If you haven’t heard about central bank digital currencies (CBDCs) before, you’re not alone. However, it’s fascinating to discover that CBDCs have become a captivating topic in the financial world, as they have the potential to redefine the core principles of monetary systems.
Backed by the unwavering trust and authority of central banks, these digital forms of currency offer the promise of improved efficiency and groundbreaking opportunities. As digital equivalents of conventional fiat currencies, they possess the ability to transform financial transactions and unlock novel prospects for economic governance.
Yet, despite the hype and at the heart of discussions surrounding such ‘Schumpeterian’ innovation lies a seemingly simple yet all-encompassing question: What do CBDCs entail and is there a convincing case for it?
While this query may appear straightforward, it embodies a collective thirst for understanding and a quest for clarity that permeates the scope of digital finance. This is because a growing number of politicians, central bankers and experts are questioning the purpose of the CBDCs.
In the near future, the eNaira has the potential to become the preferred medium for everyday payments by households and businesses, establishing itself as a staple form of transaction in Nigeria
To shed light on this subject, I will present some of the emerging ideas regarding CBDCs and offer insights into the potential development of CBDC architecture as efforts in this field intensify. It also becomes crucial to analyse the future landscape of the digital currency being pursued by the Central Bank of Nigeria.
A longstanding question in the field of economics revolves around the fundamental purpose of money. Although this question may be old, it still raises a couple of relevant inquiries that remain pertinent in today’s context. Broadly speaking, money serves as a medium of exchange, a unit of account, and a store of value.
Additionally, money plays a crucial role in facilitating economic activities, promoting efficiency in resource allocation, and supporting economic stability. However, the specific functions and characteristics of money can vary depending on the economic system, societal context, and prevailing monetary theories.
And here is where the primary motivations for the implementation of a central bank’s digital currency come into play. The first motivation revolves around enhancing access to and usability of central bank money, while the second motivation centres on ensuring efficiency in local payments through innovative approaches.
The opening questions of -what do CBDCs entail and is there a convincing case for it-are, in certain aspects, not mutually exclusive. It’s simply a matter of people needing a better understanding of CBDCs and why they make perfect sense.
Simply put, central bank digital currencies (CBDCs) are a revolutionary idea in central banking. They involve creating digital versions of traditional currencies, using technology to transform the way financial systems operate. In practice, the appeal of CBDCs lies in their ability to simplify financial transactions by removing obstacles and inefficiencies that have long troubled traditional systems.
One of the main counterarguments against CBDCs is the lack of a compelling case in their favour. Additionally, some argue that pursuing CBDC development offers little advantage compared to other alternatives. The Riksbank, Sweden’s central bank, recently published a report stating that there was not a strong enough case to support the implementation of CBDCs. Similarly, concerns regarding the weak case for CBDCs have been raised by the British House of Lords.
However, the veracity of these claims warrants further exploration. It could be argued that dismissing the need for the development of central bank digital currencies would be premature.
Even if there are claims suggesting that it might be too early for CBDCs, the evidence from central banks that have already implemented them makes it difficult to argue against their potential. While most central banks continue to carefully assess the risks and benefits, others have recognised the urgent need to act swiftly and decisively, especially in an era defined by rapid technological advancements and evolving consumer expectations. Hesitancy in this regard may lead to missed opportunities and a potential loss of relevance.
For instance, the Bahamas introduced the Sand Dollar in October 2020, becoming the world’s first CBDC. In China, the digital yuan, issued by the People’s Bank of China (PBOC), has facilitated faster, cheaper, and more secure transactions compared to conventional methods like e-payments or e-banking.
Nigeria has also introduced the eNaira, a central bank of Nigeria-issued digital currency that provides improved payment prospects in retail transactions when compared to cash payments.
These examples highlight the tangible benefits and progress that CBDCs can bring to financial systems, reinforcing the argument for their implementation and dispelling the notion that it might be premature.
However, when examining the performance of these new currencies, it raises the question of how well they have actually fared. Regardless of the measurement criteria used, there are certain fundamental principles that underlie their introduction.
In the case of these three currencies, it is evident that they are facilitated through commercial banks and have limitations on the amount users can possess. Additionally, they do not accrue interest and have zero transaction costs, which are positive aspects in my opinion.
Nevertheless, to avoid sounding pessimistic, it must be noted that thus far, these currencies have not achieved significant success, particularly in terms of widespread adoption by users. This lack of uptake is a shared characteristic among the sand, e-naira, and digital yuan.
It is important to recall that a crucial attribute of money is its acceptability. In order for a currency to function effectively, it must be widely accepted as a medium of exchange for goods and services within a given economy. Acceptability ensures that individuals and businesses have confidence in the value and usability of the currency.
In terms of offering explanations and recommendations, I would like to focus on the eNaira. However, I must forewarn you that the following discussion might be quite extensive as we explore various points in detail. So, let’s take a walk together, albeit a rather long one, through these different aspects.
A perhaps more direct, perspective on the launch of the eNaira is that it was introduced by the Central Bank of Nigeria (CBN) in accordance with Section 19 of the CBN Act. Its main objective is to be a cost-effective, widely accepted, and trusted payment method that enhances monetary policy, enables social interventions, and facilitates revenue collection and remittances.
However, since its introduction in October 2022, the eNaira has faced a lack of positive reception. Despite the enthusiasm of Nigerian youth to engage with digital currencies and the scarcity of traditional Naira currency during recent periods of inflation, the utilisation and acceptance of the eNaira remain significantly limited.
As mentioned earlier, the success of the eNaira hinges on its general acceptability, which is a difficult prospect considering Nigeria’s predominantly cash-based society. This suggests the need for additional and ongoing efforts to be made.
The success of the eNaira, both domestically and internationally, will have a substantial influence on the success of other central bank digital currencies in Africa and around the world. However, the effectiveness of sensitization efforts plays a vital role in determining this outcome. I will further explore this topic in greater detail shortly.
Let me clarify that I am not attempting to undermine the accomplishments of the Central Bank of Nigeria (CBN). It is evident that the eNaira was among the pioneering central bank digital currencies (CBDCs) to be launched, not just in Africa but also internationally.
However, I am asserting that the success or failure of the eNaira is likely to set a precedent for other African countries, some of which have already started comparing their own CBDCs to the eNaira. In light of this, I will propose several reasons for what the CBN needs to do or should have done to improve the situation.
The significant lack of acceptance of the eNaira highlights the possibility that it might have been premature to make the decision to introduce and launch the digital currency. While there are optimistic individuals within the central bank who may acknowledge that things are progressing as intended, they should look to compare the outcomes and statistics.
The bank should have exercised more prudence and conducted thorough research before embarking on such an innovative venture. The philosophy of optimism would be more justifiable if there were substantial evidence that previous central banks had achieved significant success in addressing currency-related innovations. Consequently, one could question whether the central bank acted hastily in implementing the eNaira.
In my opinion, I strongly believe that it was premature to introduce the eNaira. This is exemplified by the fact that other central banks are still in the process of studying the operational aspects and required technology to implement their own digital currencies.
The cautious approach taken by these banks suggests that a thorough examination and understanding of the implications and requirements of digital currency adoption is necessary before proceeding with such a significant decision.
What should be the next steps? In light of the current situation, the question arises: what should the central bank prioritise moving forward? It is crucial for the central bank to focus its efforts on establishing a development architecture that can build the necessary skills and technical capabilities.
By doing so, the central bank can ensure a well-planned and timely re-introduction of the eNaira. This approach will enable the acquisition of the expertise and resources required for a more successful implementation, fostering greater acceptance of the digital currency within the Nigerian market.
To intensify these efforts, it is essential for the central bank to engage in a continuous dialogue with various stakeholders. This includes reaching out to firms, both large and small, as well as those that are new or well-established. It also involves actively involving students, the unbanked population, residents in rural areas, educational institutions such as schools and universities, and local traders.
By actively seeking input and feedback from these diverse groups, the central bank can ensure that the eNaira is designed to meet their specific needs. This inclusive approach will help build trust and acceptance of the digital currency among a wide range of stakeholders.
Undoubtedly, the current situation calls for urgent attention. It is crucial to acknowledge that the eNaira cannot function effectively without the active involvement of the private sector. In fact, the development process, if approached appropriately, should include collaboration with private sector entities.
Such collaboration will not only facilitate the successful implementation of the eNaira but also contribute to the overall growth of the digital economy. In the near future, the eNaira has the potential to become the preferred medium for everyday payments by households and businesses, establishing itself as a staple form of transaction in Nigeria.
Throughout history, cash has been the predominant form of payment. Its importance cannot be understated, as it continues to play a vital role for many individuals. It is worth noting that approximately 55% of Nigerian adults, equating to around 63.7 million individuals, remain unbanked. Considering this, it is crucial to make commitments that ensure continued access to cash.
The currency change experienced during the election demonstrated the significant impact it had on livelihoods, households, and the overall economy. While the availability of cash should be maintained, it is essential to recognise that digital transactions represent the future and will increasingly become a significant part of our daily lives. Embracing digital transactions aligns with the changing landscape and ensures that Nigeria stays at the forefront of financial technology advancements.
What follows is not remotely a full and comprehensive suggestion. Nor are the points made here remotely novel. But, let me begin by outlining some prescriptions, considering the aforementioned points. Afterwards, I will circle back to briefly discuss the behavioural factors that can contribute to the demand for digital currency.
The challenge for the central bank lies in striking the right balance. The key lies in identifying the factors that can drive the adoption of the eNaira. To achieve this, there should be provisions to incentivise its usage, particularly with a focus on promoting financial inclusion, especially among the unbanked population.
Additionally, it is crucial to address unfounded concerns related to privacy protections. A revamped eNaira should incorporate privacy features comparable to those found in typical bank accounts, debit cards, and other financial instruments. The underlying structure of the digital currency should be designed in a way that personal details remain anonymous to the central bank.
In emphasising this perspective, I am not overstating the importance of user preferences. Potential users would prefer that both the government and the bank do not have access to their personal data in relation to the eNaira. However, we must also acknowledge the reality that under certain circumstances, as prescribed by law enforcement agencies, access to personal data may be granted, similar to the procedures followed with other bank accounts in general.
Simultaneously, measures should be implemented to safeguard against fraud, facilitate the prevention of financial crimes, and counteract counterfeiting. The merits of these security features should be effectively communicated to all stakeholders, ensuring transparency and trust in the eNaira system.
In alignment with these objectives, my closing remarks emphasise the implementation of a launch phase with dual focus areas, both geared towards expediting the advancement of the digital naira. An essential component of this phase would involve conducting a test pilot in significant commercial markets, namely Lagos, Kano, Port Harcourt, and the Federal Capital Territory (FCT). Such a prototype launch would address concerns regarding the security, resilience, and performance of the new currency, among other aspects.
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Additionally, the relaunch would necessitate increased investments and the development of national infrastructure to facilitate a nationwide rollout. Decisions regarding these investments should be based on comprehensive evidence and, more importantly, should involve extensive public engagement and sensitisation. This process would require a carefully calculated timeline within the scope of 24 to 48 months.
While I’m not entirely certain if this constitutes a critical assessment, it does serve to illustrate an important point. Similar to many other economic indicators, it is apparent that continuous and sufficient engagement, along with sensitisation efforts involving diverse stakeholders such as civil societies, local traders, academics, youths, businesses, private sector entities, and the Nigerian diaspora both within and outside the country, along with research evidence and transparency, will play a crucial role in ensuring the acceptance of the digital currency. However, personally, I maintain a positive outlook and harbour no scepticism regarding the potential success of the eNaira and its promising future as a digital currency.
Labelling the central bank’s actions as starting too early would be a blunt but fitting interpretation. However, it is important to note that such a viewpoint was not held by the bank at the time.
Omeihe is the president of the Academy for African Studies and serves as a Senior Economic Advisor at Marcel. He holds the position of Associate Professor at the University of the West of Scotland.
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