What You Should Know and More!

In June 2021, the Central Bank of Nigeria (CBN) announced its plan to launch a digital currency 'e-Naira' by October 2021. The eNaira was later scheduled to be unveiled same day as the Country's independence day and everyone was looking forward (perchance with different intents) to its launch. Unfortunately, on Septemer 30, 2021, the CBN annouced that it is postponing the lauch of the e-Naira in deference to the Independence day and the mood of national rededication to the collective dream of One Nigeria. So far, no new date have been announced.

Nevertheless, as we await the CBN to come through on its promise, I wish to share with you what a digital curreny is and basic information on the e-Naira.

What is a Digital Currency?

Digital currency (also called digital money, electronic money, electronic currency, or cybercash) can be defined as any means of payment that exists in a purely electronic form. A digital money is not physically tangible like a Naira or Dollar note or a coin. It is accounted for and transferred using online systems and exchanged using technologies such as smartphones, credit cards, and online cryptocurrency exchanges. In some cases, it can be converted into physical cash through the use of an ATM.

Digital money is similar in concept and use to its cash counterpart in that it can be a unit of account and a medium for daily transactions. A variant of digital money is already present in society today in the form of cash held in online bank accounts. This cash can be sent to others or received from them. It can also be used for online transactions.

Fiat Money Vs. Digital Currency

Digital money is different from fiat ?because it improves upon the process for monetary transactions. For example, the technological rails of digital money can make currency transfers across borders easier and faster as compared to standard money. This form of money also streamlines the process for monetary policy implementation for central banks. The use of cryptography in some forms of digital money makes transactions involving them tamper-proof and censorship-resistant, meaning they cannot be controlled by governments or private agencies.

Types of Digital Money

Digital currencies a majorly classified into two categories, central bank digital currencies and private digital currencies as shown in the image below;

Central Bank Digital Currencies (CBDCs)

A CBDC is virtual money issued and backed by a central bank of?sovereign nation. A new variant of Central Bank money, CBDCs are different from physical cash and reserves/settlement accounts. They are a digital?representation of sovereign state's currency that’s issued by a jurisdiction’s?monetary authority like the Central Banks and a direct liability of the Central bank that issued it. The CBDCs are not a replacement of existing paper currency but an addition to Central Banks’ currency variants.

Across the globe, 81 countries representing 90% of global GDP are exploring a CBDC with China ahead of the race. Included in these countries are four of the largest central banks (the US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England). 5 countries (the Bahamas, Saint Kitts & Nevis, Antigua & Barbuda, Saint Lucia, Grenada) have fully launched a digital currency and the Bahamian Sand Dollar being the first to become widely available. Currently, 14 other countries including major economies like Sweden and South Korea are now in the pilot stage with their CBDCs and preparing a possible full launch.

Central Bank Digital Currencies Vs. Cryptocurrencies

While CBDCs and Cryptocurrencies like bitcoin are collectively known as digital currencies, there are distinct differences between the two. CBDCs are usually issued and managed by a sovereign country through its monetary authority (i.e. Central Banks), backed by law as a legal tender and it is a direct liability of the Central Bank while Cryptocurrencies have no central authority nor is it a liability of the Central Bank or any regulated institution.

Challenges affecting Central Bank Digital Currencies

Despite the level of involvement of major economies in CBDCs and its acceptance across the globe, there are some challenges that Nation needs to consider before launching its CBDC. These include;

1. Possibility of citizens pulling too much money out of banks at once to purchase CBDCs, thus triggering a run-on banks.
2. The centralization, through the government, of a system designed to be private may produce backlash from users and create cybersecurity risks.
3. The fact that regulatory processes are not updated to deal with the new forms of money and need to be made more robust before adopting this technology.

The Central Bank of Nigeria e-Naira

In June 2021, the Central Bank of Nigeria (CBN) announced plans to launch a digital currency dubbed the ‘e-Naira’ by October 2021, joining ?81 countries strongly considering digital currencies. The CBN’s decision followed two years of contemplation on digital currency technology, and it poses a means for the CBN to achieve its intentions of 80% financial inclusion by the end of 2021.

The e-Naira is a digit representative of the paper Naira currency issued by the Central Bank of Nigeria as the Country’s complementary legal tender and will maintain a “parity of value” with the Naira. It is not an investment product and as such will not earn any interest to holders. The e-Naira is built on a blockchain open ledger technology and as such negates duplicity or fakes as each eNaira note is unique.

How does it work?

Think of the e-Naira in this way; you want to send N100 to an uncle in a remote village without a bank branch. A common practice is to buy mobile phone recharge cards of that value, load them to your phone, and text your uncle. Your uncle can then go to any phone card retailer and discount his N100 mobile phone credit for N95. The mobile retailer can redeem the call credits and pay cash because he trusts the person doing the exchange; however, he cannot tell if the mobile numbers are real.

The eNaira is designed to solve this verification risk by assuring all holders that each eNaira is a valid token. This authenticity is achieved by building the eNaira on the blockchain. Thus, instead of buying phone credits, I will debit my bank account for N100, convert to eNaira, and transfer it to my uncle. My uncle can spend the funds directly from his phone or transfer and get cash. Every retailer is more likely to accept the eNaira because it can’t be easily faked.

On accessing the eNaira, the CBN has planned a rollout in a tiered manner; first, it will issue the e-Naira, to financial institutions like banks. The banks then retail it to their customers. For transactions of less than N50,000 a day, one does not need a bank account to get the eNaira; you can use a NIN verified phone number to buy eNaira. If you want to withdraw more than N50,000 but up to the daily limit of N1 million, then you will need a BVN in addition to a NIN verified phone number. The CBN has very strict ‘Know Your Customers” protocols for this process, the aim being to assure all retailers of the safety and utility of the eNaira.

The e-Naira can be used by any two parties who can credit a Nigerian banking institution with corresponding currency. This means a seller banking with GTB in Ghana can settle his import bills from the Gambia using e-Naira. This will be the next level of the rollout. The financial institutions and FINTECH start to build out an ecosystem with eNaira as the base product.

The CBN also intends to integrate the e-Naira into its CBN’s forex process, making it easier to receive remittances to Nigeria. These transfers could be from the CBN crediting e-Naira directly to the International Money Transfer Organisation (IMTO). A Nigerian abroad sending $100 to his uncle can debit his US bank account and credit $100 to an IMTO, who will buy eNaira from their corresponding Nigerian bank. The $100 is converted to e-Naira instantly at a far lower transfer fee which is a real benefit and a significant advantage the e-Naira will enjoy

Benefits

The advent of the eNaira is a plus to the Nigerian economy, and it’s a positive progression towards a cashless society, with lower costs, and higher productivity. Some notable benefits to the economy include:

1. Financial Inclusion: The e-Naira will also bring in the vast majority of the unbanked Nigerians who have no bank account but have a phone into the formal financial economy. With the e-Naira, salary payments and payments for goods and services can be concluded. A plumber can accept payments on his phone, store them in his wallet, and make transactions with any vendor.
2. Low Transaction Cost: The eNaira has a low-cost advantage when compared to FIAT. The daily transfers between accounts are at no cost to the holder of the account. Lower transaction cost is a massive incentive as traders will pay no fees for withdrawals and deposits to and from their bank account. No transaction fees reduce the cost of commerce while improving safety.
3. Inflation: the eNaira is expected to improve on cost-push inflation. The street definition of inflation is too much cash chasing too few goods; however, not all inflation is this simple. Coins in Nigeria are scarce; thus, most merchants round up their prices to match with available currency, usually notes. This rounding up induces an artificial rise in prices because any cost-push does not cause the price hike but other factors, for example, selling eggs for N100 instead of N88. With the e-Naira, it becomes possible to transfer the exact cash price in the marketplace, especially in rural areas. This reduces the possibility of “round-up inflation.”
4. Economic Boost: the eNaira would provide more financial opportunities for Nigerians as they would be able to create new business opportunities and financial products and services thus reducing unemployment and expanding the economy.

Associated Risks

Data availability and security. To access the e-Naira wallet, one would require access to the internet through his/her mobile phone. The poor (and in some cases, lack of) in some parts of the nation may hinder the seamless adoption and utilization of the e-Naira. Additionally is the risk malicious actors attempting to hack or gain access to users' data as the e-Naira is operated on a digital platform and thus featurs users' confidential information such as BVN and NIN which maybe exposed on the system.