BusinessDay

What Nigerians should expect with launch of e-Naira

The Central Bank of Nigeria (CBN) in the early months of the year, announced plans to launch a digital currency before the end of 2021. The bank further indicated that the ‘digital naira’ to be issued would be held in various banks’ digital wallets.

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.

As the launch of the digital naira (e-Naira) draws near, Nigeria is now set to join countries like China that have officially launched their own national digital currencies.

In a bid to avoid conflict of interest, the CBN has stated that after the launch of the e-Naira, banks and other licensed operators may provide their own wallets since it does not intend to compete against them.

According to Nairametrics report, the CBN sent a presentation to banks about the e-Naira project releasing more details and guidelines about the project to banks.

The presentation stated that participants in the e-Naira programme are featured in five stages.

These are: Monetary Authority Suite. The central bank will be handing the first product component that includes issue, distribute, redeem and destroy the currency. Store data on a cloud server, monitor and analyse currency transactions.

Financial Institution Suite: Licensed financial institution will be able to request currency or issue stable coins, manage digital currency across branches, identify and AML compliance capability.

E-Government Suite: The government will be able to efficiently process digital payments sent to and received from citizens and businesses.

Merchants will provide low-cost payment and business management software, POS, remote payment solutions, online capabilities, transaction analysis and reconciliation.

Retail Consumer Suite: Features user-centred designs for a great user experience. The architecture will be expandable to enable innovation, features advanced privacy and security.

The report went further to indicate that it will have a non-interest-bearing central bank’s digital currency (CBDC) status, a transaction limit for customers, and a value-based transaction limit. It also stated that the e-Naira is a legal tender for the entire country.

Some benefits accompanied these developments, as the report stated that the digital currency infrastructure would not charge for user-to-merchant transactions and peer-to-peer wallet transactions. The report added that the proposed transaction cost for the e-Naira wallet was stated.

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).

Rakiya Mohammed, CBN director, information technology department, however, stated that the innovation would benefit the fintech ecosystem by enhancing operational efficiency. It will also create 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 CBDC 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 access all the risks as we continue on this journey”, Mohammed said.

Read also: Central Bank Digital Currencies: The next big thing in global finance

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 will 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 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, reduce overall indirect cost of cash on the broader community. It will also enable Public-Private Partnership (PPP) and innovation of opportunities in the financial system as new business opportunities arise from emerging business models, financial products and services.

However, despite these benefits, some privacy drawbacks abound. Just like cryptocurrencies, CBDC by design allows the central banks to know who is holding what money. For example, imagine that CBN issues a 1000 naira note with serial number 347589. In today’s world, once that money is printed, the CBN doesn’t ever 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 CBDC, the privacy that spending in cash gives you will not exist. Imagine the government leveraging CBDC to survey human rights organisations and what they are doing with the money they get as donations.

The adoption of a digital currency will facilitate financial inclusion by increasing the share of the population with access to financial products. It will enable banks bridge this gap by circumventing legacy infrastructure – and the attendant costs, especially in the rural communities. This will allow Nigeria’s informal economy to go mainstream, giving them access to services like credit and insurance, allowing them to expand their business and maximise potential and 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 hasty by the CBN especially when the apex bank is known for usually carrying out a lot of engagement and sensitisation before embarking on transformational initiatives such as this. However, it is a development Nigerians will continue watching with keen interest.

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