Ethiopia is advancing economic reforms by preparing legal and regulatory frameworks for a central bank digital currency (CBDC).
Ethiopia is making strides towards modernizing its economy by laying the groundwork for a central bank digital currency (CBDC). As part of its economic reform agenda, the National Bank of Ethiopia (NBE) has drafted two key proclamations. These documents not only propose the establishment of a legal framework for a CBDC but also aim to enhance the NBE’s capital and provide a foundation for consumer protection. Additionally, the Banking Business Proclamation focuses on liberalizing foreign investment in banking, addressing problematic banks, and creating a regulatory sandbox for innovative financial solutions.
Legal Framework and Regulatory Sandbox for CBDC
The Ethiopian government’s Homegrown Economic Reform Agenda includes ambitious policy changes spearheaded by the NBE. The council of ministers has approved these proclamations, and they are set to be introduced into the House of Representatives soon. The proposed legal framework will facilitate the introduction of a CBDC when necessary. The NBE’s efforts reflect a broader vision of economic modernization, including joining the Cross Border Payment System by December. However, details about this system remain unspecified.
Ethiopia is no stranger to economic liberalization. The country has already taken significant steps, such as ending the state monopoly on mobile money services. Additionally, Ethiopia utilizes blockchain-based digital infrastructure for major government payments, showcasing its willingness to embrace innovative financial technologies.
Broader Economic Reforms and International Influence
The NBE’s reform plans are part of a broader initiative to overhaul the Ethiopian economy. In April, a privately-owned Ethiopian newspaper, The Reporter, highlighted the government’s interest in launching a CBDC study in June. This study is expected to provide critical insights into the feasibility and potential impact of a CBDC on the Ethiopian economy.
Africa, as a continent, has had varied experiences with cryptocurrency and digital currencies. Despite challenges such as low internet penetration, several African countries are making headway in crypto adoption. Ethiopia, although currently prohibiting digital currencies, has seen the licensing of numerous data mining firms taking advantage of its inexpensive electricity for crypto mining. The country also plans to introduce the Web3 Fuse payment system, further indicating its progressive stance on digital financial solutions.
African Context of CBDC and Cryptocurrency
Across Africa, at least 18 countries are exploring the potential of CBDCs. Nigeria, for instance, launched the eNaira in 2022, becoming the world’s second live CBDC, though its success has been mixed. Zimbabwe, on the other hand, introduced a gold-based token as the foundation for its latest currency, demonstrating the continent’s diverse approaches to digital currency. However, not all initiatives have succeeded. The Central African Republic’s adoption of Bitcoin and its launch of the Sango cryptocurrency encountered significant challenges, with the Sango currency’s website currently non-functional.
Ethiopia’s move towards a CBDC aligns with its broader economic reform goals and its vision of integrating more deeply with the global financial system. The creation of a legal framework and a regulatory sandbox is a significant first step. As Ethiopia continues to implement its Homegrown Economic Reform Agenda, the introduction of a CBDC could play a pivotal role in transforming its financial landscape.