Digital Naira (eNaira): Staking out the Gains, Holding up the Pains - Proshare Research

Monday, October 11, 2021/07.00PM /By AbdulQudus Isiaka, Proshare Research /Header Image Credit: EcoGraphics

Over thelast three quarters of 2021, global Central Banks have been pressed to form acounterbalance to the gradual loss of monetary control in their domesticeconomies as blockchain-based cryptocurrencies went on the ascendency as ameans of payment and settlement. Nevertheless, with global Central Banksdesigning and deploying Central Bank Digital Currencies (CBDCs), things arepivoting in new directions but with additional uncertainty.

For example,with China slamming iron-fists on using crypto coins in domestic payment solutions,the world stands at the edge of a grand battle between unregulated,privately-issued currency and what has historically been 'fiat' or state-backednotes.

Theauthorities have clamped down on cryptocurrencies for business, retail, and commercialtransactions as the Chinese state pivots towards a Central Bank DigitalCurrency (CBDC). The outlines of the currency are still sketchy, but theintention is clear; to root out commercial and public settlement arrangementsbased on money that the government does not control. But what precisely is astate-controlled electronic currency or Central Bank Digital Currency (CBDC)?

PaulineAdam-Kalfon, a Partner at PwC Financial Services, noted that "Central BankDigital Currencies are immediate alternative solutions to further financialinclusion efforts by public authorities. As sovereign digital Cash, they cancontribute to modernizing the current monetary system but also help to bridgethe gap with the unbanked," she noted.

Nigeria's CBDCwas to be launched on October 01 2021, the country's 61^st independenceanniversary. Unconfirmed reports suggest that the postponement was the resultof a surge in the traffic on the eNaira website, the suit earlier filed byENaira Payment Solutions Limited, a private payment platform, before theFederal High Court demanding that the CBN changed the name "eNaira" (being acopyright name of an existing currency).

The CBNbegan to consider the creation of the eNaira in 2017, as digital paymentsgained more popularity among Nigerians. By August 2021, the apex bank partneredwith Bitt Inc., a firm renowned for introducing the Eastern Caribbean CentralBank (ECCB) CBDC pilot, launched in April 2021. This came when many othercountries had begun to consider the introduction of their digital/electronicmoney. According to the Atlantic Council, 81 countries are currently makingprogress with their CBDC Programs, with 5 countries having launched their CBDC.In contrast, 14 others have their CBDC programmes at the pilot stage and 16countries have reached the development stage of their CBDC programs.

Between CBDCs and Cryptos

Cryptocurrencieshave become a common feature in the portfolio of many investors, especially theyouth; this is apart from being a popular medium of exchange. While cryptos aredecentralized and, in effect, not regulated by any government, thedistributed-ledger technology which supports them ensures that holders cancomplete transactions in near anonymity.

Analystshave noted that this same feature of cryptos that makes them attractive to manyalso threatens Central Banks. Hence, national regulatory bodies, including theIMF, call for caution against countries adopting Bitcoin, Ethereum, etc. Intheir place, governments have opted to provide digital monetary alternatives,which are electronic fiat money issued and backed by Central Banks. Besides,the number and seriousness of regulations guiding the use of cryptocurrencies haveincreased daily.

Mostnotably, China recently placed a hard-line ban on cryptocurrency trading,making all transactions illegal, regardless of where their accounts are domiciled.The Peoples Bank of China (PBoC) had as early as 2013 cited high energy usage(in crypto mining), money laundry, smuggling, and other uses to whichcryptocurrencies are put as the reason for imposing stiff regulations. USregulators have also made similar moves. In an event organized by the WashingtonPost, SEC Chairman, Gary Gensler, noted that there does not seem to bea future for cryptocurrencies, as stricter measures and regulations are in theworks. This is coming when the Federal Reserves Chairman, Jerome Powell, hassignalled the possible introduction of an American CBDC.

On February5, 2021, the CBN in a circular numbered BSD/DIR/PUB/LAB/014/001 barred DepositMoney Banks from facilitating payments for cryptocurrency exchanges. In themonths that followed, the apex bank stepped up plans to introduce the state-backeddigital currency.

Ahead of theintroduction of the eNaira, the CBN released policy guidelines on October 1. Thedocument detailed the various participants in the launch and usage of the CBDCand their specific roles. The eNaira would operate through a two-layered model- a structure that provides for public-private partnership. The CBN holds theliability for the eNaira but circulates it through financial institutions (SeeIllustration 1 below).

Illustration 1: Central Bank Digital Currency: Participantsand their roles

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Unpacking the eNaira

Theregulatory guidelines on the eNaira released on October 01 also provide awalk-through on the mechanics of the eNaira platform. Regular users can use the eNaira bydownloading the "eNaira Speed Wallet" from app stores. After meeting allthe requirements, including providing a unique identifier like TIN/NIN or BVN,the user would obtain validation and activation from their preferred financial institution.

The eNaira catersto four scales of transactions: ConsumerTransactions, Merchant/Wholesale Transactions, Financial transactions, and MDATransactions.

Consumer/RetailTransactions refer to the range of services available to regular consumers onthe eNaira platform. At this level, holders of the eNaira are allowed to engagein Person-to-Person (P2P) transactions; Person-to-Business (P2B) and vice versa;Person-to-Government (P2G) and vice versa. Likewise, holders of the eNaira cantransfer Cash or Bank accounts to eNaira wallet; and vice versa. The dailytransaction limit for individuals without a verified NIN is N50,000, while those consumers who haveexisting bank accounts and BVN can transfer up to N1m (SeeIllustration 2 below).

Illustration 2: CBDC-Cumulative Balance and TransferLimit for Consumers

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The secondform of transaction on the eNaira platform is Merchant Transactions. Thesetransactions allow Merchant Business users to engage in Merchant Business toPerson (M/B2P) transactions and enable them to transfer their Cash to their eNairawallet. Importantly, unlike consumers, Merchants are expected to close theirtill balance to their Financial Institutions daily. Merchants, however, have no transfer limit(SeeIllustration 3 below).

Illustration 3:CBDC- Cumulative Balance and Transfer Limit for Merchants

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FinancialInstitution Transactions allow Financial Institutions, which serve asintermediaries between the CBN and customers, to transfer funds from theirwallets to the CBN and vice versa. Similarly, Financial Institutions cantransact with Government and vice versa. Again, the eNaira caters to transfersbetween businesses and Financial Institutions and transfers between the FinancialInstitutions and their Customers.

The fourth categoryof transactions that could use the eNaira platform is the MDA Transactions. Thesescales of transactions facilitate the transfer of digital funds between MDAs toIndividuals (vice versa) Person to MDAs; this category also supports transfers betweenMDAs, the transfer between MDAs and FIs vice versa catered for under this scale.

The various participantswill hold a unique wallet type (See illustration 4 below).

Illustration 4: Types of wallets held by the variousparticipants

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The eNaira Payoff

The eNaira willbe more cost-effective than cash. Although it performs the same functions asphysical currency, CBDCs do not have to be printed now and again like their physicalcousins. According to statistics from the Central Bank of Nigeria's (CBN's) currencyoperations department, between 2014 and 2019, Nigeria spent a total of N307billion on producing banknotes. With the introduction of the eNaira, the countrywould save a ton on its currency management.

Theintroduction of the eNaira in Nigeria is expected to promote financialinclusion by helping the many unbanked people to get more convenient andreliable access to money through their mobile devices and phones. As of March2021, data from the Nigeria Inter-Bank Settlement System Plc (NIBSS) shows thatonly 47m BVN numbers exist; this impliesthat less than 40% of Nigeria's adult population have access to a bank account.Analysts expect that a state-backed digital currency like the eNaira would helpbring more Nigerians into the formal banking system, a situation which itselfwould see the effect of monetary policy changes transmit quicker to theeconomy. Apart from this, the eNaira is expected to improve the ability of the Governmentto deploy targeted social interventions and cash transfer programs.

Since theNigerian CBDC- the eNaira would only exist in electronic form and would beexchangeable for other CBDCs, local and international transfer of funds can be completedmuch faster and lower cost. This, in turn, could lead to an increase in theannual remittances from abroad.

Perhaps the strongestargument favouring the eNaira is the need to create an alternative tocryptocurrencies that have become widely accepted due to the digitization oftrade and commerce. However, they have been beneficial to individuals engagedin some form of illegal activities.Essentiallythe eNaira is expected to offer the best of both worldsÃ¢â‚¬â€the convenience andsecurity of digital cryptocurrencies, and the regulated, reserve-backed moneycirculation of the traditional banking system

Swerving Past Pitfalls

Despite themany incentives for introducing the eNaira, specific challenges need to be addressedto succeed digital money. The widespread illiteracy and low internetpenetration seem to pose significant difficulties. Another concern that needsto be considered as the eNaira is being introduced is the liquidity concernsthat may arise when customers make too large a withdrawal from banks to buy theeNaira. Also, being a centralized system,the eNaira could face cybersecurity challenges. Finally, the CBN must regularlyupdate the eNaira platform with new features and technology to meet users'changing needs.