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 the last three quarters of 2021, global Central Banks have been pressed to form a counterbalance to the gradual loss of monetary control in their domestic economies as blockchain-based cryptocurrencies went on the ascendency as a means of payment and settlement. Nevertheless, with global Central Banks designing and deploying Central Bank Digital Currencies (CBDCs), things are pivoting 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-backed notes.


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


Pauline Adam-Kalfon, a Partner at PwC Financial Services, noted that "Central Bank Digital Currencies are immediate alternative solutions to further financial inclusion efforts by public authorities. As sovereign digital Cash, they can contribute to modernizing the current monetary system but also help to bridge the gap with the unbanked," she noted.


Nigeria's CBDC was to be launched on October 01 2021, the country's 61st independence anniversary. Unconfirmed reports suggest that the postponement was the result of a surge in the traffic on the eNaira website, the suit earlier filed by ENaira Payment Solutions Limited, a private payment platform, before the Federal High Court demanding that the CBN changed the name "eNaira" (being a copyright name of an existing currency).


The CBN began to consider the creation of the eNaira in 2017, as digital payments gained more popularity among Nigerians. By August 2021, the apex bank partnered with Bitt Inc., a firm renowned for introducing the Eastern Caribbean Central Bank (ECCB) CBDC pilot, launched in April 2021. This came when many other countries had begun to consider the introduction of their digital/electronic money. According to the Atlantic Council, 81 countries are currently making progress with their CBDC Programs, with 5 countries having launched their CBDC. In contrast, 14 others have their CBDC programmes at the pilot stage and 16 countries have reached the development stage of their CBDC programs.

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Between CBDCs and Cryptos

Cryptocurrencies have become a common feature in the portfolio of many investors, especially the youth; this is apart from being a popular medium of exchange. While cryptos are decentralized and, in effect, not regulated by any government, the distributed-ledger technology which supports them ensures that holders can complete transactions in near anonymity.


Analysts have noted that this same feature of cryptos that makes them attractive to many also threatens Central Banks. Hence, national regulatory bodies, including the IMF, call for caution against countries adopting Bitcoin, Ethereum, etc. In their 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 have increased daily.


Most notably, 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 which cryptocurrencies are put as the reason for imposing stiff regulations. US regulators have also made similar moves. In an event organized by the Washington Post, SEC Chairman, Gary Gensler, noted that there does not seem to be a future for cryptocurrencies, as stricter measures and regulations are in the works. This is coming when the Federal Reserves Chairman, Jerome Powell, has signalled the possible introduction of an American CBDC.


On February 5, 2021, the CBN in a circular numbered BSD/DIR/PUB/LAB/014/001 barred Deposit Money Banks from facilitating payments for cryptocurrency exchanges. In the months that followed, the apex bank stepped up plans to introduce the state-backed digital currency.


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


Illustration 1: Central Bank Digital Currency: Participants and their roles

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Unpacking the eNaira

The regulatory guidelines on the eNaira released on October 01 also provide a walk-through on the mechanics of the eNaira platform.  Regular users can use the eNaira by downloading the "eNaira Speed Wallet" from app stores. After meeting all the 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 caters to four scales of transactions:  Consumer Transactions, Merchant/Wholesale Transactions, Financial transactions, and MDA Transactions.


Consumer/Retail Transactions refer to the range of services available to regular consumers on the eNaira platform. At this level, holders of the eNaira are allowed to engage in Person-to-Person (P2P) transactions; Person-to-Business (P2B) and vice versa; Person-to-Government (P2G) and vice versa. Likewise, holders of the eNaira can transfer Cash or Bank accounts to eNaira wallet; and vice versa. The daily transaction limit for individuals without a verified NIN  is N50,000, while those consumers who have existing bank accounts and BVN can transfer up to N1m (See Illustration 2 below).


Illustration 2: CBDC-Cumulative Balance and Transfer Limit for Consumers

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The second form of transaction on the eNaira platform is Merchant Transactions. These transactions allow Merchant Business users to engage in Merchant Business to Person (M/B2P) transactions and enable them to transfer their Cash to their eNaira wallet. Importantly, unlike consumers, Merchants are expected to close their till balance to their Financial Institutions daily.  Merchants, however, have no transfer limit(See Illustration 3 below).


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

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Financial Institution Transactions allow Financial Institutions, which serve as intermediaries between the CBN and customers, to transfer funds from their wallets to the CBN and vice versa. Similarly, Financial Institutions can transact with Government and vice versa. Again, the eNaira caters to transfers between businesses and Financial Institutions and transfers between the Financial Institutions and their Customers.


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


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


Illustration 4: Types of wallets held by the various participants

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The eNaira Payoff

The eNaira will be more cost-effective than cash. Although it performs the same functions as physical currency, CBDCs do not have to be printed now and again like their physical cousins. According to statistics from the Central Bank of Nigeria's (CBN's) currency operations department, between 2014 and 2019, Nigeria spent a total of N307 billion on producing banknotes. With the introduction of the eNaira, the country would save a ton on its currency management.


The introduction of the eNaira in Nigeria is expected to promote financial inclusion by helping the many unbanked people to get more convenient and reliable access to money through their mobile devices and phones. As of March 2021, data from the Nigeria Inter-Bank Settlement System Plc (NIBSS) shows that only  47m BVN numbers exist; this implies that 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 help bring more Nigerians into the formal banking system, a situation which itself would see the effect of monetary policy changes transmit quicker to the economy. Apart from this, the eNaira is expected to improve the ability of the Government to deploy targeted social interventions and cash transfer programs.


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


Perhaps the strongest argument favouring the eNaira is the need to create an alternative to cryptocurrencies that have become widely accepted due to the digitization of trade and commerce. However, they have been beneficial to individuals engaged in some form of illegal activities. Essentially the eNaira is expected to offer the best of both worlds—the convenience and security of digital cryptocurrencies, and the regulated, reserve-backed money circulation of the traditional banking system


Swerving Past Pitfalls

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


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