The concept of a central bank digital currency predates the recent crypto bear market. However, it has been steadily gaining momentum as governments realize the need to modernize payment systems while addressing various economic and technological challenges. There are currently about 134 Nations and monetary unions that have explored or are exploring the use of central bank digital currencies, three of which have already been launched: Jamaica, the Bahamas, and Nigeria.

These countries and monetary unions have different but sometimes overlapping motivations for wanting to explore the option of digitizing their money, and it may not always be in the public interest.

But on the positive side, many governments are seeking to promote financial inclusion by providing unbanked individuals with an accessible digital payment option while enabling easy transfer of funds, such as welfare payments, for example. They do this in the hope of reducing reliance on banks to handle transactions, enabling ordinary people to send money transfers easily and affordably, and allowing international trade to be simplified.

Additionally, exploring central bank digital currencies could enhance economic transparency due to the immutability of blockchain technology, which would combat money laundering, tax evasion, and other financial crimes. Central bank digital currencies will also promote further expansion of the fintech sector by securing the future of the economy and encouraging advanced financial innovation.

Ethiopia, Africa's second-largest country and fifth-largest economy, made headlines after approving a draft law It has been updated Monetary policy framework by the National Bank of Ethiopia which includes, among other things, a plan to create a central bank digital currency. Economists believe the move will be a major boost to financial inclusion and efficiency in a country that was once seen as a growing economic powerhouse before a recent civil war disrupted momentum.

As the country rebuilds after the 2022 peace agreement, the National Bank of Egypt sees an opportunity to liberalize the economy and attract foreign investment. Ethiopia hopes to reform its economy, and much of its success may depend on how it implements a central bank digital currency.

There is no doubt that central bank digital currencies can unleash economic benefits that can help developing and underdeveloped countries improve their financial standing while playing a greater role on the global stage. However, whether a specific CBDC is for retail, wholesale, or hybrids, the development of these digital currencies could enable governments to assert more control over financial systems.

From a cryptocurrency perspective, if the adoption of central bank digital currencies (CBDC) becomes the norm, it could disrupt the booming decentralized finance space. For example, central bank digital currencies could threaten privately issued stablecoins, which serve an infrastructure role and facilitate DeFi activity.

For countries like Ethiopia that are strongly considering issuing central bank digital currencies, the use case in Nigeria should serve as a cautious story. When the Central Bank of Nigeria issued Nairause open source Hyperledger fabric It is a secure protocol and can process up to 3,000 transactions per second. However, the CBN has never linked eNaira to existing or developing financial infrastructure.

Ultimately, the CBN controls all nodes and blocks outside of blockchain data access, raising concerns about centralized authoritarian control. Since its launch in late 2021, eNaira has not been widely adopted and is viewed as a failure.

If central bank digital currencies are to protect national economies in the future, they must be compatible with all digital financial systems, including interoperability with public blockchains. In this case, implementing technical and organizational considerations is relatively simple; It is about the policies and vision of financial decision makers.

Any central bank digital currency (CBDC) program must collaborate with all licensed banks operating in the country while working with fintech and blockchain technology providers to ensure the interoperability of the CBDC with traditional financial systems, DeFi, and other payment paths. digital.

Kima, the interoperability protocol that links cryptocurrencies and fiat currencies, represents the type of technological infrastructure that can enable central bank digital currencies to facilitate real economic progress. Last year, Kima participated in a Pilot project Run by the Bank of Israel to evaluate the feasibility of adopting a central bank digital currency (CBDC). As part of the project, Kima successfully demonstrated a transfer of tokenized shares via a digital shekel.

Demonstrating the utility of its protocol, Kima built a demo trading platform to facilitate atomic swapping of token stocks. Kima's decentralized settlement layer handled the transaction, connecting a buyer interested in purchasing the stock using the digital shekel with the seller, who held the token stock in a cryptocurrency wallet. The seller received the amount directly into his bank account in the form of regular shekels. Using two API calls, Kima ensured that the transaction was secure and verified as it occurred instantly without any intermediaries or smart contracts.

This process – linking the central bank digital currency, token assets, digital wallet, and bank account – is what governments need to envision as the goal of any CBDC initiative. If governments intend to future-proof their economies, they must use central bank digital currencies to connect legacy financial systems to modern digital financial instruments in a secure and accessible way.