Introduction
Central Bank of Nigeria (CBN) on October 25, launched Nigeria’s Central Bank Digital Currency (CBDC) known as e-Naira. The e-Naira Wallet App is available for download and Nigerians have started signing up for the app.
e-Naira aimed at, among other things replacing the Cryptocurrency. CBN banned Nigerian deposit money banks from allowing their payment infrastructures to be used for cryptocurrency transactions, payments and settlements because it is not being issued by a Sovereign Authority and has no legal backing, it could be used to finance terrorism, among other reasons.
Other central banks like the Bank of Britain have also disclosed their plans to launch their own digital currencies, CBDCs to replace Cryptocurrency in their countries.
What is CBDC?
According to International Monetary Fund (IMF), CBDC is a digital representation of sovereign currency issued by a central bank or central monetary authority.
In addition, CBDCs come under the liability of jurisdiction of the central bank or the issuing monetary authority. Another promising approach for understanding the CBDC advantages is to take note of their important traits. The important attributes of central bank digital currencies include the following:
1. A central bank or a central monetary authority issues CBDCs.
2. The central bank or issuing monetary authority backs the CBDCs.
3. CBDCs are easily transferrable through peer-to-peer formats.
4. CBDCs are practically programmable for any use case.
5. CBDCs are considered as the legal tender.
6. Central bank digital currency is pegged against a fiat currency.
What is Digital Naira/ e-Naira?
e-Naira or digital naira is a form of digital currency that allows exchange between people online. e-Naira, which was created to facilitate digital transactions, does not need to be backed with physical cash. The e-Naira will be created independently of bank accounts; the wallet will be created by financial institutions that will create customer identification through an application product interface. It is a legal tender for the entire country, it will have a non-interest bearing Central Bank Digital Currency status, a transaction limit for customers and a value-based transaction limit. The eNaira have both advantages and disadvantages.
Advantages of of eNaira
It Has Legal Backing
A digital currency issued by a government works differently from cryptocurrency like Bitcoin. e-Naira has legal backing as it is virtual money issued by government authority. In this sense, it is better than Cryptocurrency because crypto is a private and unregulated virtual money.
Financial Inclusion
The e-Naira will aid financial inclusion and propel a cashless policy. Unbanked individuals can open and hold e-Naira wallet without having a bank account. This is one of the outstanding advantages of CBDCs. Till today, a majority of Nigerian population is unable to access financial services. Examples of rural areas in Nigeria without any physical location of deposit money banks, financial service operators clearly show restrictions on access to bank accounts. Honestly speaking, many banks are not quite eager to reach such regions with their services.
Low Cost Payment System
This digital currency will allow easy transaction but it is different from any other digital currency because it will be issued by a sovereign authority, which is the CBN. Digital naira could ensure easy access to a financial system with low costs and assurance of better efficiency. The low-cost payment system facilitates transfers between individuals and customers to business through smartphones without holding a bank account. The benefits of digital naira can ensure that people could experience new perspectives on accessing financial services.
Ensuring Access to Legal Tender if Cash is Unavailable
e-Naira could ensure that people could easily access legal tender if cash is not available for certain reasons. In the form of legal tender, CBDC and cash would have legal recognition as a suitable method for payment. It also represents a claim of liability on the government or the central bank. The advantages of central bank digital currency in ensuring access to legal tender fall in line with declining levels of cash used in payments.
Cash is quite an appealing instrument for money laundering, tax evasion, and other illegal transactions. In addition, it also presents higher security risks in the transportation of funds alongside making payments. Governments could also remove cash for reducing crime or improving tax receipts. In such cases, CBDCs would serve as the ideal replacements for cash as legal tender. Therefore, e-Naira enhances cashless policy of CBN and by extension cashless economy.
Not Volatile to Speculations
The e-Naira will be pegged to the Naira so its value remains the same like stable coins pegged to the dollar. It will not grow in value like Bitcoin or other cryptocurrencies but it will function the same way the Naira does. It will be controlled by CBN unlike Cryptocurrency that is controlled by speculators.
Radical Competition to Big Tech Monopoly and Cryptocurrency
The faster adoption of digital money has spurred profound growth in the concentration of power in large tech companies. The large companies serve as reliable payment providers due to the formidable network effect of their platforms. However, CBDCs have enabled the trust of people in blockchain technology in comparison to their nation’s banking system. Central banks could leverage such traits of CBDCs for communicating their abilities to deliver improved resilience of payments system. Therefore, the benefits of digital Naira could help Central Bank of Nigeria in fighting the monopoly of large tech firms and to replace Cryptocurrency, having banned its transactions in Nigeria.
Efficient Regulation
As a National Critical infrastructure, the e-Naira system will be subjected to comprehensive security check, all data and personally identifiable information (PII) will be kept off the ledger and will not be stored on the ledger. The Central Bank of Nigeria will issue operational licenses and guidelines to commercial banks and other money services institution who will open such accounts for individuals. A digital currency like Cryptocurrency which is not regulated could be used for money laundering, financing of terrorism and other criminal activities.
Enhancement of Cross Border Payments and Remittances
According to a study carried with the collaboration of the Central Banks of Canada, Singapore, and the UK, CBDC has the potential for improving counterparty credit risk in the case of cross-border payments and settlements between banks. The advantages of wholesale CBDCs are clearly evident in the case of financial institutions and markets. Interestingly, the wholesale CBDC benefits could provide the ideal answer for replacing cross-border payments. Nigerians who hold e-Naira wallet could use their wallet to settle payments abroad.
Disadvantages of eNaira
Does not Grow in Value
E-Naira will not grow in value like Bitcoin and other digital currencies. Although, e-Naira being pegged to the value of the fiat naira makes it stable and non volatile, it will make it unattractive to people who want a digital asset as form of investment that can yield profits. Therefore, e-Naira can’t replace Cryptocurrency in this regard.
No Interest
Money held in e-Naira wallet, will not accrue any interest to the holder unlike Naira held in conventional bank savings account.
Will Discourage Savings
As money held in the digital naira e-wallet is basically for transactions settlements and payments, it may trigger extravagant spending.
Risk of Fraud
The rise in internet banking, digital currency and digital payment system has given rise in cybercrime as well. e-Naira will expose more people to the risk of stolen passwords, hacked accounts, internet banking frauds, etc. With the introduction of Central Bank Digital Currencies, there will be a more innovative way for fraudsters to swindle and divert people’s money. The people at the rural areas are more at risk.
Read also: What CBN Needs to Do to Ensure Acceptability and Sustainability of eNaira
This article, which was written before the launch of the eNaira has been updated to reflect the fact that it has been launched.