Ahead of the planned rollout of digital currency before the end of the year by the Central Bank of Nigeria (CBN), it is important to look at the potential benefits to the economy.
The mandate of the Central Bank is derived from the 1958 Act of Parliament, as amended in 1991, 1993,1997,1998,1999 and 2007.
Consequently, the CBN Act of 2007 of the Federal Republic of Nigeria charges the Bank with the overall control and administration of the monetary and financial sector policies of the Federal Government.
The objectives of the CBN include ensuring monetary and price stability; issuing legal tender currency in Nigeria; maintaining external reserves to safeguard the international value of the legal tender currency; promoting a sound financial system in Nigeria; and acting as Banker and providing economic and financial advice to the Federal Government.
Consequently, the Bank is charged with the responsibility of administering the Banks and Other Financial Institutions Act (BOFIA), 2020, with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities, as well as the promotion of an efficient payment system.
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In trying to save the country, particularly the financial sector from activities of fraudsters and speculators, the CBN, early this year, sent a reminder to Deposit Money Banks (DMBs) to desist from transacting in, and with entities dealing in cryptocurrencies.
This led to reactions and comments from the public but the CBN explained that the use of cryptocurrencies in Nigeria goes against the key mandates of the CBN, as enshrined in the CBN Act (2007), as the issuer of legal tender in Nigeria.
In effect, the Apex bank said the use of cryptocurrencies in Nigeria is a direct contravention of existing law. It is also important to highlight that there is a critical difference between a Central Bank-issued Digital Currency and cryptocurrencies. As the names imply, while Central Banks can issue Digital Currencies, cryptocurrencies are issued by unknown and unregulated entities.
In June 2021, the CBN announced plans to launch its own digital currency before the end of the year. CBN Director, Information Technology, Rukiyat Mohammed, said the CBN has spent two years exploring the concept of digital currency.
“Before the end of the year, the Central Bank will be making an announcement and possibly launching a pilot scheme in order to be able to provide this kind of currency,” Mohammed explained.
Uju Ogubunka, president, Bank Customers Association of Nigeria (BCAN) said the CBN is the Apex bank and the issuer of legal tender. Its job, he said, is to make sure that the financial system is well driven. “If it tries to incorporate digital currency, it must have good reasons for it,” he said.
Ogubunka said the CBN’s plan to roll out digital currency is okay as it would reduce the queue in the banking halls. He said when the CBN launches it, it will be given a trial and if it works well, it will be better for the country.
The potential advantages are considerable, according to the International Monetary Fund (IMF). A Central Bank Digital Currency would allow households and businesses to directly make electronic payments using money issued by the Bank of Nigeria.
“As you are going to have cash in your pocket, you are going to have digital currency in your pocket. 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, U.S. without having to transmit cash and at a very reduced cost,” Mohammed said.
She said 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. The Central Bank’s digital currency will reduce the cost of currency management.
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She said the digital currency was being considered on the back of the present global demand, citing the remittances which are a huge market in Africa “we all know how long instructions take for money to be sent to or received from abroad.”
The digital currency she said would help the country to achieve the 80 percent financial inclusion target, which it missed in 2020.
According to the Washington D.C. based IMF, some countries want to lower costs of handling cash, especially across vast territories or multiple islands. Some are keen to improve financial inclusion, so those without bank accounts still have access to a means of payment as cash use diminishes. For many, payments are the first step to accessing other financial services like savings accounts and loans, said Fund.
Some central banks are concerned that their payment systems are increasingly dominated by a few large, and often foreign, companies. So they aim to offer an attractive domestic alternative that would also serve as a backup and induce the private sector to offer efficient services at a low cost.
There are risks too. Perhaps the most important is related to bank funding. “What if you decided to withdraw your savings from the local bank and hold only the central bank digital currency? I know, you’ve grown suspicious of big banks since the last crisis. But banks are important to channel your savings to finance someone else’s project. Maybe our baker friend needs a loan to get a new oven. So it’s important to find ways to limit vast or sharp shifts away from bank deposits. Some central banks may impose fees if you hold more than a certain amount of digital currency—we’ll see,” the IMF said.
Similarly, people may choose to hold a digital currency issued by a foreign central bank, if it is deemed safer, more stable, or perhaps more efficient and easier to use. That would be a problem for the domestic banking system and for central banks trying to steer their economy through interest rates on assets in domestic currency.
So central banks may have to find ways to manage cross-border flows in and out of digital currencies. That’s a big open issue we’re working on.
Finally, the credibility of central banks might be at risk, and the demands on them will be significant. “Can you imagine a central bank becoming more like a software company, constantly needing to remain on the cutting edge of technology and serve diverse and rapidly evolving user needs?”, the Fund said.
