Finance

e-Naira launch: How the CBDC can enable economic growth for Nigeria

e-Naira launch: How the CBDC can grow the Nigerian economy - Startup Lagos

The Central Bank of Nigeria has finally launched the e-Naira, the country’s digital currency, following a three-year development phase for Africa’s first digital currency. With this development, Nigeria joins the rank of over 14 countries globally still in the pilot stages of their own central bank digital currencies (CBDCs), including China, Sweden, and South Korea, with many other countries that are at the stages of consideration of introducing a digital tender. With this move, it is hoped that the economy will be opened up to newer possibilities, through increased cross-border trade, accelerated financial inclusion, and cheaper and faster remittance. Presently, Kenya is leading Africa in the mobile payments market with the revolutionary impact of M-Pesa in the country.

A short history of money

Money is a recognized exchange value of an item, serving as a medium of exchange, a store of changing value, or a unit of account. As such, traditionally, asides from commodity money that possesses its own intrinsic use and value, fiat money or legal tender, of its own accord has little or no value or use. The Naira, for example, cannot be consumed directly or utilized to serve a need other than the exchange of goods or services. With the advent of technology, the internet of things, and blockchain platforms, the world had begun to reinvent the age-old culture of money. Given that the value of money was built on the fiat/trust of two transacting parties and the creditworthiness of a third mediating party, money necessarily does not require a physical form. This third party, being the government, carries out the responsibility of regulating and governing the value of the currency, as well as the nature of transactions with the legal tender.

And so, in 2009, Satoshi Nakamoto (a pseudonym representing a person or group of persons) birthed the first decentralized cryptocurrency, bitcoin, that was built on this basic principle of trust, however with a decentralizing element. The initial reception of this widely circulated tokenized form of exchange was slow and skeptical, with a lot of persons raising brows at the safety and reliability of this platform. Nonetheless, there has been a growing clamor, especially with the spread of web 3.0, for newer decentralized and open-source alternatives to knowledge and tools. These are what have, over time, popularized the use of cryptocurrencies. The hope was that through these seamless platforms, cross-border payments could be easily facilitated, with the offer of even better security, as all transactions are digital and encrypted.

Clampdown on crypto

Earlier in February this year, the Central Bank of Nigeria (CBN) had, however, on the back of claims that the digital currency was being utilized for money laundering and terrorism, issued a ban on all transactions using the digital currency, and directed financial institutions to block cryptocurrency accounts. While the CBN was firm on its resolve to regulate the financial environment in the country, to avoid abuses and excesses, it was also making plans to leverage the increasing reliance on these digital modes of transaction. This time around, offering the alternative the added element of control and regulation.

CBN ban on crypto on February 5, 2021.

The e-Naira

After setting up the e-Naira website on the 27th of September, the CBN had announced that on the 1st of October, it will be launching the Central Bank Digital Currency (CBDC), otherwise known as the e-Naira. However, due to certain exigencies, this launch date was moved to the 25th of October. The apex bank, ahead of the launch, had outlined new guidelines for the digital currency, on regulation and its issuance to citizens.

This step by the CBN is one in the footsteps of other countries such as China, India, and to hit closer to home, South Africa and Ghana. The growth and proliferation of cryptocurrencies, along with this pervasive lack of centralized control and regulation on the value of the more popular digital currencies, globally is what has birthed and nurtured the interest of various countries to grow their own digital currencies. In a statement, President Muhammadu Buhari outlined that alongside digital innovations, the CBDC can foster economic growth through enhancing economic activities. He captures some estimates that indicate that the adoption of CBDC and its underlying blockchain technology can boost Nigeria’s GDP by $29 billion over the next 10 years.

The Hyperledger Fabric Blockchain is the chosen blockchain network, by the CBN to run the digital currency on, and would be fully controlled and managed by the CBN. However other trusted parties and stakeholders would be given access to the platform on a permission basis. These parties, consisting majorly of financial institutions will help to facilitate identity verification, payment processing, and ease of transfers among other customer needs. As Owonibi points out further,

The interconnected nature of the payment landscape will be maintained, meaning…the deposit money banks and Nigeria Inter-bank Settlement System (NIBSS) will still have a role…fintech companies will also have a role and the central bank will be in the middle.

The e-Naira speed wallet can be easily downloaded from the mobile app store, and the processes of installation and setup are quite easy to follow. The registration process is further facilitated through one’s bank, and through the BVN. This enables the user, signing up, to easily set up without little hitches and challenges.

How the e-Naira would benefit the Nigerian economy

On some of the benefits that the e-Naira would have to Nigerians, commentators have claimed that it would assist with greater ease of transacting business, mitigating risk. As individuals would have these currencies secured with the CBN in the Speed Wallet, there would be minimal risks of fraud. The CBN has also noted that they would be pegging the value of the digital tender with the Naira, and as such, the currency would be subject to the vagaries of Forex fluctuations. Nonetheless, the e-Naira would have a non-interest-bearing CBDC status, implying that there would not be charges on merchant services and other sundry transactions using digital currency. Furthermore, the currency would be accessible to both bank account holders as well as those without a bank account in the country.

As explained earlier, the success and legitimacy of modes of transacting are dependent, in some respects, on the trust between the transacting and mediating parties. Some pundits believe that the floating of the e-Naira is a gimmick by the government to have a handle on all financial transactions in the country and monitor all of these. While this is not without its essential benefits, in enabling a quicker clampdown on nefarious activities stimulated by the transfer of money, this can stifle citizen trust, and weaken the preference for the e-Naira. While regulation is good, it must not be misconstrued as being intrusive and forceful.

On a further possible downside to the introduction of digital currency, commentators point out the danger of creating fissures in our already flailing economy. As Prof. Ndubuisi Ekekwe points out,

There is a massive promise on the ascension of a digital currency, e-naira, in Nigeria. But e-Naira can also crack Nigeria’s economy…if e-Naira launches, expect everyone to move his or her money from retail banks to CBN – and if that is the case, retail banks will have limited money to lend, freezing banking as we know it.

This informs the CBN’s decision to stipulate initial transaction limits on three levels of use of the Speed wallet. In the first tier, the user could be anyone without a bank account, so long as the user has a passport photograph, a name, birth date, place, phone number, and a verifiable address. The limit for sending and receiving the digital currency is pegged at N50,000 for these users, with a minimum requirement of the National Identity Number (NIN) for this account, and a cumulative balance of N300,000 daily. The second tier is for users with an existing bank account, and a limit of sending and receiving N200,000 daily, with a cumulative balance of N500,000 per day. The user’s Bank Verification Number (BVN) is required as a minimum for this level. The third and final tier enables transactions daily of over N1 million, with a cumulative balance of N5 million. This too requires the minimum of a BVN for registration.

Adedeji Owonibi, Founder, Convexity, the blockchain solutions company behind the e-Naira development.
Adedeji Owonibi, Founder, Convexity
Image Credits: Convexity, 2021

According to Techpoint, Adedeji Owonibi, Founder and COO, blockchain solutions company, Convexity, is a key resource person with the CBN as to how the e-Naira would work and what it would entail for the Nigerian market. With these new developments, a lot of persons are keen on the outcome of the introduction of this cryptocurrency and what it would hold for the economy. As the CBN goes on to direct,

Besides pre-generated codes, the banks can send invitation codes for onbarding to a specific list of selected customers. Onboarding will be done for customers who have a code assigned by their banks. The banks have already validated and verified these customers.

The apex bank also emphasizes the point that banks can decide to set up their own wallets, as it did not intend, in any way to compete with the banks, however noting that comprehensive security checks will be undergone frequently to ensure that there are no fraudulent activities being run to the detriment of this national critical infrastructure.

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