As the world embraces a more digitally connected and technologically advanced future, the landscape of financial transactions is rapidly evolving. Technological advancements, including blockchain platforms and the rise of digital currencies, are paving the way for more secure, efficient, and inclusive financial systems. These innovations not only streamline cross-border transactions but also provide unprecedented opportunities for financial inclusion. In this context, the Bank of Ghana intended to develop a Central Bank Digital Currency (CBDC) to facilitate financial inclusion, foster a cash-lite economy, enhance operational efficiency, and provide a safe alternative to privately issued digital currencies.
The CBDC aims to facilitate payments without requiring a bank account or smartphone, thus boosting digital services and financial inclusion across all demographic groups.
To realize this digital currency, the Bank of Ghana partnered with a German company, G+D, in August 2021 to pilot the digital cedi or E-Cedi. G+D offers production-ready CBDC solutions and is developing CBDC solutions with central banks globally, aiming to build interconnected ecosystems integrating both physical and digital cash.
A Central Bank Digital Currency (CBDC) is a digital version of an existing national currency, secured by blockchain technology. Blockchain is a digital ledger shared across many computers, where each transaction is recorded in a block linked to the previous one, forming a chain. This technology ensures that once a block is added, it cannot be changed or deleted, making it secure and tamper-proof. This shared, immutable ledger records all transactions, ensuring traceability and security.
CBDCs, like the E-Cedi, utilize blockchain to ensure all transactions are permanently recorded, providing an unchangeable and traceable transaction history. Unlike fiat currencies, digital currencies exist exclusively in electronic form and never take a physical form. While digital currencies and cryptocurrencies both exist electronically, digital currencies are issued by governments and backed by fiat money, whereas cryptocurrencies are secured by encryption and not backed by any physical commodity.
The E-Cedi has the potential to include more people in the Ghanaian economy, especially the unbanked population, boosting GDP and lowering transaction costs associated with transfers and transactions. Digital currencies are available 24/7, allowing for faster payments and broader accessibility.
The Bank of Ghana is leveraging the E-Cedi to roll out a project aimed at boosting international trade by enhancing the confidence of foreign traders dealing with Ghanaian MSMEs. The Bank of Ghana and the Monetary Authority of Singapore jointly initiated Project Digital Economy Semi-Fungible Tokens (DEFST) to help MSMEs enter the global trade market and access financial support more easily. Launched in June 2023, the project aims to introduce faster and more efficient options for international trade.
The DESFT solution comprises Universal Trusted Credentials (UTCs), CBDC, stablecoin integration, a trade marketplace, and an escrow arrangement, facilitating payments upon the successful verification of digital credentials and enhancing transaction reliability and security.
The Bank of Ghana recently announced the successful completion of the first proof of concept of cross-border trade using digital credentials in collaboration with MAS. This phase demonstrated the use of digital credentials for international trade and cross-border payments using the E-Cedi and the Singaporean dollar-pegged stablecoin.
In April 2024, a pilot trade between Ghana and Singapore was successfully conducted using the DESFT system, facilitated by Purpose Bound Money (PBM). This system significantly lowers payment processing costs for Ghanaian MSMEs in cross-border transactions. The next phase aims to expand PBM functionality to manage multiple digital currencies and ensure their interoperability, placing Africa at the forefront of global inclusive fintech innovation.
The Government of Ghana is well on its way to establishing the E-Cedi as a medium of exchange by 2026. Digital transactions using digital currencies offer a modern alternative to traditional fiat transactions, leveraging blockchain technology to enhance security, efficiency, and flexibility. Project DEFST represents a significant innovation with the potential to transform how transactions are conducted across various industries, reducing barriers to trade for MSMEs. While the project promises many benefits, the balance between cost-effectiveness and the involvement of intermediaries remains to be seen. The project's ultimate goal is to support African SMEs engaging in international trade by removing significant obstacles through new-generation financial technology.
--
Read the original publication at N. Dowuona & Company