Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited

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  • Fiscal Policy

From banning cryptocurrency to launching eNaira at the speed of light 16 Nov 2021

The Central Bank of Nigeria (CBN) launched its central bank digital currency (CBDC), called eNaira, on October 25, 2021. This was barely six months since the CBN’s last public repudiation of a private form of digital currency – cryptocurrency – which the central bank has repeatedly banned in the Nigerian banking system. But the central bank’s hostility towards cryptocurrency was not ideological. Overtly motivated by the politics of the government of the day, the CBN was sweeping in banning cryptocurrency. Now that it has issued a public digital currency, it is curious to know why the CBN would expect public confidence in the eNaira.

Even in issuing the eNaira, the CBN had acted rather rashly. It did precious little to consult with relevant stakeholders before buying an off-the-shelf digital money application to launch the eNaira. The risk of disintermediation, which peer-to-peer (P2P) digital transactions pose to the banks, was not addressed, raising concerns about the negative impacts of the digital currency on banks’ balance sheets and profitability.

The eNaira stands no chance, at its launching, to be accepted for cross-border transactions. More serious central banks from advanced and emerging market economies are collaborating to ensure that when they launch their own CBDC, they would be accepted, at least among the collaborating countries, for cross-border transactions. One of such collaborations involves Australia, Malaysia, Singapore and South Africa, with the Bank of International Settlement’s Innovation Hub leading the scheme.

The launch of the eNaira was a major development in the economy – that is what it was supposed to be if the digital currency was properly developed. But for whatever reason, the CBN decided to dilute the event by launching a new addition to its plethora of interventional funding schemes. Insisting on its beaten path, the CBN Governor, Godwin Emefiele, announced “The 100 for 100 PPP – Policy on Production and Productivity” programme, to serially identify sets of 100 companies that the central bank would fund for 100 days in addressing the country’s trade imbalance.

The CBN is now the only game in town. It has continued to grow its balance sheet, bloated by illegal financing of the federal government. Rather than regulating the banks, the CBN is now competing with them on many fronts, potentially including with its eNaira. In this scenario, as the profitability of the banks takes a hit, it may result in labour downsizing in an industry that was not spared the negative impact of the COVID-19 pandemic.

The potential benefits of CBDC are recognised and many. A central bank digital currency brings safety – fostered by customer identification – into the anonymous digital currency space. The CBN embraces this by requiring Bank Verification Number (BVN) and National Identity Number (NIN) for sign-up to eNaira. CBDC can also make transactions faster and for lower costs. Quite significantly, it supports the development of the innovation culture, which is reshaping many industries. And, in theory, it can expand financial access.

But none of these is guaranteed. eNaira may just increase the concentration of financial access. Indeed, by requiring BVN to open eNaira wallet, one must already have a bank account. Expansion of mobile telecommunication in the country has stalled in the past few years and with rising extreme poverty, mobile phone is becoming a luxury that poor Nigerians that may benefit from mobile payment can no longer afford.

However, CBDC can inspire more cyberattacks. In a surveillance state, which Nigeria is fast evolving into under the current regime, customer’s privacy may be easily compromised. The CBN offers no assurance that it would mitigate this risk, especially given its current proclivity to act as an agent of state security. We saw this during the EndSARS protest last year when accounts of activists were frozen by the apex bank. Transactions with eNaira would make it much easier for tracking both transactions and counterparties on a portal controlled by the central bank.

The CBN is not the only central bank that has launched a CBDC, but it is one of only about six central banks to do so – mostly in pilot stage. China that is reputed to be an early adopter of CBDC has yet to launch its own digital currency. The US authorities have been very cautious, insisting that the dollar is already digital, in terms of operations, and that a CBDC may offer no significant new value to the economy.

It is plausible that the rationale for the rush in adopting and launching the eNaira is to enable the CBN to continue to justify its ban on cryptocurrency. Despite the ban, Nigeria is the leading country per capita for Bitcoin and cryptocurrency adoption in the world, according to Statista. Somehow, eNaira should assuage the negative feeling of active citizens trading cryptocurrency about a policy that clearly runs contrary to their interest.

In spite of the so-called launch, the eNaira should be seen to be in pilot trial. According to Emefiele, only 500 million eNaira, valued at $1.21 million at then-exchange rate, was issued at the launch. The CBN needs to have the consultations it failed to have before last month. It needs to convince those who think otherwise that by launching the eNaira, the country would not be isolated, but instead integrated, in the ongoing policy and digital infrastructures for a global digital currency that would facilitates cross-border transactions.

It is also imperative that the CBN refocuses on its core mandates and desists from acting as a commercial bank, development finance institution and a central bank, rolled into one.