A brief incursion into the historical evolution of money is necessary to set the pace for this discussion. It is common knowledge that the inefficiencies of the barter system (the system where humans paid for and transacted for goods and services by exchanging commodities such as salt, rare metals and precious stones) led to the invention of money or currency. Initially, the desire to use these precious stones and rare metals as a store of value led to the creation of coins from rare metals (i.e. commodity money). Subsequently, representative money was created, which were notes and coins backed by commodities, and representing a redeemable claim on those commodities. In fact, as recently as 1971, the U.S. dollar was backed by gold and could be directly converted into gold.
Currently, most countries use fiat currency, a form of money which lacks intrinsic value but has been established as legal tender by government decree (also known as ‘fiat’, hence, the term fiat currency). By establishing a fiat currency as legal tender, the government of a jurisdiction recognises that currency as the standard for settling public and private debts in that jurisdiction, meaning that any debtor within that jurisdiction may extinguish her debts or other financial obligations (such as tax payments) by tendering the relevant amount of fiat currency. Fiat currency is usually issued by central banks, and traditionally takes the form of notes and coins.
What is a CBDC?
According to the European Central Bank, a CBDC is a publicly-available digital form of fiat currency which is issued by a state with legal tender status. The Bank for International Settlements defines a CBDC as digital money which is issued by a central bank, denominated in the national unit of account, and represents a liability of the issuing central bank. There are 2 types of CBDCs. Where the CBDC is intended to be the digital equivalent of cash for use by end users such as consumers and businesses, it is referred to as a general purpose or retail CBDC.
Where the CBDC is intended to function similar to reserves held in a central bank to be used primarily by financial institutions, it is known as a wholesale CDBC. Retail CBDCs are intended to have all the characteristics of money, including acting as a medium of exchange, store of value, means of payment, unit of account, and being a settlement asset. The eCedi is intended to be a token-based retail CBDC.
What is the difference between the eCedi and electronic money?
Electronic money and CBDCs are very different things. Most Ghanaians are fairly familiar with the concept of electronic money, due to the popularity of the services provided by electronic money issuers (informally referred to as mobile money issuers) in Ghana. The Payment Systems and Services Act, 2019 (Act 987) (the PSP Act) defines electronic money as: “Monetary value which is stored electronically or magnetically, and represented by a claim on the issuer which is issued on receipt of funds, redeemable against cash, and may be accepted by a person”. Put plainly, electronic money is the electronic or magnetic representation of money created by an electronic money issuer after being credited with Ghana cedi notes and coins, and electronic money holders are entitled to transfer their electronic money to the electronic money issuer to redeem the underlying Ghana cedi notes and coins.
Accordingly, the PSP Act authorises electronic money issuers to issue electronic money (at par value) by crediting the monetary value on receipt of banknotes or coins, and to, at the request of electronic money holders, redeem the monetary value of the electronic money held by customers by giving out banknotes and coins and debiting the monetary value. On the other hand, the eCedi will be a digital version of the Ghana cedi notes and coins in the form of cryptographic tokens which are stored locally on a digital wallet and can be transferred from one user to another.
From the above definitions, the key distinctions between the eCedi (as a CBDC) and electronic money can be categorised as follows:
- issuer: eCedi is issued by the Bank of Ghana and represents a claim on the Bank of Ghana while electronic money is issued by electronic money issuers that have been licensed by the Bank of Ghana under the PSP Act (not the Bank of Ghana itself), and represents a claim on the electronic money issuer;
- form: eCedi is a digital, dematerialised version of the Ghana cedi issued directly by the Bank of Ghana as legal tender. This means the eCedi will in itself be central bank money (along with cash and central bank reserves), and the Bank of Ghana will not be obliged to keep physical Ghana cedi notes and coins for the redemption of the eCedi. In contrast, electronic money is merely an electronic representation of central bank physical cash in the custody of the electronic money issuer (and for that purpose, electronic money issuers are required to ensure that they keep enough physical Ghana cedi notes and coins for the redemption of all electronic money in circulation); and
- legal status: the eCedi will be legal tender in Ghana, while electronic money is not actually legal tender but rather a means for paying the legal tender.
Does the Bank of Ghana have the legislative authority to issue CBDCs?
Prior to Ghana’s independence, the West African Currency Board was responsible for issuing the applicable currencies, which were the West African pound, shillings and pence. The Bank of Ghana was created and took over the issue of currency notes and coins (which were in the form of Ghana pounds, shillings and pence) after independence.
The Bank of Ghana introduced cedi notes and pesewa coins to replace the Ghana pounds, shillings and pence after Ghana left the British colonial monetary system in 1965. Article 183(1) of the 1992 Constitution of Ghana (Constitution) acknowledged the Bank of Ghana’s pre-existing role as the central bank of Ghana, and provides that Bank of Ghana shall be the only authority to issue the currency of Ghana. Article 183(2)(a) of the Constitution further mandates the Bank of Ghana to direct and regulate the currency system in the interest of the economic progress of Ghana.
The Bank of Ghana Act, 2002 (as amended) (the Bank of Ghana Act) was enacted to amend and consolidate all laws relating to the Bank of Ghana and provide for related matters. The Bank of Ghana Act authorises the Bank of Ghana to, among others, issue and redeem currency notes and coins and promote, regulate and supervise payment and settlement systems. The Bank of Ghana Act stipulates that currency notes and (to the extent that they have not been tampered with) coins issued by the Bank of Ghana are legal tender at their face value.
The Bank of Ghana Act also regulates the unit, denomination and form of currency by stating that the unit of currency shall be the cedi, which shall be divided into 100 pesewas (with a pesewa being 1/100 of a cedi) and requiring the currency to be printed or minted by or under the authority of the Bank of Ghana.
A general review of all the other relevant legislation such as the PSP Act and the Foreign Exchange Act, 2006 (Act 723) (as amended) indicates that statutory references to legal tender or the definition of currency are invariably references to banknotes and coins issued by the Bank of Ghana. The key conclusions from the review of the applicable legislation are as follows:
- the Bank of Ghana Act does not authorise the Bank of Ghana to issue a dematerialised version of the cedi. It limits the powers of the Bank of Ghana to printed and minted currency only;
- since the Bank of Ghana Act has conferred the status of legal tender on cedi notes and coins, the Bank of Ghana requires specific legislative support to issue a dematerialised version of the cedi as legal tender; and
- the proper name for the unit of currency in Ghana (as established by the Bank of Ghana Act) is the cedi. The name ‘eCedi’ deviates from the statutorily prescribed unit of currency, and cannot be considered as legal tender without legislation.
It may be argued that the Bank of Ghana is authorised to issue a dematerialised version of the cedi as legal tender (without further legislation) pursuant to the provisions of article 183 (1) and article 183(2)(a) of the Constitution. Such a view would, however, be erroneous because the Constitution only identifies the Bank of Ghana as the issuing authority for Ghana’s currency, and the regulator of Ghana’s currency system. Specific details of the currency, such as its unit, denomination and form are regulated by section 37 of the Bank of Ghana Act, not the Constitution.
Further, the Constitution does not declare any currency as legal tender. As we have already discussed, legal tender (being by its very nature a command from the sovereign) has a peremptory nature which must be achieved through legislation. It is for this reason that the Bank of Ghana Act supplements section 35 (which deals with the authority of the Bank of Ghana to issue and redeem currency notes and coins) and section 37 (which deals with the unit, denomination and form of currency) with section 41, which clothes cedi notes and coins with authority as legal tender.
The adoption of a CBDC is welcome news for the financial ecosystem in Ghana. The traditional payment systems are fraught with many challenges, including longer transaction settlement periods (due to lack of the infrastructure for real-time settlement), complex structures in the international payment system, higher transaction costs due to fees from intermediaries and theft (due to carrying of physical cash).
Digital currencies have the potential to address these issues, hence, their growing popularity. Additionally, developments in financial technology and experiences from the COVID-19 pandemic have demonstrated the convenience of digital payments. To evolve and fulfil its currency issuance mandate in these digital times, it is imperative that the Bank of Ghana issues a CBDC. However, care must be taken to ensure that this is done in a manner which is consistent with applicable law, to prevent legal setbacks to the adoption of these new technologies.
The writer is a Senior Associate, Financial Institutions and Capital Markets