CBDC

The Central Bank of Eswatini (CBE) conducted comprehensive research and experimentation on a Central Bank Digital Currency (CBDC), known as the Digital Lilangeni. In partnership with Giesecke+Devrient (G+D), the Bank completed a diagnostic study, proof-of-concept, and pilot projects to explore how a digital currency could work in practice. The initiative culminated in the Digital Lilangeni Design Paper (2024), which outlines key design principles and technical considerations for a potential retail CBDC that would complement physical cash.

The research explored various aspects including accessibility, interoperability with existing payment systems, offline payment capability, and appropriate governance structures. The proposed design would enable digital payments while maintaining privacy protections and regulatory compliance.

However, the CBE has not issued a CBDC and has decided not to proceed with issuance at this time. The research and pilot projects provided valuable insights that inform the Bank's understanding of digital currency systems, but current priorities focus on the ongoing modernization of Eswatini's payment infrastructure.

What is a CBDC? 

A CBDC is a form of central bank issued money that exists only in digital form. A CBDC is fully backed by the central bank similar to other forms of central bank money such as cash. Unlike most privately issued cryptocurrencies, A CBDC, being digital fiat currency, could be made legal tender and should be capable of achieving all four conceptual uses of money;

1. as means of exchange
2. as a measure of value
3. as a store value and
4. as a unit of account.

There are two main types of CBDCs, a wholesale CBDC and a retail CBDC:

• A wholesale CBDC is a digital currency issued by the central bank directly to commercial and other financial institutions which have reserve accounts at the central banks. A whole CBDC is used by banks for settlement amongst themselves and is not accessible to the general public. 
• A retail CBDC is similar to cash in that it is available to the wider public. This means users can be able to pay for service in a retail CBDC.

What is retail CBDC?

A retail central bank digital currency (CBDC) is a digital currency that is made available to the general public and is issued by the central bank. It differs from private digital currencies in that it continues to be a liability of the central bank, just like actual fiat currency (banknotes and coins). A CBDC only exists in digital form, and all transactions must be completed via a computer, smartphone, or other digital device.

The Central Bank of Eswatini conducted research and testing to explore whether to issue a CBDC and how it could work in practice. The CBE has completed this research and development project and has decided not to proceed with issuing a CBDC at the moment.

How is a retail CBDC different from other forms of digital currency?

The following table depicts the key differences between a retail CBDC and other forms of digital money. 

Source: Giesecke+Devrient

Why is the CBE considering a CBDC?

The CBE explored a potential Digital Lilangeni with the following motivations:

• Providing secure access to central bank-issued money: Offering citizens access to central bank-issued money in digital form to transact digitally in a more affordable way
• Fostering digitalisation: Accelerating the digitalisation of the domestic economy and the financial sector
• Catalysing innovation: Creating opportunities for new business models and innovative financial products and services within the Kingdom of Eswatini
• Deepening financial inclusion: Enabling broader participation in the financial system, particularly for unbanked populations
• Regional leadership: Anticipating the future role of the CBE as an active regulator and facilitator of digitalisation within the Common Monetary Area (CMA) and the African continent

The CBE identified specific challenges in Eswatini's payment landscape that a CBDC could potentially address:

• Cash dominance: Despite growth in digital financial services like mobile money and bank cards, cash remained the most preferred retail payment method, with high management and handling costs
• Affordability: Digital payment instruments came with transaction fees that led many citizens to cash out and use physical money to avoid these costs
• Limited interoperability: Challenges existed when sending electronic funds between different mobile money service providers or to transactional bank accounts, adding costs and reducing seamless consumer experience

The CBE believed that a CBDC could address these challenges and provide a more sustainable path forward, particularly in support of the National Payment System Vision 2025 and the National Financial Inclusion Strategy.

Objectives of the CBDC Project

The CBDC Project was designed to assess the feasibility and potential benefits of a Digital Lilangeni, with the objective of enhancing financial inclusion, strengthening payment system resilience, and supporting digital transformation in Eswatini. Through extensive research and experimentation, the project addressed critical questions related to the motivations for issuing a CBDC and evaluated various design considerations.

The CBE’s efforts included:

• Defining Design Principles: The project investigated governance, accessibility, and interoperability requirements, ensuring a Digital Lilangeni would meet the specific needs of Eswatini’s financial ecosystem​.
• Identifying Use Cases: Detailed analysis of potential use cases specific to Eswatini was conducted to ensure that the CBDC would serve practical and relevant purposes for citizens and businesses​.
• Evaluating Distribution Models: The project explored various distribution frameworks, ultimately implementing a two-tier model where the CBE would issue CBDCs to financial service providers for distribution to end-users​.
• Addressing Technical and Legal Considerations: Technical architecture, offline capability, and regulatory compliance were central to the concept and pilot phases. Legal and regulatory frameworks, including AML/KYC standards, were thoroughly reviewed for CBDC issuance in Eswatini​.

To achieve these objectives, the project began with a series of training sessions on CBDCs for CBE staff, establishing a knowledgeable foundation. Subsequently, the Digital Lilangeni Design Paper was published, summarizing design principles, technical specifications, and considerations identified through sandbox testing. This document serves as a resource for stakeholders, outlining the motivations, benefits, and key considerations surrounding a CBDC in Eswatini.

Building on this groundwork, the CBE implemented both a Proof of Concept (PoC) and a pilot phase. The pilot involved controlled testing of online and offline payments, including smart card transactions within the CBE, and broader participation from business owners, financial service providers, and consumers. These stages provided invaluable insights into the operational feasibility and potential impact of a retail CBDC in real-world scenarios​.

Through these efforts, the CBDC Project has created a strong foundation for future decisions on the issuance of a Digital Lilangeni, aligning with Eswatini's goals for financial inclusion and modern payment systems.

How might a digital Lilangeni Work 

The proposed Digital Lilangeni would have been designed in cash-like denominations such as E10, E20, E50, E100, and E200. Consumers and businesses would have been able to use the digital Lilangeni to pay for goods and services as well as conduct remittances.

The Digital Lilangeni was designed to complement cash and other existing means of payment, not to replace physical currency.

Who is the CBE engaging on CBDC?

The CBE had engaged Giesecke+Devrient (G+D), a global company based in Munich, Germany, for technical and strategic insights into the Digital Lilangeni initiative. G+D offers solutions for building and running a CBDC as well as to end-to-end cash management solutions. G+D has worked on a number of retail CBDC projects. Through G+D’s support, which included expertise from global CBDC projects, the CBE was able to explore policy frameworks, technical design, and localized CBDC use cases relevant to Eswatini’s financial ecosystem.

Next Steps

The CBE has completed the research and development project and it has decided not to proceed with issuing a CBDC at the moment. This decision is influenced by the ongoing modernisation of the payments systems in the country including the ongoing phased implementation of a national payment switch. The switch enhances the payment system in the country by improving efficiencies, promoting interoperability which drives financial inclusion, and reducing reliance on cash.  The Bank will continue to evaluate the evolving financial landscape and may revisit CBDC issuance if conditions become more favorable.

CBDC Frequently Asked Questions - https://www.centralbank.org.sz/faq/  (scroll to the bottom of the web page)