The phenomenon of digital currencies has assumed a wider dimension globally over the last decade with its attendant impact on commerce and the economy often dividing opinions on the subject. The growth in its adoption is partly attributed to massive expansions in the global Fintech industry and the unending search for newer digital investment frontiers, and more flexible currency/payment solutions.
Digital currency refers to any means of payment that exists in a purely electronic form. Digital money is not physically tangible like a bill or a coin. It is accounted for and transferred using internet and electronic means. One well-known form of digital money is the cryptocurrency which is the most popular globally.
A cryptocurrency, or crypto is a binary data designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. The validity of each crypto-coin is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography Cryptos are mostly issued by private systems and largely remains out of the purview of the government.
The first released crypto as open-source software was the Bitcoin in 2009, which is also the first decentralised cryptocurrency. Since the release of bitcoin, many other cryptocurrencies have been created. The global market capitalisation for the cryptocurrencies stood on at $2.12 trillion on August 31, 2021; with coins such as Bitcoin, Ethereum, Cardano, Binance Coin and XRP taking up huge market shares.
In the distribution of global cryptocurrency ownership, recent statistics revealed that Nigeria is third with an estimated 13 million owners, only behind India & USA with 100 million & 27 million owners respectively; indicating that Nigeria is the leading hub for the crypto market on the African continent. The soaring wave of Nigerians; especially the younger population who continually subscribe to this crypto system and the unmoderated dimension it was assuming in the country prompted the Central Bank of Nigeria (CBN) to intervene in February 2021 by circularising an instruction to all financial institutions to stop the facilitation of any transactions that involves cryptocurrencies. It went further to task the regulated bodies into identifying individuals or organizations engaging in cryptocurrency transactions within their system and shut down their accounts with immediate effect. Finally, the circular noted that failure to adhere to the directives will attract severe regulatory sanctions on the part of the regulated entity. The apex bank justified the move by maintaining that the crypto-market is a loose and unregulated market that is amenable to terrorism financing and all sort of internet frauds; thereby as the country’s financial controller, it felt constrained to be decisive in halting its operations. The clampdown on cryptocurrency by CBN was met with outrage and sparked controversy among the general public as people debated what the ruling would mean for the country’s financial institution especially the burgeoning Fintech sector.
The directive was however met with immediate compliance by all Fintech platforms across the country. Almost immediately after the Central Bank released the circular, major Fintech companies that offer cryptocurrency processing options on their platform including Flutterwave, Buycoin, and Piggvest amongst others notified their customers of the removal of virtual crypto accounts hosted with Deposit Money Banks (DMBs). They also made it known that they will no longer process cryptocurrency transactions via naira deposit, disabling the option in line with CBN’s directive. These announcements led to huge panic among the public as people scampered to withdraw their funds from these Fintech platforms despite continued reassurance of the safety of people’s money by these companies. Stability however returned to the cryptomarket after the brief tumult, with the foreign based Crypto hosting platforms providing alternative methods for transactions to be carried out without direct involvement of Nigerian financial institutions.
It therefore came as an astonishing bombshell when out of the blue in May 2021, the CBN; who was still facing sustained backlash in some quarters over its ban of cryptocurrencies in the country announced that it will create and launch its own digital currency called the “eNaira” by October 1, 2021. The apex bank governor, Godwin Emefiele revealed that the idea of a digital currency would soon become a reality in the country, and that the central bank has already set up its committee which is working on the concept.
Emefiele said the eNaira would operate as a wallet against which customers can hold existing funds in their bank account. The detailed report on the design and operational module of the eNaira project revealed that the new currency will be a legal tender for the entire country, it will have a non-interest bearing CBDC (Central Bank Digital Currency) status, witha valued-based transaction limit for customers. Participants in the eNaira program are grouped into five components, including Monetary Authority Suite which is the CBN that will be handing the first product component that includes issuance, distribution, redemption and destroying of the currency. It will store data on a cloud server while monitoring and analysing currency transactions. Second is the Financial Institution Suite which is the licensed financial institution that will be able to request currency or issue stablecoins, manage digital currency across branches, carry out customer due-diligence (KYC), while also identifying and enforcing compliance capability. Third is the eGovernment Suite whereby the government will be able to efficiently process digital payments sent to and received from citizens and businesses. Fourth is the Merchants who will provide low-cost payment and business management software, POS, remote payment solutions, online capabilities, transaction analysis and reconciliation services. The fifth component is the Retail Consumer Suite which will feature user-centred designs for a great user experience. The architecture will be expandable to enable innovation and advanced privacy and security.
Consequently, the proposed transaction cost for the eNaira wallet was also outlined by the Central Bank. The digital currency infrastructure will not charge for user-to-merchant transactions and P2P (peer to peer) wallet transactions and it shall be the responsibility of Nigerian banks to promote and market the centrally issued digital currency as a cash alternative to existing and potential customers in support of the Nigerian apex bank’s goal for financial inclusion. In order to catalyse the adoption of the eNaira, banks will facilitate onboarding and provide world-class customer service. The banks will be allowed to invite all their customers to register for the eNaira; and besides pre-generated codes, the banks can send invitation codes for onboarding to a specific list of selected customers. Onboarding will be done for customers who have a code assigned by their banks on the assumption that the banks have already validated and verified these customers. Onboarding is the process of integrating or familiarizing customers with a new product/service offering.
Furthermore, the Central Bank stated that the wallet provided by its institution was merely a stop-gap measure for meeting the deadline, given that banks and other licensed operators may provide their own wallets since it didn’t intend to compete against the banks. As part of the digital currency initiative, Nigeria’s central bank has made clear that NIBSS (Nigeria Interbank Settlement System) and other switching platforms will still be relevant as the existing infrastructure can be integrated and leveraged in the eNaira implementation. As a National Critical Infrastructure, the eNaira system will be subject to comprehensive security checks, all data and personally identifiable information will be kept off the ledger and will not be stored on the ledger.
In order to meet the October 1 start-up date, a three-tier consumer Speed Wallet system will be issued by the apex bank before banks and other licensed operators can provide their own wallets for the eNaira.The tier 1 wallet is open to anyone without a bank account. It also comes with a transfer limit of ₦50,000 and a cumulative balance of ₦300,000 fixed daily. The minimum requirement to open this wallet is a National Identity Number (NIN).For tier 2 wallets users, an existing bank account with a linked bank verification number (BVN) is the minimum requirement for this level. Users are restricted to sending and receiving ₦200,000 daily and having a balance of ₦500,000.Tier 3 wallet holders can transact up to ₦1,000,000 daily with the cumulative balance set at ₦5,000,000. At least a BVN is needed to get this wallet category.Transaction limits on merchant-level wallets are also set at ₦1,000,000 per day, though there are no limits to how much users can have in their accounts.
It is pertinent at this juncture to point out that CBDCs are digital currencies issued only by the government; and while they might share similarities with cryptocurrencies such as running on a Blockchain for example; they’re not necessarily in the form of volatile cryptocurrencies subject to the erratic market fluctuations. CBN is not creating a speculative cryptocurrency as some might presuppose; what is being done basically is to turn our Naira fiat currency into a digital currencythat is also designed for the internet to facilitate digital transactions. This digital currency will not need to be backed by any physical cash as it holds monetary value on its own.. Additionally, The eNaira will not grow or plummet in value like Bitcoin or other cryptocurrencies but will function the same way the Naira does. The only major difference being that the former is digital. The eNaira will be pegged to the Naira so their value remains the same, like stable coins pegged to the US Dollar.
The rationale for the CBN’s major policy shift regarding digital currencies can be attributed to a number of factors; the global traction cryptocurrencies keep getting is an undeniable major influence, and the rising surge in possible adoption of CBDCs in manycountries well-disposed to the new innovation was also adding to its increased popularity.Over 80 countries are currently testing and researching the possibility of a central bank digital currency in addition to countries like India, China, South Africa, Ghana who have already decided on a home-grown digital currency. More countries are adopting CBDCs because they have realised the capability of the Blockchain as to how fast, efficient and flexible they are. The CBN have also categorically stated that the objective of the eNaira is to aid financial inclusion, improve payment efficiency, improve revenue and tax collection, targeted social interventions, amongst others.There is also growing assumptions that digital currencies will dominate monetary transactions in the near future and as such; it is advisable for government to embrace the system and start keying in so as not to be left lurching in the dark. The CBN’s ban on cryptocurrencies subsists for now but with this introduction of an official digital payment system; subsequent forms of harmonisation and/or integration cannot be totally ruled out if common ground can be attained on moderation and other conflicting areas resolved.
The attribute of centralisation and monitoring creates a sharp difference between eNaira and cryptocurrencies and this may be a bane to the success of eNaira as the Nigerian market which consists mainly of the younger population tends to gravitate more towards the banned Cryptos. How the CBN bridges this trust-deficit and convinces the youth who are the main drivers of digital payment and commerce into participating fully will be fundamental to the long-term success of this scheme.Until the pilot scheme for the eNaira becomes fully operationalon October 1, no one knows for sure what to fully expect. For example; How will the transactions be driven and integrated to daily commercial activities? How will institutional and private investors be attracted to long-term partnerships for the project? Will there be any digital currency deal with external countries to facilitate foreign transactions with such countries? What form will cross-border payments take?How willfull privacy be ensured?How will financial institutions, web payment solutions firm and Fintech giants be incentivised to bolster the project’s sustainable progress? These key questions amongst others are pressing posers seeking answers as the launch date draws closer. It is also unclear how this digital currency will help the Naira retain or increase in value; as it is merely a digital duplicate of the paper money and efforts to help encourage participation and entrench it into our financial system might include the apex bank offering marginal discounts to people making purchases or payments with the digital currency else there might be no motivation to adopt it as a payment solution. There are further worries on the low level of sensitisation and communications with components who form the crux of the CBN’s five-layer framework for the project. More needs to be done in the form of awareness creation to generate support and participation in the project by all and sundry.
But in the interim, the CBN has displayed commitment to embracing prevailing global innovations that would open rooms for modifications and futuristic opportunities with the peculiarity of our system capable offurther driving us to initiateeven more sustainable innovations.It should be noted that this new digital currency system may not be a seamless jolly ride and to ensure the project’s success; all hands must be on deck to frontally address technical encumbrances and non-technical impediments as they emerge along the way.