What You Need To Know About e-Naira.

By Mustapha Babalola Toheeb

Overview.

The Central Bank of Nigeria’s (CBN) digital currency dubbed “e-Naira” has sparked hot debates since the apex bank sent a presentation on its use case to Nigerian banks, slating October 1 as its launch date.

Across Nigeria’s finance industry and among cryptocurrency and blockchain enthusiasts, the question of the real impact (if any) that the newly created e-Naira would have on the economy, has popped up time and again, as have questions about how effective it would be in achieving the apex bank’s monetary policy and financial inclusion objectives.

This article seeks to discuss the concept of e-naira, its benefit and the feasibility of the digital currency.

Introduction.

On the 5th day of February 2021, the Central Bank of Nigeria (“CBN”) instructed banks and other financial institutions to refrain from dealing with cryptocurrency (a digital currency) and facilitating payment for cryptocurrency exchanges. With this, various crypto-based companies were frustrated out of the Nigerian market and the growth of other digital and virtual currencies in Nigeria decelerated.

Interestingly, the CBN has recently launched a project titled “Project Giant” on June 24, 2021; a project to produce and issue a government-controlled digital currency in Nigeria known as “eNaira”. On August 27, 2021, the CBN circulated a presentation to licensed Financial Institutions (“FI”) which provides guidelines on the issuance and operation of eNaira in Nigeria (“Presentation”).[1]

The Central Bank Digital Currency (CBDC) is an alternative means of payment to cash. While we acknowledge that there are two types of payment modes i.e. physical and virtual, cash is termed physical while CBDC is virtual. The CBDC can be local (i.e. within the country) or cross the border (between two or more countries). The CBDC is usually used in situations where the local currency of a country is often subjugated in which case the government may ban the use of foreign currency and make the local digital currency compulsory.

Before now, there have been attempts to introduce CBDC. The first in 1992 was by the Bank of Finland which operated for 3 years and got transferred to private ownership and technically ceased to be CBDC. It was aimed at providing small-scale retail payments and operated as a prepaid stored-value card. Ecuador attempted it in 2014 but shut it down in 2018. This attempt failed because the government had asked the citizens to trust it and keep their monies in a virtual currency backed by physical dollars during their financial crises. It was abandoned as the government could not live up to its billing. Cambodia through the National Bank of Cambodia in 2020 implemented it to address the gluttonous appetite for foreign currency and hoped it would encourage the greater use of their local currency as opposed to the dollar.

The advent of crypto and by extension Libra (Facebook digital currency) has put pressure on countries to delve into finding suitable alternatives that will make them remain relevant. The recent progress made and the implementation of CBDC by the People’s Bank of China (PBOC) has also been a major driver of interest. However, as of date, eighty-one countries have signified interest in the onboarding of CBDC out of which only five have taken off. Recently Australia, Singapore, South Africa, and Malaysia formed a consortium of countries for a cross-border CBDC which is expected to improve trade and exchange. Though CBDCs are not the obvious best solutions, problems ranging from hygiene to macroeconomics have been touted as key issues to be addressed through its implementation.[2]

What is e-naira?

According to the CBN, the e-Naira is a digital currency to be issued by the Nigerian government with the same value as fiat naira (i.e. physical naira notes). It is to be purchased by the general public through FI and transferred into e-wallets maintained by customers. It is similar to the Chinese digital renminbi and the Swedish e-krona. Digital currencies are monies that exist not in physical form but only as electronic data, but perform the basic functions of money being unit of account, store of value and means of exchange.

First, the CBDCs are going to be legal tender and considered CBN’s direct liability. They will be divided into two categories: retail and wholesale. Retail CBDC will be used as a digital extension of the currency by all persons and businesses, while a wholesale CBDC may only be deployed as a settlement asset in the inter-bank market by permitted institutions. This means that retail CBDC will be used in the same manner as banknotes to make retail payments (Peer-to-Peer and Business-to-Person), while wholesale CBDC will be used to enable transactions between financial institutions, including banks, and entities holding accounts with central banks.

In comparison, retail CBDCs are more suited for central banks in developing countries than wholesale, as they are focused on reducing the barriers to financial inclusion, but may limit the financial intermediation role currently played by banks. Wholesale, on the other hand, could prevent some of the more disruptive impact of CBDC on the financial sector, but may limit efficiency and broad access to CBDC relative to a retail model.[3]

Intention of e-naira.

Digital currencies, therefore, remain useful for inter-party transactions as long as such parties accept the validity of the currency in use, as they have the advantage of instant settlement, especially among online communities.

Although the most popular form of the digital currency remains the cryptocurrency, there are actually thousands of digital currencies in the contemporary world with each of them operating and enjoying security courtesy of the respective encryption codes mutually adopted by the parties in such transactions, especially as most governments in the world had played shy of conferring any form of endorsement and legitimacy on transactions conducted through any digital currency.

However, given the growing use of the digital currency dispensation, several governments across the world Nigeria inclusive, have started showing interest in the operations of digital currencies with the CBDC option emerging as the preferred starting point for them. In that context too, the CBN’s initiative to launch the e-Naira must qualify as the first attempt by the Nigerian government to embrace the digital currency dispensation. That is also why there seems to be significant public interest trailing the intended launch of the e-Naira guidelines.[4]

According to the CBN, the e-Naira will aid financial inclusion and propel a cashless policy, e-Naira, which was created to facilitate digital transactions, does not need to be backed with physical cash. The e-Naira will be pegged to the Naira so their value remains the same like stable coins pegged to the dollar.

According to CBN, the introduction of a CBDC has a lot of benefits to the economy, government and stakeholders, some of which are highlighted below.

The CBDC has the potential to reduce cash handling costs by five to seven per cent, deepen digital financial inclusion and promote the development of e-commerce.

E-Naira will promote formal cross-border payments for efficiency, convenience and affordability. It will also create a reliable mechanism to distribute fiscal stimulus to citizens, which is highly vital due to activities seen during the distribution of Coronavirus Disease palliatives.

The project would reduce tax leakages due to evasion and illicit money flows. It will also promote and support the implementation of government objectives.

Nigerians would experience a reduction in the overall indirect cost of cash on the broader community and reduce issues that come with handling physical cash.

It will create innovative opportunities in the financial system, as new business opportunities arise from emerging business models, financial products and services.

A two-tier model for CBDC will enable Public-Private Partnerships wherein the CBN designs an e-Naira and distributes it technologically through Regulated Financial Institutions.

E-Naira will create an opportunity to unlock new revenue and growth opportunities thereby generating a sustainable value pool by unlocking new market segments.[5]

How will eNaira operate in practice?

eNaira will be supplied by the CBN (from their Stock Wallet) to intermediaries (licensed FIs) for onward supply to individuals. Consequently, FIs will maintain a treasury wallet to receive eNaira from the CBN. eNaira transactions will operate on new and existing systems including the Nigerian central switch i.e. the Nigeria Inter-Bank Settlement System Plc (NIBSS).

There are to be four major parties in the operating model of eNaira. (i) The CBN; (ii) the licensed FIs (responsible for issuing eNaira to Customers, monitoring digital transactions under their institution; (iii) Businesses and Merchants (responsible for complying with the CBN regulation on KYC and AML/CFT); and (iv) Customers (responsible for maintaining an eNaira Wallet).[6]

It is to be noted that upon launch of the eNaira, the CBN will provide an interim e-wallet (the Spead Wallet) for customers until FIs can develop and launch their individual wallets.[7]

How feasible is the e-Naira project?

There are a lot of controversies surrounding the e-Naira project already. There are also different opinions about it even though a few of them might end up being misconceptions. Before we ask ourselves about the feasibility of the e-Naira, it is pertinent to know that the average Nigerian sees it as a hidden agenda. I spoke to different groups of people across different social statuses, age brackets, and educational backgrounds and they all seem to believe that the e-Naira project will end up a debacle and is borne out of the desire to “enslave” and control the masses.

On the feasibility of the project, the first question that abounds is what is the purpose of the e-Naira. After thorough analysis and speaking to a few experts, it seemed that the CBN is launching the e-naira simply because it wants to provide “former” patrons of cryptocurrency with another option. The e-Naira, however, does not seem like a currency that will be traded and is simply a virtual replacement for the “physical” naira, but this time with a lot of limitations.

The main purpose Nigerians were after cryptocurrencies like Bitcoin was because they saw it as an avenue to make money. Cryptocurrency trading launched so many businesses in the country. Many of these businesses were worth millions of naira in few months and had so many people on their platforms. Many people, especially jobless youth, made a living from involving in cryptocurrency endeavours.

Nigeria is a country faced with so many challenges and somehow, these challenges are inter-connected.

A project like e-Naira would only work in a stable community where citizens have fully embraced cashless policies and there are systems in place to support its use. For instance, how does the average uneducated or a semi-literate danfo driver who plans to pay road-check agberos their tout-fares from the fares he gets from his passengers, do all these using the e-Naira?

If the plan of the CBN is to mitigate money laundering and terrorism by controlling the amount of money that can be sent and received using the e-Naira, these criminals are smart and will always find a way to get past it.

Let us examine China and the reason the country banned the use of cryptocurrency in the country. China banned the use of cryptocurrency as a way to control (their flourishing) economy. Provinces in China also complained about the mining activities which was affecting electricity generation in these provinces. Nigeria on the other hand had no reason to ban the use of cryptocurrency in the country as this was what was boosting her economy and providing job opportunities and a means of livelihood in its own seemingly inconsequential way.

One reason why the e-Naira is looking far away from feasible is that the “physical” Naira is suffering. This leaves us with the question of why issue a virtual one that is both expensive to issue and maintain? The e-Naira project will take a lot of money to materialize and more money to maintain, it would have been better if these limited funds are pushed into activities that could boost the naira and the economy at large.

If the plan is to use the e-Naira for trading activities just like Bitcoin and the rest of them, what are the plans to boost it when it suffers a dip like the dip that flagship cryptocurrency Bitcoin suffered these past months?

The interest in forex in the country is low, according to statistics. This is a result of the unfavourable policies surrounding the practice. There are a whole lot of other digital currencies that have less value than the naira and if they have not been able to thrive, what is the assurance that the e-Naira will be able to?

One more question that the CBN needs to ask is what the adoption rate of the e-Naira will be. With how popular Bitcoin and other cryptocurrencies were, there were still a large group of Nigerians that had their reservations about them. What sensitization plans does the apex bank have? How long would it take for e-Naira to become modus operandi?

Considering all these, do you think the e-Naira project is a feasible one?

The reality is the e-Naira might become another abandoned project after a few months, or years if it lasts that long. This is because it does not solve any economic or societal problem. The Central Bank also had to outsource its technical partner for the project. If the apex bank had to employ the services of Barbados-based Bitt Inc ., it only shows how not ready it is with the project. A project like the e-naira should be managed solely and strictly by the apex bank because it has to do with the country and is an issue of national interest.[8] How long does the Central Bank plan on employing the services of Bitt Inc.? How sustainable will the expensive partnership be?

Mustapha Babalola Toheeb writes from Lagos, Nigeria.

[1] https://www.mondaq.com/nigeria/fin-tech/1108724/enaira-the-future-of-digital-currency-in-nigeria-

[2] https://m.guardian.ng/opinion/nigerias-e-naira-an-analysts-perspective/

[3] https://financialstreet.ng/understanding-the-proposed-e-naira/

[4] https://dailytrust.com/educate-nigerians-on-e-naira

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] https://techbooky.business/e-naira-feasibility-reality-and-what-could-have-been-if-cryptocurrency-was-left-to-thrive/?utm_source=rss&utm_medium=rss&utm_campaign=e-naira-feasibility-reality-and-what-could-have-been-if-cryptocurrency-was-left-to-thrive