financial institution and PSPs have been capitalizing on to generate revenue. These are several revenue streams that PSPs may still use to bolster their revenue streams. Therefore, the damage on the revenue streams falling under such categories can be cushioned by the retailer financial institutions.

Stress on Bank Deposits

There are possible concerns that the introduction of CBDC will stress the bank deposits by having many users opting for CBDC (conversion from bank deposits to CBDC). These concerns are considered stressful to the deposits regardless of whether the CBDC will be zero-remunerated as the banknotes (Pfister, 2020).

Operation Costs

Our proposal fronts Hybrid Model to develop a cordial operation with other stakeholders and reduce the risks most customers experience during bank runs or when banks face technical or financial challenges that make it hard for the banks to honour customer instructions. However, the model will increase the possible operational costs, which may defeat the key points raised by CBK on the benefits of CBDC. Therefore, CBK will need a clear consultative initiative with key stakeholders to avoid making CBDC have similar costs like transactions through e-Money or generally bank deposits.

Adopting the Direct Model may seem more cost-effective; however, it may require more restructuring of CBK based on Article 231 of the Constitution and s 4A of the Central Bank of Kenya Act. A new statutory corporate entity will be created to be the sole operator of the CBDC as issued by the CBK to New Statutory Entity – such structuring will allow CBK to explore its core functions without seeming to compete with the PSPs.

Remuneration of CBDC

There are vital debates on whether the CBDC will be zero-remunerated or have a tiered-remuneration model.

CBK must have a vivid plan on how it will go about nominal interest rates concerning the CBDC. Bindseil and Panetta (2020) propose that the zero-remuneration model applied to banknotes is less suitable towards CBDC; therefore, it is best to utilise a two-tiered remuneration model that will allow “(i) to offer CBDC to citizens (in quantities sufficient for it to be used as means of payment) at interest rates that are never lower than those on banknotes (i.e., never below zero); and (ii) to protect financial stability and the effectiveness of the monetary policy.” However, considering that the introduction of CBDC does not render banknotes obsolete, the issue concerning zero-remuneration towards banknotes may result in a temptation to consider applying the same policy (Pfister, 2020). Yet, the CBK knows there is a visible chance of conflict with entities under the banking sector.

  • What factors would determine the level of adoption of CBDC as a means of payment in Kenya?

The level of adoption of CBDC is pegged on elements that built what World Bank defines as financial inclusion. Financial Inclusion is an essential objective of CBK that requires various stakeholders to genuinely participate in achieving the penetration of financial services in Kenya. Learning from the development of e-Money solutions as offered by the government (regulatory framework), public (other than government entities or agencies), and private entities, it is essential to appreciate the launch of Mobile Money M-Pesa in the year 2007 in Kenya and the year 2010 in South Africa.


The launch of M-Pesa resulted in a new financial service that enabled a cordial transactional environment for the banked and unbanked members of the Kenyan society. However, there was also the aspect of availability of mobile phones to be used in effecting transfer of funds. The critical factor to note is that M-Pesa focused on functionality and how easy it is to use, which is similar to what CBK is looking into when assessing the chances of success of CBDC.

The CBK is interested in "functionality" (Discussion Paper on CBDC pg. 3, 7 & 21). Therefore, regardless of the complex infrastructure of the CBDC, the front end should be user-friendly to enable high levels of usability and acceptance in society. Adopting the functionality model will enhance financial inclusion.

In reflecting on the infrastructure that will make the CBDC achievable, it is essential to factor in the gadgets needed to use such technology. M-Pesa solutions resulted in adopting the Unstructured Supplementary Service Data (USSD) to enable transactions beyond Peer-to-Peer (P2P) or Customer-to-Business (C2B) or Business-to-Customer (B2C). These transactions would involve the standard transfer of funds or secure and paying (non-)security-based loans from various providers.

The use of USSD bridged a gap that existed between feature phone users and low-level smartphone users that did not have the needed Operating System (OS) capable of allowing access to the application store or application requiring a specific version of the OS to operate or access online banking through browsers to transact. In a nutshell, history is repeating itself.

There is a need to understand whether financial service solutions enhance the purchasing of mobile phones – it does not matter whether it is a smart or a feature phone. The CBK may consider liaising with Safaricom PLC or Safaricom Money Transfer Services Limited while considering the provision of the Data Protection Act, 2019 and Computer Misuse and Cybercrimes Act, 2018 for purposes of accessing such data – de-identified, pseudonymized, or anonymized.

In accessing the above data, CBK will be able to tell whether when M-Pesa was launched, and within twelve (12) months after launch, many subscribers were registering for M-Pesa and whether the registration was on active mobile phone use, or it was merely a registration of phone numbers (popularly referred as "lines") only.

South Africa

The M-Pesa launch in South Africa did not yield similar results as it did in Kenya. A study of this will help understand the best way to adopt CBDC in Kenya while determining why a financial service like M-Pesa failed to pick up in South Africa. We acknowledge that what M-Pesa offers is different from what CBDC will be all about; however, the purpose of adoption of technology is imperative. The key factor to note is that when M-Pesa was launched in South Africa, the target was to secure at least 10 million users in three years, but there were only 76,000 subscribers in the sixth year. Some sources provide that the high level of financial inclusion in South Africa made it impossible for M-Pesa to penetrate the market in the state it was at that period.

The CBK is banking on predictable reasons such as stability and being a reliable provider, which ignores the key reasons why people are more intrigued to engage cryptocurrencies, Initial Coin Offering (ICO), Initial Token Offerings (ITO), among others, regardless of the risks that the CBK is banking on to solve as an issuer of a CBDC. As stated earlier, when introducing M-Pesa in South Africa, South Africa already had a well-established financial inclusion practical structure and solution-oriented that encouraged most people to find the solutions offered through the existing financial institutions as reliable.

In 2021, Quartz (Onyango, 2021), VOA (Ruvaga, 2021) and BBC documented how Kenyans top in P2P trading of tokens. These platforms offer various transactions checkpoints and well-structured Know Your Customer (KYC), Anti-Money Laundering (AML), and Combating Terrorism Funding (CFT) technology-enhanced solutions that help in verifying data. These related regulatory requirements do not necessarily mean that AML/CFT is addressed to the core as even the traditional brick and motor financial institutions experience these challenges, one being the Dusit attack linked to DTB Bank and M-Pesa.

These current solutions, regardless of the minor (based on the market pool) shortcoming that CBK is banking on, are reliable and have proven to be worth using by most token enthusiasts. It is similar to M-Pesa and a stable South Africa’s financial inclusion standard. Further, like how South Africa's financial institutions offered other products that M-Pesa did not provide, the same applies to CBDC introduction, there are more benefits that current token enthusiasts get from the other structures as compared to what CBDC will offer, hence, high chances of not being highly appreciated as the CBK envisions.

Enhancing Financial Inclusion

It is our opinion that while what may trigger traction towards the use of CBDC is not vivid, in Kenya, several options are available for consideration. As mentioned earlier, history is repeating itself. Our reference was on the adoption of the USSD as a critical element to have those with feature phones appreciate and use the CBDC – however, this does not necessarily mean that those with a smartphone will join the usage of CBDC.

It is documented that USSD can access underlying Blockchain Technology to enhance access to various financial solutions that rely on the Blockchain infrastructure. The CBK may opt to liaise with Kotani Pay Limited t/a Kotani Pay that is currently enabling its users to access tokens (cryptocurrencies) and even convert to fiat currency via USSD.

Blockchain Technology was applauded by the Blockchain & AI Taskforce spearheaded by Prof. Bitange Ndemo. On the other hand, USSD has been in use in the Kenyan market for far too long, not to mention it is still in use to this date by feature phones, low-end smartphones, and high-end smartphone users. A paper dubbed "Towards Blockchain Services for Mobile Money Traceability and Federation” (Agbezoutsi, Uriene, and Dandjinou, 2019) provides a localized context of using USSD and Blockchain Technology. Therefore, there is a conversation on USSD and Blockchain technology and an existing practical example like Kotani Pay. GSMA has equally documented the interoperability between USSD and Blockchain used in Ghana on land matters via a company known as BenBen. Further, GSMA indicates that USSD is interoperable with Blockchain, AI, and IoT.

Public Awareness Campaign

Our opinion is that most Kenyan Government agencies are poor at public awareness matters. It is one area that the government has failed to capitalize on to make the public aware of its services, objectives, or functions. It would be best that if the CBK positively considers the CBDC, there must be a thorough localized public awareness campaign across the country – for the knowledge and enhance financial inclusion.


We hold the opinion that should CBK factor the comparative analysis on M-Pesa in Kenya and South Africa; it should also consider the use of USSD and engage in the substantive public awareness campaign, there is a high chance of achieving acceptance of the CBDC, which results in having a significant positive impact towards financial inclusion among the unbanked and banked members of the Kenyan society.

  • What advantages and disadvantages do you believe CBDC would introduce over the existing digital payments landscape in Kenya?

Hybrid Model: Advantages + Disadvantages

The Hybrid Model is an inclusive system that increases the safeguards of the customers' needs, whereby CBK can honour the transactional instructions even when the PSP is facing technical or financial challenges. However, management and maintenance of the infrastructure as an interoperable system between CBK and PSPs will be costly, or at least the costs will be higher than anticipated.

Multitiered System: Advantage + Disadvantage

We have proposed using CBDC through the Procurement System under an open Blockchain and one private under the Hybrid Model. Developing and managing such infrastructure will be costly towards the CBK; however, considering corruption has an impact on the economic policy of CBK, it is a crucial area of focus for CBK in collaboration with other relevant and well-meaning government agencies and private entities like Kenya Private Sector Alliance (KEPSA) and Kenya Association of Manufacturers (KAM).

Transaction Time: Advantage

The CBDC will reduce the transaction time and cut down on the multitiered correspondence banks that assist in cross-border transactions based on their respective time zones.

Know Your Customer: Advantage + Disadvantage

KYC is an essential part of the current financial systems; therefore, regardless of the entity onboarding the users, a KYC will be necessary for balancing concerns arising under Anti-Money Laundering (AML) and Combat Financing Terrorism (CFT). However, some token enthusiasts will be reluctant to onboard for reasons like the Kenya Revenue Authority (KRA), which seems to have access to and assess a person's financial records.

Based on the amount of data collected and financial data collected through the transactions, there will be credible data concerning various aspects of many people's private lives. Such an amount of data is an excellent incentive to trigger cyber-attacks. It is evident that the government of Kenya, through various agencies, entities, or parastatals, have poor practices on matters Information Communication Technology; therefore, most knowledgeable members of the society will be concerned about their privacy as the CBK may not be equipped to handle breaches and consequently, handle ransom demands.

Innovation: Advantage + Disadvantage

The introduction of the CBDC will result in more innovation if the financial institutions are directly involved in the operation. PSPs are profit-focused entities; therefore, they will adopt various innovations to ensure that their respective solutions are more preferred than how things would have turned out should CBK have the monopoly on CBDC distribution.

Technology that requires computer-based instructions is generally susceptible to various attacks that may impact the general performance of the economy, not to mention the trust of the infrastructure in place. Adopting advanced and multi-backed-up systems must be considered to avoid unimaginable damages that may arise from malfunctioning or cyber-attacks of the CBDC infrastructure.

As Kenya positions itself in International Relations, unnecessary remarks that may irk other countries may result in strategic cyberwars sponsored by rival states. Such cyberattacks target critical state infrastructure, which may include the CBDC infrastructure.

  • What additional potential opportunities, considerations, or risks of a CBDC may exist that have not been discussed in this paper?

Procurement as CBDC Launch Channel

The introduction of CBDC via the government tendering processes. The government tendering process is marred with corruption that essentially impacts the CBK's Monetary or Economic Policy. In the Discussion Paper on CBDC, CBK mentions that the CBDC will be a liability on its end and an asset to the holder. Therefore, considering that most government agencies or entities tend to have their own budget, which is misappropriated based on the Office of the Auditor-General.

We view that introducing tendering and payment of any funds on a tender is paid via the CBDC through a public Blockchain. It will enhance transparency on financial flows and distribution of CBDC to the general public as it should be a requirement that secondary payments for purposes of achieving the tenders must be paid in the currency received.

Our opinion is that the introduction of CBDC will shake other service providers in the financial sector.  Therefore, CBK needs to anticipate (un)necessary sponsored or funded lawsuit initiated through third parties. However, while the litigation aspect is visible, CBK may counter the above by adopting an inclusive CBDC architecture model that allows other financial service providers to take an active role.

The other possible litigation matter that may arise may be based on the discriminatory approach of introducing CBDC to the Kenyan space; thus, initiating through the flow of a stream model.

The Youth

The Constitution of Kenya provides that youths are a collectivity of individuals in Kenya who have attained the age of eighteen (18) years but have not attained the age of thirty-five (35) years. Based on the Census conducted in the year 2019 in the Republic of Kenya through the Kenya National Bureau of Statistics (KNBS), the Census Report indicates that the youth's total population was 13,777,600.

We understand that demographics segmentation may project a more refined model of how youth accept CBDC. The critical factor is for CBK to liaise with Payment Service Providers (PSP) to understand the rate at which the youth are interacting with their solutions. Further, a population above the youth, a category ranging from thirty-five (35) years to forty-five (45) years old, may be factored in the assessment as the group likely to adopt CBDC related solutions.

Drawing our unverified analysis or opinion from the performance of gaming companies, tanked real estate or investment-based projects, and mobile loan issuing entities in Kenya, the key trigger to generate traction towards a product is usually practical hope and financial or tangible asset returns (regardless of how minute the returns will be).

The psychological impact of hope and financial or tangible asset returns is vital for gaining traction on a product. The Kenyan population, influenced by globalization, is transforming from a reserved to a liberal population – liberal in that there is a high chance of taking risks. These risks are some of the reasons that CBK is banking on, yet the critical population engaging in tokens is not keen on the same, which makes CBK’s concern a minor concern. Therefore, CBK will need to provide more solutions that provide practical hope and convincing financial returns (interest rates).

However, where interest rates are more similar to a financial institution regulated by the Banking Act, regulations by the Capital Markets Authority (CMA), Insurance Act, SACCO Society Regulatory Authority (SASRA), or Government Bonds/Treasury Bills, there will be less interest towards the CBDC. If reference is to be made towards M-Pesa in South Africa, the CBDC should offer a better solution to what is already in the market, whether regulated or not by the CBK, CMA, IRA, SASRA, Treasury Bills, among others.

Infrastructural & Data Protection

The CBDC infrastructure will fall under critical infrastructure as per the Computer Misuse and Cyber Crimes Act. It will entail personal and sensitive data as per the Data Protection Act. Further, considering the various motivations of cyber-attacks, it is best to consider appropriate measures to reduce liabilities arising from a data breach.

In adopting the Hybrid Model, the CBK will become a Data Processor, resulting in multiple contracts with Data Controllers, in this case, the PSPs. Ideally, CBK may outsource contractors that will operate and provide the infrastructure.

  • Are there additional ways to manage potential risks associated with CBDC that were not discussed in this paper?

Regulatory Framework

CBK or any third party may have already factored in various visible angles of regulatory framework if CBK proceeds to launch CBDC. However, based on our proposed model, CBK should consider reviewing/amending the regulatory structures that address how PSPs will not have CBDC as part of their assets should the PSP experience physical or financial technicalities.

Hybrid Model, if wrongly misunderstood, other statutory organisations like Kenya Deposit Insurance Corporation (KDIC) may find the practice as one that creates conflict. However, it is more of an infrastructural issue requiring regulatory structuring.

Remuneration Model

Banque de France believes there is a delicate balance on ensuring that CBDC is acceptable and actively used in households and business entities but not to the point that will trigger switching from bank deposits to CBDC accounts.

Smart Contracts

Blockchain technology offers the opportunity to establish well-structured smart contracts that will require less input by financial institutions and CBK to realise the instructions, which is an advantage. However, on the other hand, if CBK and the Financial Reporting Centre (FRC) opt to interfere with the smart contracts, it will result in unnecessary delays.

Alternative Tokens

The way CBDC will work is not clearly known; however, based on the existing competition, it is evident that tokens not owned by the government's central, or reserve banks appreciate in value; therefore, if other non-government entities may perfect their approach on tokens, the CBK or its product (CBDC) will experience extreme competition from FinTech companies that are niche-focused.

  • Which model of CBDC do you believe would be the most suitable in Kenya and why?

The CBK, other than launching the CBDC, is primarily interested in financial inclusion. Our understanding is that financial inclusion should meet the views of CBK or World Bank and factor in previous experiences of most Kenyans regardless of financial status or disposable income – however, mostly the poor and unbanked. We rely on a decade-old research paper conducted by Dupas, Green, Keats & Robinson (2012): Challenges in Banking the Rural Poor: Evidence from Kenya’s Western Province.


Our experiment had two parts. In the first part, we waived the fixed cost of opening a basic savings account at a local bank for a random subset of individuals who were initially unbanked. While 63% of people opened an account, only 18% actively used it. Survey evidence suggests that the main reasons people did not begin saving in their bank accounts are that: (1) they do not trust the bank, (2) service is unreliable, and (3) withdrawal fees are prohibitively expensive. In the second part of the experiment, we provided information on local credit options and lowered the eligibility requirements for an initial small loan. Within the following 6 months, only 3% of people initiated the loan application process. Survey evidence suggests that people do not borrow because they do not want to risk losing their collateral. These results suggest that, while simply expanding access to banking services (for instance by lowering account opening fees) will benefit a minority, broader success may be unobtainable unless the quality of services is simultaneously improved. There are also challenges on the demand side, however. More work needs to be done to understand what savings and credit products are best suited for the majority of rural households.

(Dupas, Green, Keats, et al. 2012)

We note that Kenya has had tremendous growth since the year 2012. However, our opinion is that the three points raised in the research quoted hereinabove provide a precise pictorial composition of what may still be happening to this very date. According to the 2019 Finaccess Household Report, a collaboration/partnership of CBK, KNBS, and FSD Kenya indicates the following under "Reason for non-use of bank accounts” and “Challenges faced in use of bank account”

Reason for non-use of bank accounts

Of the twenty-two (22) reasons surveyed for non-use of a bank account, eight (8) reasons emerged top with a total response rate of 88.3 percent (Figure 3.13). Lack of money to save, inability to maintain an account and lack of regular income were the top three reasons cited, in total accounting for 70 percent of response rate. This concludes that demand side factors rather than supply side constraints do influence use of bank services. Other reasons such as long distance to nearest bank, lack of trust, financial literacy limitations, among others were not significant.

Challenges faced in use of bank account

There are two main challenges customers cited in the use of a bank account. These are; Automated Teller Machine (ATM) or card machine not working, and being levied with unexpected charges (Figure 3.14).

The ATM/ card machine not working was more pronounced in the urban areas and among the female users while the unexpected charges was more cited by male and rural users. The loss of money in the bank account was cited more by female users and those residing in rural areas.

Proposed Model

The ongoing debate on whether CBDC has/will have similar properties with cash banknotes has resulted in questions on how the CBDC ought to be presented; thus, other than the Direct Model, whether the CBDC should be presented as a wholesaler or retailer.

CBDC is also available to offer solutions that have previously affected the banking sector on receivership whereby the funds owed to customers are held for years: reference is made to formerly Charter House, Chase Bank, Dubai Bank, Imperial Bank, among others. Therefore, it is best that with the CBDC, the Direct and Intermediated CBDC model should be dropped in favour of the Hybrid CBDC.

Bank of International Settlements:

If a PSP fails, holdings of the CBDC are not considered part of the PSP's estate available to creditors. The legal framework should also allow for portability in bulk, i.e., give the central bank the power to switch retail customer relationships from a failing PSP to a fully functional one.

While the Intermediated CBDC will shield CBK on matters Data Protection Laws in case of a breach, it will not provide a better structure that will bolster trust in the banking sector as most people find banks untrustworthy places to keep funds. Intermediated CBDC will not allow CBK to have a ledger concerning the retail users, which means that should a financial institution go under receivership or experience technical challenges, CBK will not be able to honour any payments. However, on the other hand, Hybrid CBDC will resolve that challenge.

The Hybrid Model will enable CBDC to have the ledger of accounts concerning the users (Auer & Böhme 2020). Doing so will help settle any payouts should the PSP fail to honour the request due to technical or financial factors.

Product Introduction Strategy

Advisory on new products requires a strategic approach towards the Social, Political, Economic, Religious, and Legal factors. We believe in drawing inspiration from the expansion strategies that CEMEX S.A.B. de C.V adopted.

The entity had diverse but unique ways of accessing a new market without raising too many mergers and acquisitions (M&A) pre or post M&A challenges. While the introduction of CBDC is not essentially an M&A-related activity, certain practices adopted by the aforementioned entity ought to be factored in by CBK.

CBK’s Direct Model is more of horizontal diversification & expansion, while Intermediated and Hybrid Models are more of a vertical expansion model. The former will require CBK to assume specific roles that PSPs majorly handle, while the latter will allow CBK to expand its role within the scope of its traditional operation.

CEMEX expansion process entails three vital components, which are (a) Opportunity Identification, (b) Due Diligence, and (c) Post Merger Integration Process (PMI) (Ghemawat, and Matthews, 2004). As it stands, CBK is in the opportunity identification stage; hence, the request for comments concerning the CBDC. Therefore, at this material time, it is a question of the quantitative and qualitative analysis whereby the former refers to the country while the latter focuses on political factors. Other factors include market analysis, the possibility of restructuring the company (we note that CBK is not a company pursuant to the Companies Act or Banking Act), or the market.

However, our analysis establishes that the Discussion Paper on CBDC also incorporates part (b) that addresses Due Diligence (DD). In a new entrant level expansion of an entity, the DD requires developing a checklist, engaging the government/sector-specific authorities, levelling with local competitors, and engaging associations (Ghemawat and Matthews, 2000). Our view is that of the three models proposed by CBK to use in introducing CBDC in Kenya, the Hybrid Model will offer an easy introduction of CBDC to the Kenyan market space.

Our proposal is in favour of the Hybrid Model is influenced by the following:

Quantitative Analysis: while CBK controls Monetary Policy and advises the government on the same, it cannot engage a stable drive to achieve Financial Inclusion as per the World Bank's definition of Financial Inclusion. Further, it will be easier to have other financial entities propel the CBDC concept to the public.

Importantly, considering the fundamental element of Financial Inclusion is a person having a bank account, it will be easier for other financial institutions and PSPs to use the data they collected during the KYC process to communicate with their current customers on their new product lines in this case, CBDC.

Qualitative Analysis: the CBK has already rubbed shoulders with the financial institutions on matters loan interest rates; therefore, the urge to engage in direct competition with the financial institutions and PSPs is likely to arouse political stalemate that will target and negatively impact the economic goals of the country.

Market analysis: the financial institutions and PSPs have direct access to the majority of the hopefully to be users of CBDC and are more willing to engage in high-end technological innovations to enhance their service penetration to the market. That is an obligation that CBK cannot catch up with, and if it does, it will be at a high cost.

Restructuring the Company: we accentuate that we understand that CBK is not regulated under the Companies Act or Banking Act. However, the adoption of CBDC under the Direct Model will mean that CBK is assuming the roles of the retailer financial institutions and PSPs, which will result in a conflict of interest. The other opaque idea would be that CBK designates the CBDC to another statutory entity as a distributor while CBK retains the critical roles envisioned under the Constitution and Central Bank of Kenya Act.

In that regard, the structure of CBK will remain as is.

Restructuring the Market: adopting the two-tiered retail CBDC that allows CBK to record retail balances will be a better way to offer financial solutions through the CBDC. Of all the promises that CBDC may offer, the Hybrid Model stems out as one of the main selling points.

Further, the advantages of using the Hybrid Model will bolster a quick approach to developing a regulatory framework to effectively regulate CBDC and its activities as the involvement of retailer financial institutions will result in crucial stakeholder engagements that will better the understanding of how various parties interact with the CBDC and what will be the best legal phraseology to regulate the market.

  • Are there additional design principles that should be considered that were not discussed in this paper?


  • How could a CBDC be designed to achieve maximum interoperability with the existing payment platforms in Kenya?

Our view towards the question is provided for under question 6 concerning factors to consider in bolstering the level of adoption of CBDC. Our analysis is that the technological infrastructure that hosts the CBDC requires high-end smartphones for practical use. However, there have been positive developments on how private companies have adopted USSD in Kenya and Ghana to enable users to rip the benefits of Blockchain through USSD.

Our opinion is that the use of USSD will be one of the cost-effective measures of ensuring interoperability between CBDC infrastructure and existing PSPs. Further, CBDC being a new product in the market, various PSP and financial institutions will be keen on how they can take advantage of the CBDC; however, the said entities will not be willing to dedicate intense budgets to develop a curated Blockchain technology when the performance of the CBDC is not clear and consequently, investing in it is not worthwhile.

The budgetary costs for developing curated Blockchain solutions that are interoperable with the CBDC, secure, and synchronize with other financial institutions for effecting cross-border transactions will be crucial.

It is clear that CBK cannot risk running the CBDC as a monopoly, and even if it does, for a start, it will require the input of the retailers or PSPs in the financial sector. In that regard, it already gives a pictorial composition of what type of CBDC architecture CBK will need to adopt. Drawing inspiration from CMA, CBK should consider providing room for Sandbox Regulations on onboarding processes as most PSPs and retailer financial institutions would prefer getting more innovative with the introduction of the CBDC.

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