Since the Central Bank of Nigeria (CBN) made history as the second country in the world to launch a commercial Central Bank Digital Currency (CBDC) it has struggled to attract users. Without ubiquitous adoption, a new report by the Centre for European Reform (CER) says it has no future in payments.
The report authored by Zack Meyers, a senior research fellow at the centre, notes that the primary objectives of a CBDC cannot be achieved unless it is “available everywhere” and can win market share from today’s card payments. Even when they try to push for adoption, they will still struggle.
BusinessDay recently reported that although the eNaira app has seen 764,000 downloads after 8 months, only 18,460 wallets owned by individuals are funded and just 80 merchants actually fund their eNaira wallets.
The CER report suggests that central banks’ push for CBDCs is beyond putting up a resistance for cryptocurrencies. In Nigeria, many had said the launch of the eNaira was a direct response to the growth of the cryptocurrency market in the country. The CBN had also alluded to that sentiments in some of its utterances while addressing the need for eNaira.
Nonetheless, central banks are also concerned about the increasing adoption of digital payments at the expense of cash. This leaves a lot of leverage in the hands of private entities which can be employed against a state in a time of crisis. For example, the recent decision of SWIFT, a US card network, to withdraw its services from Russia as a result of the invasion of Ukraine, demonstrates that even private payment systems can become drawn into international conflicts.
Alternative payment systems such as the eNaira, therefore, may be needed to improve the economy’s resilience to system outages, natural disasters, or cyberattacks. This informs the race to create CBDCs across many regions including Europe, the United Kingdom, the United States, Asia, and Africa. The International Monetary Fund counts about 100 countries actively evaluating CBDCs. However, only a few countries have so far launched. These include the Bahamas, Nigeria, and seven countries under the Eastern Caribbean Currency Union.
Although central banks are easy to mouth off the benefits of having a CBDC, many consumers struggle to make sense of it. There is a basis for their confusion. Nigeria’s banking sector, for example, is robust and deposits are guaranteed by the Nigeria Deposit Insurance Corporation at least to a certain limit.
“So, a CBDC could look similar to any bank account today. State-backed savings options are already available for those who want them,” Meyer noted.
Read also: BDCs want CBN to scrap multiple forex rates
With the security incentive out of the window, it becomes a hard sell for merchants and even individuals. But central banks also argue that usage is just a small part of the advantages of CBDCs. The most important benefit is that a CBDC exists as an ‘anchor’ giving consumers certainty that money can be withdrawn from the private banking system.
Meyers notes that if the problem is that fewer consumers and retailers use cash, then a CBDC would only be a solution if it was more widely used instead. But there is also a problem with the over-adoption of a CBDC. Some experts worry that if consumers can quickly shift their bank deposits into CBDCs rather than needing to withdraw cash, banks would become more vulnerable to runs. They also note that if customers were to put more of their savings in CBDCs and less in bank deposits, then banks will need more expensive wholesale funding to provide loans to customers.
In Nigeria, banks are already struggling to provide loans partly due to the high cash reserve ratio (CRR). The CBN increased the CRR from 22.5 percent to 27.5 percent in January 2020. At 27.5 percent, Nigeria has the highest reserve requirement in sub-Saharan Africa, while peers such as South Africa, Kenya, and Ghana all have CRRs below 10 percent.
To avoid the problem, there may be a need for CBDCs to have caps on individual holdings or unattractive interest rates. This will limit risks to private banks but it could also make the CBDC unattractive to users. Existing payment services do not have limits for savings and they offer high-interest rates to attract customers. The eNaira currently does not offer any interest rate to users, hence, does not have any incentive for saving.
“The primary objectives of a CBDC therefore cannot be achieved unless it is “available everywhere” and can win market share from today’s card payments. Yet CBDCs will struggle to compete,” Meyer notes in the report.
In the event that the eNaira, for example, offers financially attractive interest rates to both consumers and retailers, it could encourage merchants to accept it. The high fees charged by card companies and other payment channels remain a barrier to digital banking adoption which can be addressed by a cheaper, quicker, and safer eNaira.
Nevertheless, offering a favourable interest rate on CBDC holdings can also pose a challenge for the central bank. According to the report, keeping the interest rate high enough to maintain the CBDC’s use could easily conflict with a central bank’s monetary policy objectives. For example, should the CBN decide to offer a 13 percent interest rate on eNaira savings to attract users, it would be counterproductive to its 13 percent interest rates announced after the last Monetary Policy Council meeting. It could also dissuade customers from using private banks which offer less than 5 percent on savings.
Importantly, offering attractive interest rates for eNaira savings could lead to the platform being used as an investment vehicle, rather than as a payment option, as the CBN intended.
Where offering bumper incentives fail, the central banks can consider pushing CBDC for privacy reasons. Meyers explains that the central banks have no incentives to exploit personal transaction data. Thus, a CBDC design can ensure that small, in-personal transactions are made offline and without reporting the transaction back to a centralised ledger – making them more private than electronic transactions today.
Jerome Okolo, an energy entrepreneur in Nigeria says the CBDCs may not be doing well because the commercial banks are not marketing them well.
“I can think of many advantages, e.g, smart contracts attached to your e-wallet to buy a product from a specified supplier under certain conditions, setting up your wallet with instructions to house excess cash in specific products chasing yield or interest. They are also excellent for machine-to-machine communications. Instead of handing over N1000 (interest-free) to use the Ikoyi Link Bridge, set up your car to make micropayments from your wallets,” Okolo said.
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