Monday, October 11, 2021
/07.00PM /By  AbdulQudus Isiaka, Proshare Research /Header Image Credit: EcoGraphics

 

Over the
last three quarters of 2021, global Central Banks have been pressed to form a
counterbalance to the gradual loss of monetary control in their domestic
economies as blockchain-based cryptocurrencies went on the ascendency as a
means of payment and settlement. Nevertheless, with global Central Banks
designing and deploying Central Bank Digital Currencies (CBDCs), things are
pivoting in new directions but with additional uncertainty.

 

For example,
with China slamming iron-fists on using crypto coins in domestic payment solutions,
the world stands at the edge of a grand battle between unregulated,
privately-issued currency and what has historically been ‘fiat’ or state-backed
notes.

 

The
authorities have clamped down on cryptocurrencies for business, retail, and commercial
transactions as the Chinese state pivots towards a Central Bank Digital
Currency (CBDC). The outlines of the currency are still sketchy, but the
intention is clear; to root out commercial and public settlement arrangements
based on money that the government does not control. But what precisely is a
state-controlled electronic currency or Central Bank Digital Currency (CBDC)?

 

Pauline
Adam-Kalfon, a Partner at PwC Financial Services, noted that “Central Bank
Digital Currencies are immediate alternative solutions to further financial
inclusion efforts by public authorities. As sovereign digital Cash, they can
contribute to modernizing the current monetary system but also help to bridge
the gap with the unbanked,”
she noted.

 

Nigeria’s CBDC
was to be launched on October 01 2021, the country’s 61st independence
anniversary. Unconfirmed reports suggest that the postponement was the result
of a surge in the traffic on the eNaira website, the suit earlier filed by
ENaira Payment Solutions Limited, a private payment platform, before the
Federal High Court demanding that the CBN changed the name “eNaira” (being a
copyright name of an existing currency).

 

The CBN
began to consider the creation of the eNaira in 2017, as digital payments
gained more popularity among Nigerians. By August 2021, the apex bank partnered
with Bitt Inc., a firm renowned for introducing the Eastern Caribbean Central
Bank (ECCB) CBDC pilot, launched in April 2021. This came when many other
countries had begun to consider the introduction of their digital/electronic
money. According to the Atlantic Council, 81 countries are currently making
progress with their CBDC Programs, with 5 countries having launched their CBDC.
In contrast, 14 others have their CBDC programmes at the pilot stage and 16
countries have reached the development stage of their CBDC programs.

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Between CBDCs and Cryptos

Cryptocurrencies
have become a common feature in the portfolio of many investors, especially the
youth; this is apart from being a popular medium of exchange. While cryptos are
decentralized and, in effect, not regulated by any government, the
distributed-ledger technology which supports them ensures that holders can
complete transactions in near anonymity.

 

Analysts
have noted that this same feature of cryptos that makes them attractive to many
also threatens Central Banks. Hence, national regulatory bodies, including the
IMF, call for caution against countries adopting Bitcoin, Ethereum, etc. In
their place, governments have opted to provide digital monetary alternatives,
which are electronic fiat money issued and backed by Central Banks. Besides,
the number and seriousness of regulations guiding the use of cryptocurrencies have
increased daily.

 

Most
notably, China recently placed a hard-line ban on cryptocurrency trading,
making all transactions illegal, regardless of where their accounts are domiciled.
The Peoples Bank of China (PBoC) had as early as 2013 cited high energy usage
(in crypto mining), money laundry, smuggling, and other uses to which
cryptocurrencies are put as the reason for imposing stiff regulations. US
regulators have also made similar moves. In an event organized by the Washington
Post
, SEC Chairman, Gary Gensler, noted that there does not seem to be
a future for cryptocurrencies, as stricter measures and regulations are in the
works. This is coming when the Federal Reserves Chairman, Jerome Powell, has
signalled the possible introduction of an American CBDC.

 

On February
5, 2021, the CBN in a circular numbered BSD/DIR/PUB/LAB/014/001 barred Deposit
Money Banks from facilitating payments for cryptocurrency exchanges. In the
months that followed, the apex bank stepped up plans to introduce the state-backed
digital currency.

 

Ahead of the
introduction of the eNaira, the CBN released policy guidelines on October 1. The
document detailed the various participants in the launch and usage of the CBDC
and their specific roles. The eNaira would operate through a two-layered model
– a structure that provides for public-private partnership. The CBN holds the
liability for the eNaira but circulates it through financial institutions
(See
Illustration 1 below).

 

Illustration 1: Central Bank Digital Currency: Participants
and their roles

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Unpacking the eNaira

The
regulatory guidelines on the eNaira released on October 01 also provide a
walk-through on the mechanics of the eNaira platform.  Regular users can use the eNaira by
downloading the “eNaira Speed Wallet” from app stores. After meeting all
the requirements, including providing a unique identifier like TIN/NIN or BVN,
the user would obtain validation and activation from their preferred financial institution.

 

The eNaira caters
to four scales of transactions:  Consumer
Transactions, Merchant/Wholesale Transactions, Financial transactions, and MDA
Transactions.

 

Consumer/Retail
Transactions refer to the range of services available to regular consumers on
the eNaira platform. At this level, holders of the eNaira are allowed to engage
in Person-to-Person (P2P) transactions; Person-to-Business (P2B) and vice versa;
Person-to-Government (P2G) and vice versa. Likewise, holders of the eNaira can
transfer Cash or Bank accounts to eNaira wallet; and vice versa. The daily
transaction limit for individuals without a verified NIN  is N50,000, while those consumers who have
existing bank accounts and BVN can transfer up to N1m
(See
Illustration 2 below).

 

Illustration 2: CBDC-Cumulative Balance and Transfer
Limit for Consumers

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The second
form of transaction on the eNaira platform is Merchant Transactions. These
transactions allow Merchant Business users to engage in Merchant Business to
Person (M/B2P) transactions and enable them to transfer their Cash to their eNaira
wallet. Importantly, unlike consumers, Merchants are expected to close their
till balance to their Financial Institutions daily.  Merchants, however, have no transfer limit
(See
Illustration 3 below).

 

Illustration 3:
CBDC- Cumulative Balance and Transfer Limit for Merchants

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Financial
Institution Transactions allow Financial Institutions, which serve as
intermediaries between the CBN and customers, to transfer funds from their
wallets to the CBN and vice versa. Similarly, Financial Institutions can
transact with Government and vice versa. Again, the eNaira caters to transfers
between businesses and Financial Institutions and transfers between the Financial
Institutions and their Customers.

 

The fourth category
of transactions that could use the eNaira platform is the MDA Transactions. These
scales of transactions facilitate the transfer of digital funds between MDAs to
Individuals (vice versa) Person to MDAs; this category also supports transfers between
MDAs, the transfer between MDAs and FIs vice versa catered for under this scale.

 

The various participants
will hold a unique wallet type
(See illustration 4 below).

 

Illustration 4: Types of wallets held by the various
participants

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The eNaira Payoff

The eNaira will
be more cost-effective than cash. Although it performs the same functions as
physical currency, CBDCs do not have to be printed now and again like their physical
cousins. According to statistics from the Central Bank of Nigeria’s (CBN’s) currency
operations department, between 2014 and 2019, Nigeria spent a total of N307
billion on producing banknotes. With the introduction of the eNaira, the country
would save a ton on its currency management.

 

The
introduction of the eNaira in Nigeria is expected to promote financial
inclusion by helping the many unbanked people to get more convenient and
reliable access to money through their mobile devices and phones. As of March
2021, data from the Nigeria Inter-Bank Settlement System Plc (NIBSS) shows that
only  47m BVN numbers exist; this implies
that less than 40% of Nigeria’s adult population have access to a bank account.
Analysts expect that a state-backed digital currency like the eNaira would help
bring more Nigerians into the formal banking system, a situation which itself
would see the effect of monetary policy changes transmit quicker to the
economy. Apart from this, the eNaira is expected to improve the ability of the Government
to deploy targeted social interventions and cash transfer programs.

 

Since the
Nigerian CBDC- the eNaira would only exist in electronic form and would be
exchangeable for other CBDCs, local and international transfer of funds can be completed
much faster and lower cost. This, in turn, could lead to an increase in the
annual remittances from abroad.

 

Perhaps the strongest
argument favouring the eNaira is the need to create an alternative to
cryptocurrencies that have become widely accepted due to the digitization of
trade and commerce. However, they have been beneficial to individuals engaged
in some form of illegal activities.

Essentially
the eNaira is expected to offer the best of both worlds—the convenience and
security of digital cryptocurrencies, and the regulated, reserve-backed money
circulation of the traditional banking system

 

Swerving Past Pitfalls

Despite the
many incentives for introducing the eNaira, specific challenges need to be addressed
to succeed digital money. The widespread illiteracy and low internet
penetration seem to pose significant difficulties. Another concern that needs
to be considered as the eNaira is being introduced is the liquidity concerns
that may arise when customers make too large a withdrawal from banks to buy the
eNaira. Also, being a  centralized system,
the eNaira could face cybersecurity challenges. Finally, the CBN must regularly
update the eNaira platform with new features and technology to meet users’
changing needs.

 

Related Video

1.      CIBN
Hosts Discourse on Blockchain Tech in Nigeria
 – Feb
28, 2017

 

Related Links

1.     CBN
e-Naira Series 2: Can the e-Naira Deepen Financial Inclusion?

2.      CBN
e-Naira Series 1: Examining the Positives

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