Nigeria Recently became the first African country to introduce a digital currency. It joins the Bahamas and the Eastern Caribbean Central Bank in being among the first jurisdictions in the world to implement national digital currencies. Wale Fatade from The Conversation Africa asks Iwa Salami what a digital currency is and if Nigeria can achieve its goals of introducing the currency.
What is a digital currency and how does it work?
A digital currency is a means of payment or money that exists in purely electronic form. Central bank digital currencies are issued and regulated by the nation’s monetary authority, or the central bank, and are backed by the government. They are different from the existing ones central bank electronic moneyProvided by central banks, but can only be used by selected banks and financial institutions. When financial institutions pay each other, they pay into account reserves at a central bank.
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Before central bank digital currencies, the only way that consumers could use money that is a direct liability of a central bank was with physical cash. Existing digital retail payment from customer deposit accounts at banks is based on money that is the responsibility of the institution providing the account, not a central bank. A central bank digital currency is a direct liability of the central bank and is available to all households and businesses that provide them access to central bank electronic money.
It can be transferred or exchanged using technologies like blockchain. Blockchain is a system for storing transaction records through a computer network.
Nigeria’s digital currency will be the digital form of Naira and will be used as cash.
The digital currency of a central bank is not a cryptocurrency. Cryptocurrencies, such as Bitcoin, are not currencies in most countries, as they are not a generally accepted form of payment. Although they are still widely known as cryptocurrencies, they are best described as digital assets or crypto assets.
The Bahamas, Saint Lucia, Grenada, Antigua and Barbuda are among the seven countries who have launched central bank digital currencies.
Why has Nigeria launched a digital currency?
The Central Bank has given Many reasons for launching the eNaira. That is for:
- promote and facilitate financial inclusion
- Allow direct disbursements of social assistance to citizens.
- facilitate diaspora remittances
- reduce the cost of cash processing
- improve the availability and usability of Central Bank money
- increase revenue and tax collection
- support a resilient payment system
- improve the efficiency of cross-border payments.
The introduction of eNaira will allow peer-to-peer payments, eliminating ‘middlemen’ or the use of intermediaries, such as financial institutions.
What are the risks and how can they be mitigated?
One is its potential to disrupt existing banking systems. This could happen if citizens decide to have digital currency instead of keeping their physical Naira in a bank account. This would mean that banks would not have money to provide loans and other financial products. It could result in banks raising their interest rates as an incentive for clients to keep deposits with the banks. But then the interest charged on the loans would also go up to cover the interest on the savings.
However, since eNaira does not accrue interest and the Central Bank can set transaction and balance limits on certain eNaira portfolios, this risk is minimized.
The second risk is operational. For example, if IT systems fail or if there are technological failures or cyberattacks. These can compromise user privacy. The Central Bank will need robust technology and IT security systems.
Closely linked is the reputational risk for the Central Bank if operational risks materialize. They are likely to have a major impact on your credibility and reputation both domestically and globally.
When the Central Bank takes on this new role, issuing the eNaira and maintaining a central ledger of all transactions, it could find it more difficult to perform its key function of ensuring a safe and sound financial system, as its focus could shift towards managing assets. the eNaira. system in addition to performing its other functions in the national economy.
One possible way to ease this burden is by creating synthetic central bank digital currencies. This idea was presented in 2019 at a International Monetary Fund Document. In such a system, the central bank does not directly administer the system, but rather outsources tasks to private institutions. Financial institutions issue the digital currency, which is fully backed by central bank money.
Closely linked is the risk that the system will be used to launder money and finance terrorism. Financial institutions would need robust systems to combat these threats, backed by a national legal infrastructure.
Another risk is related to data protection and privacy. Central bank claim (is that he:
The eNaira system is built with deep considerations around privacy and data protection and in compliance with National Data Protection Regulations.
However, as the system is designed in accordance with the guidelines To prevent the illicit flow and use of funds that require the identification of the parties carrying out the transaction and the details of their transactions, it is necessary that adequate systems are in place to ensure that the privacy rights of the users of the eNaira system are not violated. .
You also need to educate people about eNaira. Although the central bank says there are “campaigns to deepen the awareness of eNaira among the population,” it is not clear what this implies. Citizens should know the difference between digital representation of cash deposits in bank accounts and eNaira in digital wallets.
Is Nigeria ready for it? If not, how can the gaps be addressed?
Nigeria could certainly do that, provided the technological infrastructure and technological know-how are in place. Is set that eNaira will be managed by the central bank through the Digital Currency Management System to mint and issue eNaira, but it seems that this system has been built by Bitt, a global fintech company. It provides digital currency and stablecoin solutions to central banks, financial institutions, and ecosystem participants around the world. As such, the maintenance of the eNaira system would be highly dependent on the technological strength of this company and the extent to which they are retained to provide a maintenance framework for the system.
Another problem is the electricity crisis and widespread lack of access to the Internet across the country. These must be immediate priorities for the Central Bank and the government to resolve the success of the eNaira system. It is good to see that there is a plan in place so that the system can be used offline.
Another challenge that the poor may have in accessing the eNaira system is the difficulty of achieving a digital identity. ENaira’s design foresees using the existing system of Bank Verification Number and National Identity Number. Obtaining the necessary documents for these is expensive and cumbersome.
What Nigeria has the largest population on the continent, leading this process could mark the beginning of regional monetary integration. If central bank digital currency deals could work together across the continent, it could solve the challenge of inconvertibility of African currencies. This could help intraregional trade, which has been challenging achieve in Africa. With the African continental free trade agreement already in place, the successful launch of eNaira could be a step towards regional monetary integration in Africa and potentially a regional central bank digital currency.