The country was cheerful when the Central Bank of Nigeria (CBN) announced it would be piloting its version of the central bank digital currency (CBDC) on 1 October 2021. Surprisingly, the apex bank decided to skip the pilot scheme to launch the eNaira on 25 October 2021 fully. For the country that will host the Headquarters of the African Central Bank when the common currency in Africa materialises, this is a monumental feat.
Research shows that global central banks are taking their time to study the CBDC before they fully launch it. For example, the People's Bank of China has been working on a digital currency since 2014 but is yet to launch fully. In July 2021, the European Central Bank (ECB) confirmed that it will begin a two-year study of the digital euro, with sights set on a 2026 launch. Between 2014 and 2018, Ecuador operated its digital currency for before its parliament voted to abolish it.
Worryingly, the hasty decision to launch the eNaira feels like the Cold War's race to the moon. The decision by the CBN Governor is either very rash or under orders from an external force. On balance, and it is a close thing, I think it is the latter. Of course, we all tend to be wiser after an event.
The race to the moon was about proving which country is applying the knowledge of their best scientists and technology. Given the country's economic position, one struggles to see the rationale. If any country were supposed to rush to launch a CBDC, it would have been the U.S. for fear of Chinese dominance. There is an argument that the e-CNY could overthrow the U.S. dollar's primacy as the global reserve currency and destabilise its financial dominance. Notably, the U.S. Federal Reserve (Fed) is the furthest behind in developing a CBDC amongst the four largest central banks (i.e. the Fed, ECB, BoE, and Bank of Japan) in the world.
Traditionally, monumental innovations tend to get endorsements from the National Assembly. Surprisingly, the Presidency did not send the eNaira proposal to the House of Assembly for advice and due process. It was surprising to see a lack of public engagement before launching the eNaira. Even in quasi-authoritarian settings like China, Saudi Arabia, and Russia, public engagement is held for the CBDC. At the announcement, the CBN Governor only thanked the Minister of Digital Economy. It was strange. What about the Minister of finance?
A global example within the digital currency context will classify Nigeria's case as an anomaly. Currently, in the U.K., the Bank of England is collaborating with their ministry of finance (H.M. Treasury) to explore the potential of a CBDC. They plan to engage widely with stakeholders to introduce a digital currency's benefits, risks, and practicalities. A Committee is already taking evidence on the central issues. It will examine how a CBDC might affect the bank's role, monetary policy and the financial sector. This practice is the same across developed and developing economies.
Let's compare with previous CBN events without judging anyone by another's standards. Back in 2007, Prof. Soludo had to present a proposal to redenominate the Naira to the Federal executive council and, later, the Presidential Committee – led by the Minister of finance. He also engaged in several public discussions, including a speech at the Bank of International Settlement. At one point, the National Assembly requested his resignation and suggested he was going against the law for not engaging with them. In 2011, Sanusi Lamido had to appear before the Senate to explain the rationale behind introducing Islamic Banking in Nigeria. It is also not new for the current Governor to present a policy before the National Assembly. The last one was in February to justify why they banned cryptocurrency.
Without any exaggeration, previous National Assembly leaders would have invited the CBN Governor by now. The public remains optimistic that an invitation is on its way, as there is no reason to think the intelligence and leadership standards in the National Assembly has gone down over the years. The public will be interested in hearing answers on not just why the launching of the eNaira was rushed, although that too.
Like all innovations, rigorous investigations are conducted to understand what is being proposed. For the CBDC, the process starts from researching to developing to piloting before a full launch. CBN achieved this feat by skipping all the stages. That is why Nigeria is only one of the seven countries to launch a central bank digital currency (CBDC). Others are The Bahamas, St Kitts and Nevis, Antigua and Barbuda, St Lucia, St Vincent and the Grenadines, and Grenada. These countries will not compare with Nigeria's economy, population, education, market, etc.
Together with the seven countries above, there are eighty-seven economies in the world researching, developing or piloting a version of CBDC, according to the American think-tank - Atlantic Council. Seventeen countries are at the pilot stage. These include countries like China, Malaysia, South Africa and Saudi Arabia. The central banks of Canada, Turkey, Russia, and Japan are among the 15 countries at the development stage. The 39 economies at the research stage include the U.S., U.K., E.U., India, Ghana, and Kenya.
China is currently issuing 200 digital yuan (e-CNY) to randomly selected citizens in its pilot scheme. At the same time, Senegal had abandoned its quest after a trial. The Monetary Authority of Singapore and the ECB also announced that they engaged in a successful cross-border payment and settlement experiment through the sole use of CBDC. Many more economies engage in cross border payment tests, such as partnerships between South Africa, Singapore, Malaysia, and Australia.
The countries piloting and researching CBDC are aware that careful considerations are required to mitigate all challenges. For example, new research shows the existing regulations are not updated to deal with the new forms of money. Thus, rules need to be made more robust before adopting this technology. Unlike the informed economies, the CBN did not see this as a challenge. Still, the public hopes the National Assembly will.
Appraising the eNaira, it is designed to coexist with the Naira but only in a digital form. The eNaira requires a wallet, a digital storage that holds the eNaira. Opening a wallet requires vital personal information, like name, date of birth, e-mail address, bank account, and bank verification number (BVN). Bank customers can move money from their bank account to their eNaira wallet. They can monitor their eNaira wallet, check balances and view transaction history. They can make in-store payments using their eNaira wallet by scanning Q.R. codes and can send money to one another through a linked bank account or card. Technically, the eNaira account is similar to the conventional bank account system, in which the CBN guarantees the deposits.
If appropriately designed, the eNaira could bring much good for the digital economy. The eNaira can be a powerful tool to address an economic recession. The CBN could charge a lower or negative interest rate on these accounts, making saving money less attractive. The accounts could be used to distribute cash to citizens like the trader money allocated around the country. That is similar to the Chinese government's pilot scheme where an expiry date to spend the digital currency is given. Unlike the Chinese economy, there is a lack of clarity on how the eNaira will include the estimated 40 million unbanked adults.
Customers know that eNaira is fundamentally safer than the regular cash in a commercial bank since it is deposited in the nation's central bank. If the CBN allows customers to convert a lot of cash to eNaira, it could trigger a run on commercial banks. Potentially, commercial banks customers could move their deposits to eNaira, which will kill off commercial banks' business models. Conventional banks are modelled to take a stable depositor base, leverage it, and extend loans into the real economy. If deposit the base shrinks and becomes less stable, lending will reduce.
Given the scenario above, there is an issue whether the CBN will provide all the lending in the economy. The CBN could convert the eNaira deposits that left commercial bank accounts and then lend them back to the bank. That way, the CBN has become a lender of first resort instead of a lender of last resort. For this to happen, several risk analyses will have to be done to determine which banks they should give how many deposits. Again, the central bank does not want to get involved in that business.
Another worry about using the eNaira is that consumers and fintech firms expecting cheaper services might not get it. Tech services are affordable for customers due to the high number of suppliers in the market. The CBN's eNaira will remove that competition. It will essentially be a monopsony, and the bank will be required to break even.
The eNaira benefits are designed to enhance anti-money laundering and counter-terrorist financing efforts through blockchain or other distributed ledger technology. However, two days after the launch, the CBN alerted the public to be careful of fake eNaira social media accounts attempting to defraud trick users. Without new standards and careful coordination, Nigeria's financial system may face momentous interoperability problems in the future.
The existing CBN Act of 2007 does not include many aspects of financial technology (fintech). The risk of cybersecurity and lack of privacy worry users as the government centralises the system. Currently, software developers have pointed out privacy issues and loopholes for money laundering with the Speed Wallet. Financial institutions are unclear how the CBN plans to inject the newly created money in the Stock Wallet by every user, knowing that asset swaps will be involved. Some clarity about the degree of collateralisation would be good. The technical issues with eNaira can cause reputational risk. Technology may be exposed to glitches, cyber-attacks or human error, reflecting poorly on the central bank.
Central banks worldwide will be closely watching how things progress with the eNaira.
Dr Nasir Aminu is a Senior Lecturer in Economics at Cardiff Metropolitan University.