The Central Bank of Nigeria (CBN) has announced plans to launch its own digital currency before the end of the year.
A central bank digital currency (CBDC) is a widely used digital representation of a country’s sovereign currency issued by the monetary author.
Nigeria has two kinds of fiat money – notes and coins. Fiat money is a currency established as a legal tender by government regulation. The central bank digital currency is meant to be the third form of fiat money. It is not new in Nigeria.
Nigeria is among the top countries in the world as far as advancement in the use of digital money is concerned.
The CBN has spent two years exploring the concept of digital currency. The central bank’s digital currency is going to complement Nigeria’s coins and notes. The central bank digital currency will be as good as you having cash in your pocket.
A central bank digital currency would allow households and businesses to directly make electronic payments using money issued by the Central Bank of Nigeria.
As you are going to have cash in your pocket, you are going to have digital currency in your pocket.
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Nigerians in the rural areas who use cash should be able to have and use central bank digital currency. They should be able to buy anything in Ghana, South Africa, US without having to transmit cash and at a very reduced cost. Central bank’s digital currency will reduce the cost of currency management.
Other digital currencies like Bitcoin and cryptocurrency are not under the control of the CBN. They are purely personal decisions that individuals make.
Digital currency risks have been identified and the CBN is setting up a central governance structure that will involve all industry stakeholders to look at some of the risks as the digital currency journey continues.
The Central Bank digital currency would help the country to achieve the 80 percent financial inclusion target it missed in 2020. The currency will also help ease the process and cost of transaction, currency management, as well as complement CBN’s cashless policy. It would also enable innovation in the payment system in the country, enabling Nigerians to be able to transact more online.
According to the Bank of International Settlements (BIS), over 70 percent of central banks are interested in the possibility of issuing a virtual currency.
CBDCs can expand the functionalities of existing currency, making several payment use cases more efficient for cash money. The degree to which CBDC can in fact offer these benefits will largely depend on its design, according to PwC, a global network of firms delivering world-class assurance, tax, and consulting services for businesses.
CBDCs could improve trust, efficiency and payment functionality among different use cases and players, such as retail, wholesale, cross-border payments.
For retail, a report by the PwC stated that among the multitude of options payment already in use worldwide for the retail market (e.g. cash payment, credit, debit, etc.), CBDCs would offer a new choice for digital transactions, instant peer-to-peer payments and physical transactions. They could also potentially reduce costs and diversify payment channels.
The CBDC concept could facilitate a broader diversified access of institutions to high value payments and could leverage the birth of a new wholesale financial structure.
On cross-border, the report indicated that once DBDCs’ configuration and access mode are made clear, the question arises whether it can be used only domestically or also elsewhere. CBDCs could establish more direct monetary relationships at international level, reduce risks, improve the inefficiencies caused by today’s international banking model, while strengthening competition in the international accounts, and fostering the integration and the inclusiveness of financial markets.
