It is no longer news that the Central Bank of Nigeria (CBN) is going live with its digital currency project (Project Giant) on October 1 2021. With this, Nigeria joins a growing list of Countries that have embarked on the digital currency project. The creation of these so-called Central Bank Digital Currencies (CBDC) is a creative response to the ongoing disruption of financial systems by the block chain technology which traditional finance “experts” have failed to wish away. So where does eNaira fit in the financial ecosystem and how does it affect the way money works going forward?
What is eNaira?
In its simplest form, eNaira is a virtual or electronic version of the Naira created, distributed and managed by the CBN and held by users in digital wallets (similar to cryptocurrency wallets). The digital currency will be accessible from mobile phones and computer networks, and does not exist in physical forms. Because it is managed by a central ledger run by the CBN, it requires that you hold an account directly with the central bank, as opposed to holding one with the various banks in the Country. The eNaira can be used by individuals and businesses to store value and make payments.
How is the eNaira Different?
Conceptually the eNaira will be equivalent to the Fiat Naira (a nickname for the Naira in your hand now), and according to the guidelines rolled out by the CBN it will only serve as a complement. The main difference between the two is that the eNaira is strictly digital and will be issued and transacted on a single ledger (like the block chain) controlled and regulated by the CBN. Think of a mega digital bank managed by the CBN.
Per the CBN guidelines, the eNaira is a non-interest Central Bank Digital Currency, meaning that you will earn zero interest on your wallet balances.
Why is the CBN Issuing an eNaira?
Central Banks like control.
The primary responsibility of Central Banks around the world is ensuring price stability by controlling inflation. But to effectively discharge these responsibilities, central banks need the help and cooperation of the commercial banks. You have obviously heard of monetary policy, which simply means using interest rates to control money supply, inflation and economic growth. One shortcoming of the current monetary policy framework is that central banks are not fully in control of their most important tool, in the sense that it depends on commercial banks and public perception to be effective. For instance, to reduce the current high inflation rate, the CBN may opt to increase its interest rate (Monetary Policy Rate – MPR), aiming to reduce the quantity of money in circulation. In response, the CBN would expect commercial banks to increase their interest rate in tandem. What if the banks increase their lending rate as expected but fail to increase the savings rate as much (as it’s often the case)? The CBN becomes “helpless”.
Furthermore, almost all financial records currently reside with the commercial bank, hence the CBN must rely on them to execute stuff like loan creation, conditional cash transfers (i.e Trader Money), tax collection, etcetera.
Similarly, by promoting a decentralised financial system that is not controlled by a single entity, the block chain technology is directly challenging the legitimacy of the central banks. Already the CBN has somewhat turned cryptocurrency investing into a “black market activity”. You can’t tell someone that a thing is bad without offering a better alternative. Central banks believe that a digital currency will help them get a hand on the ongoing disruption of financial systems, and give them better first-hand information about the economy to discharge their monetary policy responsibilities as well as better promote financial inclusion.
Lastly the eNaira will help reduce the cost of printing paper money which is huge.
Is it a Cryptocurrency?
No. Cryptocurrencies are operated based on an idea of decentralisation where no single entity determines, regulates or controls transactions. On the other hand, the Central Bank Digital Currency will be centralised and controlled by the CBN, they will determine which transaction is allowed and which will not be allowed. The CBN can reverse, cancel or stop any transaction as determined by its rules and operational guidelines.
Also cryptocurrencies operate as an open ledger system where everyone on the network can see details of all transactions. The Central Bank Digital Currency is different as only the CBN will have access to all transactions.
How Does the eNaira Benefit Us?
Most importantly, the eNaira will greatly facilitate a cheap and faster payment system. Think about the current inefficiency in the payment system. To send money from your bank account to another bank account, your money must be routed through intermediary platforms such as NEFT and RTGS (it’s okay if you have never heard of them). Sometimes, these intermediary settlement platforms fail or take hours to days to settle. The Central Bank Digital Currency network will eliminate these intermediaries and the additional cost (time and money) they attract.
Secondly, the Central Bank Digital Currency, if adopted by other central banks around the world, will improve cross border transactions by eliminating the time and money wasted by intermediaries such as SWIFT and correspondent banks.
Lastly, because your funds are now held directly with the CBN as opposed to the commercial banks, you have less to worry about bank failure and insolvency. Central Banks carry the full faith of the federal government and offer certain implied guarantees.
Are There Issues with a Digital Currency?
I dare say yes. The popularity of block chain technology was gained by the inefficiency of the current financial system. In spite of the many inadequacies of the current system, we have carried on for so long as if all innovative possibilities for process improvement have been exhausted. More so, central banks around the world have not shown anything in the past that they have the flexibility and a granular understanding of the needs of businesses to design and implement an efficient payment system. The rise of digital payments will precipitate a structural change and realignment of the financial system and requires central banks to carry out an honest reassessment of their readiness.
Secondly there is the issue of privacy. The idea of the Central Bank having access to all financial records and transactions will be unsettling to many and may cause a flight to decentralised cryptocurrencies.
Finally, in a world where Central Bank Digital Currency become the norm may hurt countries and entities with poor credit ratings. At the micro level, if customers suspect that their local bank is having a liquidity crisis, they can quickly move out all their funds to the Central Banks in a matter of seconds without even stepping foot into the banks. Similarly, citizens who lose faith in their local currency can easily migrate their funds to a foreign digital currency and cause more distress to the local currency.
The Future
The form of money has changed over the years. We have moved from monies backed by commodities (cowries), to coins and notes backed by gold and today we use coin and paper money backed by credit. The changes over the years happened to essentially accommodate the level of industrialisation. In the current industrial revolution, the current form of money has become expensive, inefficient and inadequate.
The rise of a cashless, digital economy is well underway. We are clearly at an inflection point where Central Bank Digital Currencies, Stablecoins and Cryptocurrencies may replace paper money and bank deposits. The enabling technology (block chain and its variants) is already provided and has largely gained global acceptance. What is left is building the infrastructure that works best. Whether it is the Central Bank Digital Currency, Stablecoins, cryptocurrency or any combination of the three, we will see which one works best.
The adoption of digital currency appears to be inevitable in the years to come.
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