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Experts: How CBN’s E-Naira’ll improve payments, cashless policy

The Central Bank of Nigeria recently announced that it would in October launch the nation’s digital currency, ‘e-Naira’. PAUL OGBUOKIRI reports that introduction of the virtual-money will revolutionise the handling of cash in the country and enhance the cashless policy

 

Central Bank’s digital currency (CBDC) explained

 

Central Bank Digital Currencies (CBDCs) have recently emerged as a hot topic in the financial space. Banks, Institutions, and governments are performing research and analysis on the economic and technical feasibility of introducing a new form of digital money and its impact on monetary and fiscal policy.

 

A Bank of International Settlements report states that over 80 per cent of Central Banks are already researching CBDC. In simple terms, CBDC is short for Central Bank Digital Currency, an electronic form of Central Bank money that citizens can use to make digital payments and store value. A CBDC offers three main elements: A digital currency, issued by the Central Bank and Universally accessible.

 

Advances in financial technologies

 

The International Monetary Fund (IMF) warns that central banks may have to rethink what constitutes their reserve currency holdings.

 

In a recent study, the global lender points to the changing geopolitical landscape, technological advances and the impact of the Covid-19 pandemic as events likely to influence the composition of reserves.

 

In addition to the US dollar, other currencies like the Euro, the Japanese and the British Pound act as settlement currencies in global trade. Still, the US dollar dominates when it comes to its status as the world’s reserve currency.

 

However, in a study, whose findings are shared via the global institution’s blog, the IMF says that the pandemic inspired “advances in financial and payment technologies” will likely “impact the future composition of reserve holdings.”

According to the authors of the blog, many central bankers are now aware of threats from private issuers of digital money, like the Facebook backed Diem. Consequently, some central banks may be attempting to counter this threat by issuing their own digital currencies.

 

The authors wrote: “(The) potential competition from private issuers such as Diem – Facebook’s blockchain-based payment system – has spurred major central banks to accelerate work on central bank digital currencies and cross-border payments.

 

“Diem Association is an independent organization governing the blockchain payment and Facebook is one of 27 member companies. “Institutions like the European Central Bank and the People’s Bank of China, which are already “exploring the issuance of central bank digital currencies,” believe that their ultimate success on this front “could increase demand for their currencies.”

 

In turn, this increased demand will accelerate the dumping of the US dollar as the preferred global reserve currency

Central Banks are gradually warming to digital currencies

 

What began as a dream to wrest control away from the state is becoming a model of adoption for the central banks that, once wary of digital currencies, are now learning to love them.

Last April, amid the COVID-induced panic that engulfed the planet, more shocking news came from China.

 

The People’s Bank of China (PBOC) announced that it would start testing its own central bank digital currency, a first for a major economy. Government employees in four cities were paid in digital Yuan, while four commercial banks began internal tests.

 

By December, around 50,000 lucky citizens had received 200 e-yuan (£23) in their digital wallets to spend on apps such as the food delivery service Meituan. A new era had started.

 

Replacing physical cash

Another reason why central bankers are warming up to CBDCs is the slow but steady adoption of cryptocurrencies by the public. Initial coin offerings (ICOs), once seen as a scam, are becoming a mainstream method for start-ups to raise capital.

 

By late November 2020, the total market capitalisation of crypto assets stood at £476 billion. COVID-19 has also boosted the use of digital cash, with digital payments becoming the norm.

 

“The pandemic has led to an increased focus on digital cash to replace contaminable physical cash, in addition to creating more reliable, effective, and optimised mechanisms for the distribution of (COVID-19) relief funds. This led central banks to prioritise CBDCs,” Hernandez said.

 

Not surprisingly, it was a technology company that kick-started the race. In June 2019, Facebook announced the launch of its own digital currency, Libra. The project’s white paper stated that CBDCs could be integrated into the Libra network, sparking fears among central bankers that a private company would compete with them in their own game.

 

In a dramatic testimony to Congress last July, Mark Zuckerberg warned US policymakers that if they didn’t endorse Libra, China would move first. Chinese officials took notice, worrying that the Yuan would not be included in Libra’s currency basket, amid a trade war with the US.

 

Nigeria joins the new global trend

 

At a Senate hearing in February, the Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, famously described the cryptocurrencies as ‘money out of thin air.’ In an interesting turn of events, the CBN is using the technology behind this “money out of thin air” to create the eNaira. It revealed on July 22, 2021, that the pilot scheme for the project will begin. While digital currencies like Bitcoin, Ethereum and Elon Musk’s coveted Dogecoin are relatively popular, central bank digital currencies (CBDCs) are not as well-known. A digital currency issued by a government works differently from a cryptocurrency like Bitcoin. Cryptocurrencies are not controlled by a singular entity. The creation and distribution of Bitcoin is decentralised, meaning anyone can participate.

 

Why Nigeria is introducing eNaira

 

Adedeji Owonibi, founder and COO of Blockchain solutions company, Convexity, explains that CBDCs are trending and countries want in on the action.

Over 80 countries are testing and researching the possibility of a central bank digital currency. He adds that the CBN was also fearful of the traction cryptocurrencies were getting.

Ownonibi, who is also a crypto forensic investigator, explains that he tried to allay their fears. “When the Central Bank displayed their fear about crypto gaining so much traction, I was invited to speak with them and I explained how crypto monitoring can be done through the banks.”

 

CBN says the objective of the eNaira is to aid financial inclusion, improve payment efficiency, improve revenue and tax collection, targeted social interventions, amongst other objectives. While the eNaira will play an important role in financial inclusion and propel a cashless policy, Owonibi believes it will not have any major improvement on the Nigerian economy.

 

Will the eNaira grow in value like Bitcoin?

The eNaira will not grow or plummet in value like Bitcoin or other cryptocurrencies. Interestingly, the eNaira will function the same way the Naira does. The difference being the former is digital.

 

The eNaira will be pegged to the Naira, so their value remains the same, like stable coins pegged to the dollar. According to Chimezie Chuta, Founder/ Coordinator Blockchain Nigeria User Group, Vice Chairman Blockchain Industry Coor-  dinating Committee of Nigeria (BICCoN), issuing CBDC will not suddenly turn your fortunes around.

 

The eNaira is pegged to the Naira, meaning it maintains the value of the Naira. Owonibi corroborates Chuta’s stance, emphasising that the eNaira “doesn’t provide insulation from inflation.”

 

Essentially, it works the same way stable coins maintain value. A stable coin is a cryptocurrency that is immune to volatility. They are pegged to with a fiat currency and hold the same value as the fiat.

 

Per Investopedia, they are backed by reverse assets like commodities or a foreign currency. In the case of the eNaira, it will be backed by the Naira.

 

How will the eNaira work?

 

Owonibi, who is one of the brains consulted by the CBN on how a digital currency could work, reveals that banks and fintech will have a significant role to play in deploying the eNaira.

 

“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.”

 

This suggests that while the Hyperledger Fabric Blockchain, the Blockchain network selected by the CBN for the eNaira to run on, is permissioned, the government will grant access to all the parties stated by Owonibi. Nevertheless, it has full control of the system. Financial institutions will play roles in identity verification, payment processing amongst other things.

 

Owonibi adds that, “anyone holding a Fintech licence can mint the eNaira and also create wallets for customers.”

 

In Chuta’s explanation of how the digital currency will work, he points out that it will be a peer-to-peer (P2P) transaction by people who have the eNaira wallet “just like we do in crypto, the wallets will enable you to store, send and receive the eNaira”

 

In contrast to Owonibi’s claim that Fintech with licences will be able to mint the eNaira, Chuta believes the CBN will be the only one minting the digital currency.

 

A legal claim by the CBN will back up every digital currency minted to keep inflation in check. He describes it as “a legal claim of the availability of that Naira in a physical vote” Chuta highlights steps for the implementation of the eNaira which includes issuing of the currency by the CBN, distribution through licensed financial institutions, exchange between individuals and businesses and monitoring by the CBN. Owonibi clarifies further by saying wallets will be created through financial institutions the same way bank accounts are created.

 

Connecting eNaira with existing bank accounts

 

The eNaira will be created independently of bank accounts. According to Owonibi, the wallets will be created by financial institutions that will create customer identification through an application product interface (API).

 

Chuta, on the other hand, says the connection of CBDC wallets to existing bank accounts is a bit tricky. While he’s not certain, he believes that there should be a linkage between Bank Verification Numbers (BVN) and the wallets.

 

“Without that, an individual could have two identities,” he says.

 

Last line

 

Until the pilot scheme for the eNaira commences in October, no one knows for sure what to expect.

 

From how cross border payments will work, to how privacy will be ensured, Owonibi admits that he has several unanswered questions.

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