On October 25, 2021, the Central Bank of Nigeria (CBN) launched the eNaira, the first CBDC in Africa and the second in the world to be fully open to the public following the Bahamian Sand Dollar. As a digital form of the local Naira, the eNaira is meant to complement the physical currency, while maintaining parity of value, status as liability of the CBN, and serving as legal tender.
The eNaira runs on the private blockchain Hyperledger Fabric, with an account-based system where transactions would require verification of users’ identity.The CBN has partnered with the fintech company Bitt, Inc. to provide the necessary infrastructure and technical tools for operations.
As a retail CBDC, the eNaira is accessible to individual users who can store and access it directly through digital wallets, rather than intermediary commercial banks.
However, there still remain questions with respect to utility and implementation, which could seriously undermine the eNaira if left unresolved. There has been an apparent lack of transparency throughout the RFP and overall processes to launch the eNaira.
Stringent initial access restrictions have obscured who can actually open an eNaira account. There have been no details on how tokens would be audited, their specific features, or how monetary policy would be conducted.
Moreover, there have been no indications of integration with the Interswitch network2 which powers the Nigerian payments ecosystem, a necessary requirement for adoption.
Godwin Emefiele Governor, Central Bank of Nigeria
Brian Popelka CEO, Bitt
Daniela Barbosa Executive Director, Hyperledger
Jack Ree Economist, IMF African Department
Months ahead of the eNaira’s launch, on February 5, 2021, the CBN issued a letter to all banks and financial institutions, prohibiting them from facilitating cryptocurrency transactions including providing services to crypto trading platforms.
Conversions between fiat and crypto would no longer be able to rely on the Nigerian commercial banking system. The CBN expressed concerns over the risks of cryptocurrencies including money laundering and financing of terrorism and other criminal activity, as well as lack of protections for retail investors given the volatility and high probability of loss.
While there has been no official ban for cryptocurrency or for individuals to engage in cryptocurrency activities, crackdowns on cryptocurrency users have increased. Circulars have revealed individuals’ and companies’ information and demanded banks to block their accounts.
This stance is particularly noteworthy given that local currency devaluation has driven crypto adoption in Nigeria. Inflation has become an increasing concern since 2016, when Nigeria the Naira’s peg to the USD broke.
The black market exchange rate on the streets has crept upward at significantly higher levels than the government reported exchange rate. Anticipated exchange rate reforms intend to reduce the gap between these exchange rates, establish a unified market clearing rate, and incentivize broader adoption of the eNaira for remittances.
Yet Transparency International has scored Nigeria as 25/100 in terms of corruption, ranking it 149th out of 180 countries for 2020. There have been historical instances of bribes, missing funds, and monetary gifts to government officials in return for favors. The discrepancy in exchange rates may indicate an arbitrage opportunity for select groups to profit from.
Moreover, the eNaira’s launch is timed close to the mobile money approvals granted to the telecommunications services companies MTN and Airtel, indicating that the CBN may be attempting to provide a mobile money option of its own.
The very success of the peer-to-peer transfer ecosystem, in the context of exchange rate discrepancies and inflation, may indicate that remaining unbanked could be a favorable option. This reframes the concept of financial inclusion as reliant on bank account ownership, especially if commercial banks are sidestepped for the sake of direct payment solutions including the eNaira.
Nigeria has the highest per capita usage of cryptocurrency in the world, with nearly 1/3 of the population owning or using digital currencies. It is also Africa’s largest economy, with a 2021 GDP of $514 billion, followed by Egypt and South Africa.
With regard to financial infrastructure, Nigeria has among the most efficient banking systems in Africa, which attained a swift response to the Covid-19 crisis and maintains a highly efficient clearing and settlement network.
Yet the informal economy remains substantial, making up 80% of total employment and producing transactions that comprise over 50% of GDP.
In the context of inflation, challenging exchange rate policies, and the CBN’s crackdown on crypto activities, Nigerians have turned to peer-to-peer trading platforms in order to avoid interacting with local banks.
Nigeria is the largest market for the peer-to-peer platform Paxful, with over 1.5 million users conducting over $1.5 billion in trade volume since 2015.
Paxful has experienced a 27% surge in peer-to-peer trading in Nigeria within the first 2 months after the CBN’s restrictions were placed.
Outlook and Implications
Financial inclusion is among the major expected benefits from the eNaira, which would allow digital fund transfers at virtually no cost across eNaira wallets anywhere in the world.
Initial accessibility for people with a bank account is expected to expand to people with mobile phones. 36% of the adult population (38 million Nigerians) does not have a bank account. The eNaira has a potential to become accessible for up to 90% of the country’s population.
- Decentralized identity and smart phone-based services would open access to financial services for unbanked and underbanked populations.
- An alternative remittance system based on the eNaira could offer greater efficiency at much lower costs relative to the existing system marred by forex restrictions and high transaction fees (1-5% of transaction values) to users. Remittance receipts in Nigeria amounted to $24 billion in 2019 according to the IMF.
- Increasing peer-to-peer transactions and reducing cash usage could lead to more effective payment systems and enhance consumption.
The CBN has recognized these benefits in the context of improving the competitiveness of both domestic and international commerce, as well as policy implementation. If operated effectively, the eNaria could lead to more effective monetary policy and tax collection mechanisms.
Transactions recorded on a blockchain would provide transparency into the informal economy and further strengthen the tax base. Direct fund transfers from the government to individuals could also improve social transfer programs.
Moreover, the immutability inherent to blockchain technology can prevent duplication and counterfeit issuance of currency.
Nevertheless, several risks remain with respect to monetary policy implementation, cybersecurity and privacy concerns, operational resilience, financial integrity, and financial stability.
These risks could jeopardize the sustainability of the eNaira and its very existence moving forward if they remain unaccounted for. There are, however, certain indications that these risks have been considered, with the IMF having reviewed the product design and rollout process.
- Digital wallets could reduce the demand for commercial bank accounts for storing funds, diminishing the role of banks and other financial institutions. Hence there have been set daily transaction limits to transfer funds from bank deposits to eNaira wallets, as well as balance limits (e.g., maximum of 5 million Naira, or approximately $12,000 in each wallet).
- Tiered identity verification systems, where more stringent controls are applied to less verified users, limit the risk of money laundering and other illicit activities which could impact financial integrity. Initially those with bank verification numbers could open a wallet, followed by those with registered SIM cards and mobile phones, and eventually groups with no ID numbers, the latter of which would be subject to tighter transactions and balance limits.
- Regular IT security assessments are meant to limit cybersecurity risks. Vulnerabilities may exist especially in the integrations with current systems including banks and third-party issuers.
There remains a clear need for the CBN to define avenues for adoption of the eNaira. This will involve public education on its utility, implementation of effective security measures, and a prioritization on features and intended uses embedded into the eNaira’s design. Otherwise, the eNaira will remain a misguided attempt at financial inclusion at best.
With respect to governance, the CBN needs to define the level of centralization with which it will operate the eNaira while ensuring public trust and accountability. This pertains to transparency of transactions and information, validation mechanisms, issuance of new coins, and overall monetary policy (e.g., visibility of supply rates, burn rates, and circulation).
-Read full report on Forbes