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By Ketema Adane

Ethiopia Enters the Digital Age: From Crypto Ban to CBDC Launch

Introduction

While Ethiopia’s National Bank of Ethiopia (NBE) establishment proclamation (No. 591/2008) designates Birr as the sole legal tender, a significant shift is underway. On June 14, 2024, the Council of Ministers in Addis Ababa approved a draft NBE proclamation. This new legislation establishes a legal framework for introducing a central bank digital currency (CBDC), paving the way for digital currencies to gain official recognition in Ethiopia.

This development acknowledges the undeniable potential of digital currencies. However, caution is necessary. As Ethiopians become increasingly interested in this new technology, user education is crucial to avoid scams perpetrated by individuals posing as legitimate digital currency brokers.

Understanding Digital Currency

Digital currency, existing electronically, is managed, stored, and exchanged primarily on digital systems, often over the internet. It lacks physical attributes and is solely available in digital form, yet functions similarly to physical currencies. There are various types, including:

  • Cryptocurrency: A decentralized digital currency using cryptography for security. Bitcoin is a well-known example.
  • Virtual Currency: A digital representation of value issued by a company or organization, usable for specific purposes within a particular ecosystem.
  • Central Bank Digital Currency (CBDC): A digital form of a country’s official currency issued by its central bank.

Digital currency can be stored in various ways, including distributed ledgers on the internet, centralized databases owned by institutions, or even on digital wallets or stored-value cards.

Pros and Cons of Digital Currencies

Pros:

  • Faster transaction times
  • No physical manufacturing required
  • Lower transaction costs
  • Easier implementation of monetary and fiscal policy
  • Offers greater privacy compared to other forms of currency

Cons:

  • Difficulty in storing and using
  • Vulnerability to hacking
  • Volatile prices leading to lost value
  • May not allow for irreversible transactions
  • Limited acceptability

 

Ethiopia’s Digital Currency Landscape: A Work in Progress

The global digital currency landscape is diverse. China pilots its government-backed digital yuan, while the Bahamas became the first country with a CBDC, the Sand Dollar. Sweden explores an e-krona to address declining cash use, Nigeria’s eNaira targets financial inclusion, and the US cautiously considers a digital dollar, highlighting the ongoing debate about digital currency implementation worldwide.

Ethiopia presents a unique case. Bitcoin and similar cryptocurrencies are currently illegal for transactions, with the NBE considering Birr the only legal tender. This stance is further emphasized by warnings of “legal measures” against users. However, reports suggest Ethiopians engage in cryptocurrency use, and interestingly, Ethiopia allows Bitcoin mining. This might be due to the NBE’s potential interest in the foreign currency generated by miners to pay for electricity, with Ethiopia’s relatively low electricity costs being an additional incentive for miners.

Adding complexity, the Information Network Security Administration (INSA) previously required registration for “Crypto providers,” hinting at a potential shift towards regulation before the full legality of cryptocurrency use was established.

Despite the current ban, the NBE is actively studying digital currencies. A significant development occurred on June 14, 2024, when the Council of Ministers in Addis Ababa approved a draft proclamation for the NBE. This paves the way for introducing a CBDC upon approval by the House of People’s Representatives.

It’s important to note that digital currencies require a high degree of technological expertise. Even with potential legalization, enforcement needs to be implemented progressively, considering Ethiopia’s technological infrastructure. While recent developments suggest a path towards digital currency adoption, a cautious approach is necessary to manage both the potential benefits and risks.

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On June 27, 2016, during its 36th regular meeting, the House of Peoples Representatives ratified Value Added Tax (VAT) Proclamation No.1341/2016, by replacing Proclamation No.285/1994. The Proclamation became effective immediately upon its approval.

The proclamation incorporated substantial updates in the VAT proclamation, it tried to address changes in economic activities, electronic transactions, tax exemptions, and the relationship between input and output tax, and aligned the system with existing global standards. It is made to create clear and effective legal frameworks that contribute to an efficient implementation of VAT within the national legal system.

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