28 June 2022

Historical Evolution of Money

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:

(i) 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;

(ii) 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
(iii) 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 currency, 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:

(i) 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;

(ii) 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

(iii) 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.

Conclusion

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.

Jonathan S.K. Amable

Senior Associate
Financial Institutions and Capital Markets