With the launch of the e-Naira by the Central Bank of Nigeria drawing nearer, everyone is itching to know what exactly they are, how it works, where the CBN is in terms of development, and why this matters; not only for Central banks, policymakers and banks but also for YOU the end-users.
We are in the era of Central Bank Digital Currencies (CBDCs) and Nigeria is trots along as it is set to launch a digital version of the Naira, the e-Naira. But before we proceed a couple of questions need to be answered.
First, What is a CBDC/e-Naira? A CBDC is a new digital form of central bank money equal to physical cash in reserves that your commercial banks hold at the central bank.
In line with this fact, the e-Naira is a digital representation of the paper naira currency issued by the Central Bank of Nigeria. The e-Naira will be a “complementary” legal tender in Nigeria, having the same exchange value as the Naira, and maintain a “parity of value” with the Naira.
Is it not the same as our digital payment systems today? Not quite. Yes, those online transactions and payments are digital but in reality, they are just debits and credits or say additions and subtractions between two different providers like banks to payment companies.
Real CBDCs are components of the monetary base and the direct liability of the Central Bank.
Today that practically exists in only two forms: first, is the physical cash that you hold in your hands and can see. The other, which you don’t see are the reserves that your bank holds in the Central bank. e-Naira could therefore constitute the third new form of central bank money and this is a big deal.
We are in the era of e-Naira (Nigeria’s CBDC) which is to be launched in Lagos, Abuja, Port-Harcourt, and Kano by the CBN and this is coming after the crypto and Twitter ban.
So, What does this mean for you? For starters, it means that you will be able to receive and spend in e-Naira.
How? Well, like any other digital currency, you will need an electronic wallet to receive, hold and spend it securely, which is basically an ‘app’ you will download on your phone for the pilot program (Project Giant), the name the CBN is calling it.
The banks will handle the process probably with a selected group of tech-savvy early adopter customers. An invitation code would be sent to you from your bank. However, that depends on if you are selected.
You would subsequently be directed to either a website or an app store if you are on iphone or ipad or to a Google Playstore if you are on android to download the wallet app.
Once your app is downloaded, enter the invitation code; if valid, you will proceed to register via setting of password, BVN, e-mail, phone, then you would get verified and your e-Naira wallet would be created…easy.
After the wallet creation, What’s next? Top Up of course! How do you fund it? You can receive e-Naira from another e-Naira holder from their wallet or you can transfer from your bank account to your e-Naira wallet (Naira for e-Naira).
That is credit your wallet from your bank app (the bank that invited you or a different bank). For example, if Zenith bank sent you an invite to set up your e-Naira wallet, you can use your Zenith bank account app to transfer some Naira to your e-Naira wallet or you can use your Ztb bank app to transfer to your e-Naira wallet with Zenith bank, either way, you get your e-Naira.
How do you spend it? You can spend your e-Naira through a wallet-to-wallet transfer or wallet to a bank account within the same bank or outside with another bank in which case you will enter a bank account then initiate a transfer.
But e-Naira to cash withdrawals are not allowed. You can’t just go to the ATM and start withdrawing cash from your e-Naira wallet. It’s a digital economy, hence, cashless.
On the other hand, you can convert your cash to e-Naira. All you need to do is to take it to a registered agent or your bank branch and they will credit your e-Naira wallet with the amount you deposited.
Individuals, merchants, businesses, government institutions will be on-boarded to the e-Naira platform to test run and possibly give feedback to strengthen the system before the next stage of roll-out.
Read also: Another view on e-money and e-naira
So, the e-Naira is here to usher in a new digital era to facilitate payments be it person-to-person, person-to-business, or person-to-government. It should also be noted that all payments between you and the government will be through the e-Naira in stages henceforth.
This includes salary payments for government workers, taxes, insurance, passports, drivers’ license registrations, and renewals, utility bills, and all other transactions that involve you and the government and service providers. Exciting times truly lie ahead.
In the long run, the e-Naira would surpass the hemisphere of being just a money and payment platform. It is going to be a platform where other businesses would thrive on, especially in the fintech industry. If you look at the underlying technology power in the whole process, it is going to be much easier to access funds, make payments and most importantly control the financial sector especially when it comes to foreign exchange.
We would be seeing a lot of products coming out based on the e-Naira. Digital goods, e-commerce, imports and exports, financial derivatives, and all kinds of innovations can be built on this system.
Are CBDCs and e-Naira any different from cryptocurrencies? CBDCs have some similarities as well as differences from cryptocurrencies but you won’t observe that from the name.
They are similar in the underlying technology, both are digital and based on a blockchain (a highly secured database in which all transactions are stored). The main difference though is that CBDCs are permission by a central authority and issued into existence while cryptocurrencies are permissionless, meaning that they are public and mined into existence( created cryptographically).
Both currencies are networks of platforms where digital assets like money currencies can be exchanged securely, on top of which all the derivative assets can be built. Other benefits are cherry on the pie like fast transactions and cheaper processing.
What are the risks? First, there is the risk of disintermediation of banks. If one individual replaces N1 with an N1 CBDC, the impact is limited. But if the public starts substituting their bank balances with CBDC, then this reduces the bank balances that the banks hold, increases their funding cost, and reduces their profitability.
The bigger risk for the Central bank is that in the event of a crisis, a CBDC can accelerate a run on the banks. For example, today, if you do not trust the banking system, you can go to an ATM and withdraw all your money in cash. However, there are physical limitations to how much you can withdraw from an ATM let alone all the practical challenges with how you will secure and keep these banknotes safely.
In a CBDC world, you could quickly remove your funds held at your bank and hold them in your digital wallet. And unlike paper banknotes, there is no limit on how much you can store digitally.
Central banks and your banks, however are fully aware of these risks and this is why many CBDC initiatives have tried to put various restrictions for the maximum amount of CBDC anyone is allowed to hold in their CBDC wallet to have a lower interest rate on CBDC for bank deposits, so people have an incentive to keep their money in traditional banks.
The other concern is privacy. Whilst giving the CBN access to see all transactions in the country (which is great for combating money laundering and corruption in the country), it also raises privacy concerns.
So, expect to see a lot of activity in this space over the coming months and also endeavor to be part of this revolutionary journey Nigeria is currently embarking on this because the future is finally here.