Currencies be it Ghana cedi, Euro, British pound, or the US dollar are primarily a medium of exchange for goods and services.

They have today evolved as a buildup on the prior barter system which was merely an exchange of goods for other goods with no means of assessing the proportionality in the exchange - thus, the development of money as the tool of exchange provides an efficient means of attaching value to these goods and services which were being exchanged.

From a historical perspective, currency was used as a receipt representing an individual’s right to claim grain in ancient Egypt. Representing a store value considered to be a more stable means of transactions by individuals, it became an acceptable tool for trade, and subsequently, governments of nations adopted and issued the same as their national medium of transaction.

Traditional currency, distinguished from other forms of currencies, is a form of money that is centralized, backed, and managed by a recognized government entity. Apart from its physical form, other acceptable mediums have been developed to carry currency such as debit and credit cards, etc. All these forms are issued and accepted on the back of centralized regulatory regimes.

Nonetheless, the recent phenomenon of digital currencies (cryptocurrencies) has brought into sharp contrast, the role of central banks in the regulation and management of currencies today and for the future across the world. The focus of this article is to evaluate the legality, viability, and prospects of digital currencies as the real currencies of the near future and how the regulatory challenges can be dealt with.

Traditional currencies – the paper formats

The idea and uses of currencies are widely acknowledged as all economic activities are facilitated by them. The advantages associated with the use of traditional currencies have been attributed majorly to the centralized mechanism underlying its issuance. This has provided some stability for its use either in physical or digital form. Further, it is easy to recover lost funds due to user protection laws that are passed by governments. In Ghana, the only issuing authority of currencies is the Bank of Ghana which derives its mandate from Article 183 of the 1992 Constitution.

Commercial banks licensed by the Bank of Ghana operate as retail facilitators for the saving, withdrawal, and performance of other transactions involving the use of currencies.

The digital currency revolution

Technological and digital revolutions are transforming and impacting the world and currencies and finance are no exceptions to these revolutions. As Moshit Joshi and Dixit Joshi rightly observed in their article, “if the last century has taught us anything, it is not to underestimate the transformative potential of technological innovation.” For some years now, there have been ravings on digital currencies, especially cryptocurrencies which are privately designed, owned, and managed, with many individuals trading in the same. It has generated a lot of concern from most governments as a result of the impact it is likely to make on nations’ economies as it keeps progressing and gaining more public and global attention.

Digital currency is any currency that is available exclusively in an electronic form. It makes use of an electronic ledger system that creates a network of computing nodes to process transactions, i.e., the use of cryptographs to anonymize user identity and transaction details. Digital currencies have utility similar to that of physical currencies – they can be used to purchase goods and pay for services as well.

The classic features of digital currencies have been identified as their existence only in a digital form; it can store and transfer value; it is decentralized with no regulatory authority. The types of digital currencies include the widely known cryptocurrencies, stable coins, and the central bank digital currencies (CBDC). The increasing preference for digital currencies is a result of their faster transfer and transacting times since it requires no intermediaries and the currencies exist on the same network; cheaper transaction cost; limitless access. Research has shown that digital currencies have the tendency of facilitating the implementation of monetary and fiscal policies, facilitating cross-border payments, and also serving as an efficient means of governmental payments.

A point for consideration now is whether digital currencies, especially cryptocurrencies such as bitcoin are viable currencies or they merely store value.

The basic functions of a currency are to store value, serve as a medium of exchange, and operate as a unit of account. And the viability of cryptocurrencies must be determined against the backdrop of the basic functions of a currency. To a considered extent, cryptocurrencies such as Bitcoin operate as a store of value but their volatility sets a limit to how much of a store of value it is. Thus, it is unable to maintain its relative price over a period of time as a result of the instability in its pricing.

For a currency to be a unit of account, it must be able to measure the real economic value of an item, however, items priced in bitcoins tend to have their prices fluctuating along with the price movements of bitcoin. As such, it does not represent the real value of an item.

On the basis that cryptocurrency is yet to establish itself as a plausible store of value, it cannot be functional as a medium of exchange. For instance, most people who hold bitcoin or accept it as a cash balance only do so because they expect it to appreciate over time so they can sell and this act will have a bearing on its liquidity because of the reduction in the demand that is caused in the process. 

Bitcoin's property as a medium of exchange heavily relies on scalability, liquidity, and adoption. That is to say that the number of transactions performed on a blockchain per second is relatively low, compared with the transactions performed on other digitized forms of traditional currencies such as the VISA which is an international payment system.

Liquidity in relation to crypto-markets has been explained to mean the ability to buy or sell ‘cryptos’ at a fair market price. It requires easy convertibility to other asset classes and a sufficient number of buyers and sellers in the market. However, the crypto market is still evolving hence there is a limited number of investors currently trading on the same, thus a relatively low market demand.

Adoption and regulation

On the issue of adoption, cryptocurrencies unlike traditional currencies are now gaining public knowledge, therefore, there is a measured number of people currently trading in the same.

A study shows that at the end of 2020, bitcoin traders were pegged at 18%, indicating a substantial increase from the previous year, 2019. Another point to be made lies in the fact that money is used to purchase cryptocurrencies and this defeats the whole purpose of currency production. Unlike traditional currencies which are issued by a central authority, individuals who want to trade in cryptocurrencies expend money to purchase the same.

In effect, although cryptocurrencies somewhat fit the description and functions of a currency, they are not so in the intendment of the purpose of currencies having regard to the various limitations attributed to it. They are more of assets like precious metals such as gold than they are currencies. Most nations do not have laws regulating the use and trade in digital currencies but steps are being taken to incorporate the same into their laws.

In the Ghanaian context and as indicated earlier, Article 183 of our Constitution mandates the Central Bank to be the only issuing authority of currencies in the country, meaning that only the Bank of Ghana can be the issuer of a currency and the Bank in the execution of its mandate has adopted for itself applicable legislations and rules, especially in the finance sector. The same cannot be said for digital currencies which are unregulated by any authority or legislation because it is not recognized as a currency in the country.

Now, it is time to decide whether digital currencies which are privately owned and managed should be allowed to operate in the country in the absence of governmental control.

The mandate of the Bank of Ghana to promote and maintain the stability of the currency of Ghana and direct and regulate the currency system in the interest of the economic progress of Ghana can be leveraged to provide a regulatory framework and deal with the evolution of digital currencies which seems to be drifting away from state monopoly and control of currencies. 

The existing digital currencies are not issued by our Central bank, hence, there is no regulatory framework to monitor its use or trade. The cryptocurrency market in Ghana has started on a slow pace but with the recent sensitization by "brand ambassadors" pitching its usefulness to the citizens, it is only a matter of time for the citizenry to become acquainted with its use and trade.

It is estimated that over 900 thousand people, representing 3.01% of Ghana's total population, currently own cryptocurrency. Since the trade in cryptocurrencies is not backed by any law in force in the country, the central bank and the Securities and Exchange Commission have variously issued notices to the public warning it of the unregulated nature of cryptocurrencies. This became necessary because of the many dangers the public was exposed to such as issues of cyberattacks, the non-refundable nature of hacked accounts, the volatile nature of these currencies.

Long after the Central Bank issued a public notice sometime in 2018, recognizing the emerging developments in blockchain with respect to finance, as well as the many dangers it poses to the nation and citizens, enough has not been done to provide regulation of digital currencies in Ghana. 

On the other hand, most countries have adopted the Central Bank Digital Currencies (CBDCs) regulating digital currencies as a measure to control the use and trade in digital currencies. For instance, the US launched research into the creation of its CBDC (eDollar) through its Project Hamilton. The Bahamas was the first country to launch a global central bank digital currency (CBDC) called the “Sand dollar” in May 2020 but Sweden’s eKrona is the first digital currency to hit the market with the backing of a major economy. China has also launched a pilot project for its digital Yuan to assess the use of the digital currency in its economy and currently it is spreading its use by adding on more cities in its project. Countries like England, Canada, Singapore, Thailand, and Japan are considering plans to launch a digital version of their nations' fiat currency.

In Africa, the Central Bank of Nigeria launched its eNaira digital currency in October 2021 following a ban it placed on the use and trade in cryptocurrencies in the country sometime in February 2021. Studies show that about 80% of central banks around the world are also conducting pilot tests. 

Therefore, the Central Bank must fasten its pace of introduction of eCEDI it announced sometime in 2021 as being at an advanced development stage. For the operation of the CBDC, for a country like Nigeria, the rollout of its eNaira could only be accessed by individuals with existing bank accounts. Generally, it will require the use of a smartphone and the installation of an application that will help its users to purchase or move monies from their bank accounts on to the same. Like cryptos, it will facilitate easy payments and quick financial transactions.

Challenges ahead and the reality

Some challenges that have been identified with the adoption of CBDCs are that it will require the use of high energy due to its high power consumption rate; it will still be prone to cyberattacks; it will co-exist with other digital currencies, hence it will limit its adoption as users will still be open to other choices; individuals will transfer their monies held in their bank accounts to the CBDC account and this will affect the traditional banking system as governments will still print out paper currencies and this can lead to a banking disaster in case of an economic downturn; there will be no guarantee for the privacy of users information; the use of the CBDC will result in an unstable currency due to the change in location of accounts from the regular bank accounts to the blockchain held accounts. 

In considering the possibility of the future use of digital currencies as money, nations are slow to fully adopt the usage of cryptocurrencies because it would reduce the role of the central bank and also weaken state authority over money supply – it will break the monopoly of the state over the issuance of currencies.

Nonetheless, digital values, cryptocurrencies, stable coins, and NFT are here to stay, despite the ups and downs of the crypto market and the risks associated with the same. The future of digital currencies and other digital assets utilizing them is in continuous change, but the steady expansion of technology is favorable for the rapid increase in electronic forms of money and payment. The adoption by countries of CBDCs is a step in the right direction as more research is being conducted into how best to regulate especially decentralized digital currencies like cryptocurrency.

Conclusion

The possibility of digital currencies becoming the currency of the future may seem frail now but progressively if conclusive solutions are proffered on its regulation as well as the problems associated with its use and trade on a large scale, there is a high possibility for such consideration by governments. In this light, there is a possibility that digital currencies will become a major means of payment in our financial space taking into account the technological progressions we have made in the last century.

ABOUT THE AUTHOR

CECILIA ANTWI KYEM is a Part II student of the Ghana School of Law and interns at SUSTINERI ATTORNEYS PRUC. Cecilia has an interest in Commercial Transactions, Financial Technology (Fintech), Start-ups and SMEs, Company Law and Contracts as well as Alternative Dispute Resolution. She is reachable at kyemcecilia@gmail.com