Nigeria, Africa’s most populist country has recently become the first on the continent to introduce a digital currency. It joins other countries like the Bahamas and the eastern Caribbean central bank in the world to roll out national digital currencies.
But what exactly are these digital currencies and how do they work? Are they just a load of crap backed by nothing or do they have a backing or value we should be interested in. to put into perspective, a digital currency is a means of payment or money that exists in a purely electronic form.
Central bank digital currencies are issued and regulated by the nation’s monetary authority or central bank and backed by the government, they are different from existing electronic central bank money, which is provided by central banks but can only be used by banks and selected financial institutions. When financial institutions pay each other, they pay in reserves from accounts held with a central bank.
Before central bank digital currencies, the only way consumers could use money that is a direct liability of a central bank was with physical cash. Existing digital retail payment from customer deposits accounts in banks are based on money that is the liability of the institution providing the account, not a central bank.
A central bank digital currency is a direct liability on the central bank and is available to all households and businesses giving them access to electronic central bank money. It can be transferred or exchanged using technologies such as blockchain which is simply a system of storing records of transactions across a network of computers.
Nigeria’s digital currency will be the digital form of the Naira and will be used just like cash. To clear the air, because we noticed a lot of people are still confused with the matter, a central bank digital currency is not a cryptocurrency. Cryptocurrencies, such as Bitcoin, are not currencies in most countries since they are not a generally accepted form of payment.
Although they are still widely referred to as cryptocurrencies, they are best described as digital assets, or crypto-assets. Just to keep things in perspective of course. The Bahamas, Saint Lucia, Grenada, Antigua and Barbuda are among the countries that have launched central bank digital currencies.
But why exactly did Nigeria want a digital currency and why right now in particular? Well you could of course argue that the eNaira is simply Nigeria embracing Web3 and fully appreciating the importance of digital societies in the fourth industrial revolution. When when it comes to Nigeria in particular, there’s always more to it than meets the eye.
The Nigerian central bank has given its reason for launching the currency claiming that It is to promote and facilitate financial inclusion, enable direct welfare disbursements to citizens, facilitate diaspora remittances, reduce the cost of processing cash, improve the availability and usability of Central Bank money, increase revenue and tax collection, support a resilient payment system and improve the efficiency of cross-border payments.
The introduction of the eNaira will also enable peer-to-peer payments, cutting out ‘middle men’ or the use of intermediaries, such as financial institutions. So what are the risks of such a concept and how can you mitigate them. One is its potential to disrupt existing banking systems. This could occur if citizens decide to hold digital currency instead of keeping their physical Naira in a bank account.
This would mean that banks would not have money to grant loans and other financial products. It could result in banks raising their interest rates as an incentive for customers to keep deposits within the banks. But then interest charged on loans would also go up to cover interest on savings.
Ok so that’s just scary and its also sad that banks will be virtually non existent when crypto goes fully mainstream. But don’t count banks out just yet as however the case might be, since the eNaira is non-interest bearing and the Central Bank can place transaction and balance limits on certain eNaira wallets, this risk is minimized.
The second risk is operational. For example, if IT systems were to fail or if there were technological glitches, or cyber-attacks. These can compromise user privacy. And here’s the really scary part. I seriously hope it doesn’t happen but you know it’s just bound to. The Central Bank will need robust technology and IT security systems. Closely linked is reputational risk to the Central Bank if the operational risks materialize.
They are likely to have a huge impact on its credibility and reputation both domestically and globally. When the Central Bank takes on this new function – issuing the eNaira and maintaining a central ledger of all transactions – it might find it harder to perform its key function of ensuring a safe and sound financial system since its focus could be diverted towards managing the eNaira system in addition to carrying out in the domestic economy.
A possible way to lighten this burden is through creating synthetic central bank digital currencies. This idea was put forward in 2019 in and In such a system, the central bank does not directly manage the system, but outsources tasks to private institutions. Financial institutions issue the digital currency, which is fully backed by central bank money. Closely linked is the risk of the system being used to launder money and finance terrorism. Financial institutions would need strong systems for combating these threats, supported by national legal infrastructure.
Another risk is around data protection and privacy. The Central Bank that the eNaira is built with deep considerations with respect to data protection. However, as the system is designed in line with to prevent the illicit flow and use of funds which require identifying transacting parties and the details of their transactions, proper systems need to be in place to ensure that the privacy rights of users of the eNaira system are not violated.
There’s also a need to educate people about the eNaira. Although the central bank says there are ‘campaigns to deepen the understanding of eNaira amongst the population’ it is unclear what this entails. Citizens need to know the difference between the digital representation of cash deposits in bank accounts and the eNaira in digital wallets.
Now that all that is said and done let’s take a moment to ask ourselves if Nigeria is actually ready for this kind of technology. Well Nigeria could certainly pull this off, provided the technology infrastructure and the technological know-how are in place. It is that the eNaira shall be administered by the central bank through the Digital Currency Management System to mint and issue eNaira but it appears this system has been built by , a global financial technology company. It provides digital currency and stable coin solutions to central banks, financial institutions and ecosystem participants worldwide.
As such, the maintenance of the eNaira system would very much depend on the technological strength of this company and the extent to which they are retained to provide a maintenance framework for the system.
Another issue is the electricity crisis and to the internet across the country. Which is truly just in shambles at this point if you think different then you definitely haven’t lived in lagos. These should be immediate priorities for the Central Bank, and the government, to resolve for the eNaira system to be successful. It is good to see that there’s a plan for the system to be usable while offline.
Another challenge that the poor may have in accessing the eNaira system is the difficulty of attaining digital identity. The eNaira design plans to use the existing Bank Verification Number and National Identity Number regime. Getting the documents needed for these is expensive and cumbersome. Not to mention the high level of corruption involved in the process. I’m basically so exhausted some times I give into the corruption and just go along.
As has the largest population on the continent, spearheading this process could signal the start of a regional monetary integration. If central bank digital currency arrangements could work together across the continent it could solve the challenges this continent faces in fully integrating to IT and becoming a prominent player in the fourth industrial revolution.
This could help intraregional trade, which has been to achieve in Africa. With the African Continental Free Trade agreement now operational since 1st of January 2021, the successful launch of the eNaira might be a step towards regional monetary integration in Africa and potentially a regional central bank digital currency.
So yeah I’m ending on a skeptical but very positive note and we hope more central banks take to the initiative and subscribe to this next gen idea. There are event rumors Ghana might be working on it’s own national digital currency so get ready and take a good look around because the way we define finance, banking and commerce is about to change for the better.