As the launch of the digital Naira (E-Naira) draws near, Nigeria is now set to join countries like China (digital yuan), Bahamas (sand dollar), Eastern Caribbean (DCash) that have officially launched their own national digital currencies.
The Central Bank of Nigeria (CBN) recently announced plans to launch its own digital currency before the end of the year. The ‘digital Naira’ would be issued by the CBN and held in digital wallets.
CBN Director, IT Department, Rakiya Mohammed, stated that the innovation would benefit the fintech ecosystem by enhancing operational efficiency, opportunities for fintech start-ups in building services and products as well as financial inclusion that will contribute to economic growth, and the creation of a new system complimenting the traditional payment system.
“We have spent over two years studying this concept of the central bank’s digital currency and we have identified the risks. And it is one of the reasons why I said we are setting up a central governance structure that would involve all industry stakeholders to assess all the risks as we continue on this journey”, Mohammed said.
While the recent surge and plunge in cryptocurrencies took the world by storm, many sceptics still dismiss them as the fool’s gold and lacking in most of the fundamental properties of a fiat currency (medium of exchange, store of value and a unit of account).
At this juncture, it is important to note that digital currencies are not the same as cryptocurrencies. While all cryptocurrencies are digital currencies, not all digital currencies are cryptocurrencies. How do they differ? Regulation.
Digital currencies are forms of money or cash available in non-physical (electronic/virtual) forms, typically issued by Central Banks and are subject to all the scrutiny and government backing of fiat currencies.
They are also only accessible via internet-enabled devices. Cryptocurrencies, while being digital, are not issued by Central banks or tied to any entity, government, institutions or individuals (they are not centralized). Crucially, the crypto space is devoid of regulation, hence the wild fluctuations witnessed daily in response to market forces.
However, all digital currencies rely on blockchain technology. Known as distributed ledger technology (DLT), it is a digital platform and database that allows digital information to be distributed but not copied.
Originally created to authenticate bitcoin (the most popular cryptocurrency), it was designed as a way to centralize record-keeping without needing third-party authorization – like a bank or a regulator. It enables users to record, track, and validate peer-to-peer transactions. Confirmation of records is done by multiple users with access to the data. It keeps a permanent record of all transactions, keeps users information anonymous while all activity is secure and unchangeable.
But beyond recording financial transactions, it can be used to record practically everything of value. The digital naira will employ the use of the Hyperledger Fabric blockchain.
While the risks associated with the growing use of digital currencies are clear and evolving, the CBN is banking on embracing the emerging digital world and reaping its benefits. The CBN would use electronic coins or notes instead of printing physical money.
This would lower the costs of currency management. The use of digital currencies will cut off intermediaries like banks or clearinghouses and drastically lower the cost and time involved in cross-border transactions.
Remittances and trade finance, especially with the launch of AfCFTA, will be major beneficiaries. The speed of transactions will increase and enhance the velocity of circulation of money, which will boost economic activity.
Some other benefits include the potential to reduce cash handling costs by 5-7 percent, deepening digital financial inclusion and promoting the development of e-commerce, create a reliable mechanism to distribute fiscal stimulus to citizens, reduce tax leakages due to tax evasion and illicit money flows, reduction in the overall indirect cost of cash on the broader community, enable Public-Private Partnership and Innovation of opportunities in the financial system as new business opportunities arise from emerging business models, financial products and services.
However, despite these undisputed benefits, some privacy drawbacks abound. Just like cryptocurrencies, CBDCs by design allow the central banks to know who is holding what money. For example, imagine that CBN issues the N1000 naira note with serial number 347589.
In today’s world, once that money is printed the CBN doesn’t even know who it is with. However, with a CBDC, the CBN exactly knows who is with the money and what they are doing with it. With CBDCs, the privacy that spending in cash gives you will not exist.
Imagine the government leveraging CBDC to surveil human rights organisations and what they are doing with the money they get as donations.
Also, If the CBN decides to give everyone a CBDC a virtual wallet where they can store their money, then the role of banks today is questionable. You do not need a bank to help you administer the wallet for you except the CBN decides to issue new licenses in this regard.
The adoption of a digital currency will facilitate financial inclusion by increasing the share of the population with access to financial products. It would enable banks to bridge this gap by circumventing legacy infrastructure – and the attendant costs – especially in the rural communities. This would allow Nigeria’s informal economy to go mainstream, giving them access to services like credit and insurance, allowing them to expand their business and maximize potential – by doing so, stimulating the wider economy.
“Digital currency would enhance macroeconomic management, boost economic growth, facilitate cross border trade, boost financial inclusion and monetary policy effectiveness,” Mohammed said.
The CBN will now need to create sufficient awareness of its digital currency project and its benefits given the perception of most Nigerians who have come to associate crypto-currency use to online scams.
The announcement of an October 2021 date however appears hurried from the CBN especially when the CBN is known for usually carrying out a lot of engagement and sensitization before embarking on transformational initiatives such as this. However, it is a development Nigerians will be watching with keen interest.
China, the world’s second-largest economy has followed the Bahamas to open the doors for others to follow and Nigeria aims to be at the cutting-edge at least for Africa. However, unlike China, Nigeria is a democratic multi-party state with leaders with diverse interests and opinions with more influence required to drive adoption.