Johannes !Gawaxab
The future of money is at an inflection point. On the one hand, the battle between regulated and unregulated money and sovereign versus non-sovereign money. To ensure trust and stability in the financial system and manage risks associated with digital forms of money, we should defend regulated money and rein in unregulated finance. Given our constitutional obligation to carry out central bank functions such as currency issuance, as the central bank entrusted with this responsibility, we shouldn’t shy away from assessing the significance of money in all its manifestations and future in this rapidly changing world.
Financial system goal
In the wake of these developments, we have not folded our hands. The changing landscape of finance was an imperative that informed the Bank of Namibia’s various initiatives and overarching objectives when it developed its Strategy for 2022-2024. We’ve long concluded that “listening perceptibly to the music of the future and dancing to it today” must be an unwavering endeavour for us. Our goal is to further modernise Namibia’s financial system so that it remains relevant and keeps up with, if not outpaces, other leading central banks and the rest of the world. In light of such strategic foresight and the rapid digitalisation of the financial system, the Bank of Namibia has been considering whether a potential Central Bank Digital Currency (CBDC) could play a role in the future digital payment landscape, its potential properties, costs and benefits. However, the case for CBDCs differs in each country, and we shouldn’t blindly follow what others implemented as solutions for their countries. Furthermore, given the risks associated with these particular innovations, we have considered effective oversight of the burgeoning virtual asset space in its various manifestations.
Our position on these concepts and innovations is not static and constantly evolving, informed by surveying the domestic landscape and pairing this view with global standard setters. We are determining where our limited resources should be directed, and which aspects of digital innovation are a source of concern to protect consumers and safeguard financial stability as chief considerations. Namibia’s population is small, but its challenges are diverse and often one-of-a-kind. While global trends may speak to innovation in a specific way, we must ensure that our efforts always align with the realities of innovation within our landscape, and that the financial system of the future solves our challenges and is fit for our purposes.
Cash-light society
However, we are not reinventing the wheel. In every way, we are building on the foundation of a resilient and dynamic traditional payment landscape, which has resulted in a dynamic payments landscape open to innovation and diverse players. While cash remains a significant part of our economy, the National Payment System (NPS) aims to drive Namibia towards a cash-light society, as stated in the National Payment System Vision and Strategy 2025 developed by the payments and banking industry, the Payments Association of Namibia, and the Bank as the overseer of the payment system. New business models are created daily, recent technological advances continue to change our landscape, and new operating models establish themselves in almost every sector – all thanks to digital transformation. Some of these technologies have a great deal of promise to facilitate improved financial inclusion, cut down on transactional costs and frictions, boost competition, facilitate faster trade, and make it easier for more people to participate in the financial system.
Virtual assets
With that said, let me address the elephant in the room: virtual assets. As a result of the close relationship between virtual assets and the real economy, the Bank of Namibia must manage any potential risks to monetary policy and financial stability in a proactive manner. We have seen some specific positive user cases of virtual assets. We are aware, however, that some uses have occurred through the criminal front, such as fraud, theft, money laundering (ML), and terrorism funding (TF). As a result, the Financial Action Task Force (FATF) anti-money laundering/counter-terrorism financing (AML/CFT) has mandated standards for handling virtual assets. These should be carefully considered and effectively implemented to mitigate threats to financial integrity.
For this reason, Namibia has agreed to review its legislative framework to pave the way for an appropriate framework conducive to this sector. The relevant prudential regulators are working to regulate virtual assets and draft a framework for virtual assets and virtual asset service providers. A technical committee has been established between the Bank of Namibia and NAMFISA as prudential regulators to develop a prudential licensing and regulatory framework for Virtual Assets (VAS) and Virtual Asset Service Providers (VASPs). Until such a time that it is finalised and operationalised, the public remains cautioned to be careful when investing in virtual assets, as there is no protection should funds so invested be forfeited.
Innovation Hub
However, through our newly-established Innovation Hub, we continue to engage with players in this small but growing sector. The Bank’s Hub recently conducted a survey to engage FinTech players and better understand Namibia’s landscape of VAS and VASPs. We are pleased to report that the discussions between the service providers and the Hub were fruitful, and gave us a better understanding of their operations. To continue forging this relationship, the Bank has been prepared to bring VAS and VASPs under its Fintech Framework since last year in a phased and structured manner for increased dialogue, and to assess potential risks through the Innovation Hub. The precise plan is that the Bank will, in the short term, register VASPs for this purpose and, in the long term, amend applicable laws and regulations diligently in consultation with other relevant authorities such as NAMFISA.
As an outcome of these engagements, we are updating the position paper on VAS and VASP. While Virtual Assets in Namibia remain without legal tender status, the acceptance of virtual assets for the payment of goods and services will be at the discretion of any merchant and buyer willing to participate in such an exchange or trade. Our position remains that Initial Coin Offerings (ICOs) leave themselves up to the possibility of fraud, manipulation and misrepresentation. As a result, the Bank does not advocate nor support the general public’s engagement in ICOs related to virtual assets.
A secure system
On CBDCs, it is only natural for us to thoroughly investigate whether a Central Bank-issued digital currency could play a role in preserving some of the current financial system’s secure and functional components in a complementary fashion to private sector innovations that are reshaping the future financial ecosystem. The ultimate goal of contemplating the implementation of a CBDC is to ensure that individuals operating in an increasingly digitalised economy continue to have access to the safest form of money – central bank money. The Bank will continue to exercise caution to ensure that technology is not simply adopted because it is available, but that each digital transformation initiative is directly linked to the Bank’s mandate and the promotion of financial inclusion. However, it is still early in the game. We still need to understand the legal, technical, technological and social impacts of CBDCs.
Patrick Dixon remarked, “In banking, trust is the only thing you have to sell.” As I answer the question of the meaning of money in the digital age, I have concluded that the meaning of money still serves the same purpose: a safe and secure medium of exchange, regardless of whether it is cash or in digital format. The essence of currency is backed by the trust that it is a safe and secure medium of exchange. Consequently, the issue thus becomes which institution is best- positioned to inspire confidence. I would argue that even in this digital era that we are living in, the organisations most equipped to provide trust have been and continue to be central banks. This is also the best way to guarantee an inclusive and effective financial system for everyone’s benefit.
* Johannes !Gawaxab is governor of the Bank of Namibia. This article is an adaptation of a recent speech he delivered at a Central Bank Digital Currency Virtual Assets Thought Leadership event.