Some weeks ago, the Central Bank Governor, Mr Godwin Emefiele announced that Nigeria plans to launch its own digital currency, called the “eNaira”. This is a central bank digital currency (CBDC), which is the virtual format of a fiat currency or a digital token of the official currency. This move by the CBN follows a global trend in which over 85 per cent of Central Banks are considering the adoption of digital currencies in their countries.
As opposed to common preconceptions, the eNaira is not a variant of cryptocurrencies. While CBDCs and cryptocurrencies share the characteristics of digital currencies and are blockchain-based. The latter is a decentralized asset of value secured by encryption, while the former is an economic form of fiat money issued and controlled by the centralized monetary authority. Thus, the eNaira will essentially serve as a digital representation for the physical Naira.
The CBN Governor stated that the eNaira would operate as an electronic wallet where customers can hold existing funds in their bank account. The digital currency would be implemented through a two-tiered model which would enable a structure that leaves room for public-private partnership. Just like the physical currency, the CBN will design the eNaira but disseminate it through its regulated financial institutions, which would then provide digital cash to individuals and businesses.
The benefits of the Central Bank Digital Currency (CBDC) include the significant reduction of costs associated with counterfeiters (detection, removal, and law enforcement), low transaction cost of the CBDC and the potential improvement in transaction efficiency which could encourage adoption and spur usage. If adoption is significant, it could increase transaction velocity as well as reduce cash-handling costs.
It could also help the fast-growing digital payments industry and enable the CBN to better regulate the industry, as the apex bank will be looking to position itself at the forefront of digital payments. In addition, the CBDC has the potential of helping the CBN to achieve its National Financial Inclusion Strategy target of 80.0%, which it was unable to meet in 2020, as it is targeted at both the banked and unbanked segments of the population.
Also, the eNaira will facilitate cross-border eCommerce transactions, which will subsequently reduce pressures on foreign reserves. To the banking sector, the likely benefits include lower cost of operations, reduced time and cost of cash management.
However, there are some concerns that the adoption of the CBDC might lead to depriving the users of their privacy as it will give the Central Bank profound insights into individual e-commerce transactions. In addition, the barriers to adoption include the country’s low internet penetration level, smartphone ownership, attitudes and perceptions as these are the major reasons why Nigerians do not have bank accounts thus the preference for cash according to the Enhancing Financial Innovation & Access (EFInA). Analysis based on EFInA data shows that attitudes and perceptions for physical cash would be a greater challenge for the adoption of digital currency.
While c.81% of Nigerians owned mobile phones (including smart phones) as at 2020, only c.28% actively use their phones for digital financial services.To the banking industry, CBDC also poses some risks which include the associated cost and risk of deploying/onboarding a new payment platform as well as interoperability risk as articulated by the CBN.
The greatest implication the e-Naira implementation would have for banks is the risk of disintermediation (the possibility that it might erode the role of Deposit Money Banks- DMBs as financial intermediaries) because as customers convert their bank deposits into eNaira, banks will have a smaller base on which to create loans in the short-medium term.
For smaller banks, in particular, that may have to compete for deposits with bigger banks, this could increase their cost of funds.