How CBN’s eNaira sets global example for Central Bank digital currencies – IMF

The Central Bank of Nigeria’s (CBN) digital currency – the eNaira provides just a useful example of how Central Bank Digital Currencies (CBDCs) could work in practice, the International Monetary Fund (IMF) has said.

According to the IMF, this is because the project has a two-tiered architecture whereby the CBN issues the eNaira and financial institutions directly engage with users for distribution, payment facilitation, dispute resolution, and other roles.

Also, at present, all users need to open and maintain wallets in the eNaira platform and link their bank accounts with their wallets.

Transfers can be made from bank accounts to eNaira wallets up to a daily maximum and a cumulative limit, set to prevent a sudden surge of transfers from the banking system to the eNaira platform, which could destabilize the banking system.

The IMF also believes that because the bank verification number is needed to open a wallet helps to identify end users of the eNaira, makes it possible to comply with financial integrity regulations, and is commendable.

These are contained in the IMF latest April 2022 Regional Economic Outlook (REO).

A CBDC is a digital version of cash that can be stored and transferred electronically and is fully backed by the issuing central bank.

Many central banks across the world—including 13 in sub-Saharan Africa—are currently exploring the option of using a CBDC to enhance their electronic payment system.

In October 2021, Nigeria became the first country in Africa and the second in the world after the Bahamas to issue a CBDC—the eNaira.
eNaira adoption: The journey after seven months
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“The Central Bank of Nigeria’s eNaira provides a useful example of how CBDCs could work in practice,” the Fund noted.

“As of end January, over 700,000 wallets have been downloaded and a total of 9 million transfers and payments have been made using eNaira.”

The CBN is further planning to allow users without a bank account to open an eNaira wallet with only the national identification number to make it more accessible to the unbanked. Users without bank accounts will have lower transaction limits to minimize financial integrity risks.

The CBN also plans to allow the Nigerian diaspora to send remittances through the eNaira platform. For this plan to be successful, it is important to strengthen confidence in the local currency and support a unified market clearing exchange rate, the IMF, however advised, and commended the CBN plans to make it possible to pay taxes through the eNaira platform which could potentially improve revenue collection.

Nigeria’s Bank CEOs said in April that since its launch, in October 2021, the eNaira has seen over 756,000 downloads of the App, and about 165,000 consumer and 2800 Merchant wallets.

“As we all know the future of money is digital and the central bank, having realized this fact, proactively pioneered the central bank digital currency in Africa.

“Most of the other countries are actually still in the research and development stage while two of them are in the pilot phase,” Miriam Olusanya CEO, GTBank said specifically after last month’s Bankers committee meeting.

“The advantage of the eNaira, which has a legal backing is that currently, it is at no cost, and the CBN intends to keep it relatively cheaper, than other transactional channels.

“The second advantage is that it’s pegged to Naira, meaning that the risk of fluctuations is abated. It’s in and out at the same rate, same value as an Naira.”

On the potential benefits and challenges of digital currencies, the IMF noted the possibility of fostering financial inclusion, especially in sub-Saharan Africa, where CBDCs could bring financial services to previously unbanked or underbanked people, allowing digital transactions in remote places without internet access at minimal or no cost.

Digital currencies could also help to facilitate cross-border transfers and payments. The average cost of sending remittances to sub-Saharan Africa was 8 percent of the transfer amount in 2020.

“CBDCs could make sending remittances easier, faster, and cheaper by shortening payment chains and creating more competition among remittance service providers. Faster clearance of cross-border payments can help promote trade integration within the region and with the rest of the world,” the IMF noted.

Digital currencies also provide an alternative to cryptocurrencies, which pose the risk that citizens may move their money to these assets either for ease of transaction or if they lose confidence in the local currency.

“This may undermine monetary policy transmission. Moreover, cryptocurrencies could be a conduit for illicit financial flows,” the Fund noted, pointing out that CBDCs could minimize these risks by offering a reliable and regulated alternative to cryptocurrencies.

Digital currencies could also provide timely and targeted welfare disbursement, according to the IMF, and if the CBDCs are broadly used by the population, including by low-income households, targeted welfare support could be provided directly through such platform, especially during sudden crises like those triggered by the COVID-19 pandemic or natural disasters.

The IMF, however, warned that the design and adoption of CBDCs should be able to address some potential challenges and risks, including: data integrity, cyber risk and disruptions, as well as integrity risk.

Central banks would have to put in place appropriate measures to ensure Anti-Money Laundering/Combating the Financing of Terrorism (AML/ CFT) regulations are followed.

“This would require in many countries strengthening national identification systems so that Know-Your-Customer requirements can be more easily enforced without undermining financial inclusions.”

Central banks need to be careful that CBDCs do not disrupt the banking system through significant transfers of funds from commercial banks to CBDC wallets, which reduces bank funding and lending capacity.

The IMF believes that since broad adoption and effective utilization of CBDCs hinge on the accessibility of digital infrastructure such as phone and internet connectivity, development, deployment, and oversight of CBDCs, especially in sub-Saharan Africa also require substantial technical capacity in central banks.

It therefore believes that, before pursuing CBDCs, central banks in the region would need to carefully evaluate the benefits and weigh them against the challenges and risks, considering the local context and internal capacity.

For CBDCs to be successful they also need to be accompanied by sound macroeconomic and regulatory policies that buttress confidence in the local currency.

In addition, how CBDCs could affect the thriving private industry for digital payment services should be carefully thought through and managed as some operators can have systemic importance.

“Nigeria’s financial sector already has a vibrant market for digital payment instruments such as mobile money.

“By complementing these existing instruments, CBDC can bring significant positive impacts by providing a cheaper and safer infrastructure for digital fund transfers—for example from customers of one mobile money provider to those belonging to another,” the IMF told BusinessDay in a mailed note.

“Likewise, it may also make remittances from abroad cheaper and easier reaching final recipients.”

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