After being launched to great fanfare in October 2021, Nigeria’s eNaira has so far had minimal impact on the country’s economy and citizens.
Back in 2015, when the global war on cash was kicking into gear, I remarked in an article for WOLF STREET that while the countries closest to going fully cashless were in northern Europe, the most important testing ground for cashless economics was half a world away, in sub-Saharan Africa. And so it has proven. In October 2021, Nigeria became the first large country on planet Earth to launch a central bank digital currency (CBDC), the so-called eNaira. Up until then the only CBDCs in existence were the Sand Dollar of the Bahamas and the so-called DCash of the Eastern Caribbean islands.
Yet despite being launched to great fanfare, Nigeria’s eNaira has so far had minimal impact on the country’s economy and citizens. Only about 700,000 people have downloaded an eNaira wallet — a thoroughly underwhelming number in a country with an estimated population of 225 million people. eNaira transactions have also failed to pick up despite the fact that every merchant must accept payments in the digital currently. Apparently one of the reasons for this is that Nigerian lenders are impeding the adoption and use of the CBDC due to their own concerns about losing revenue from their traditional banking services.
At least that is what CBN’s Governor Godwin Emefiele says. “There is apathy,” at the banks and fintech firms because of the lack of revenue generating opportunities, Emefiele told reporters in Abuja, the nation’s capital, last week. eNaira deposits are not considered cash on the bank’s books, and their use stands in contrast to the revenues earned from mobile banking services.
Nigeria’s commercial banks are also no doubt wary — and justifiably so — about the existential threat a widely adopted eNaira could potentially pose to their basic business model. As flagged in a previous post, one possible consequence of introducing CBDCs, whether intended or not, is the disintermediation of commercial banks, which will suddenly face unfair competition from their senior market regulator, which not only sets the rules of the market but has unlimited ability to create money.
In an extreme scenario, commercial banks could disappear altogether (though one can imagine certain well-placed institutions finding a new role in the emerging paradigm). Burkhard Balz, a member of the Executive Board of the Deutsche Bundesbank, posited in a speech at the China Europe Finance Summit, in October 2020:
“What if, in times of crisis, bank deposits were rapidly withdrawn and converted into a digital euro? We call this scenario a ‘digital bank run.’ The result could be the destabilisation of the entire financial system.”
As noted in a previous article, the IMF is deeply involved in developing CBDCs, including through providing technical assistance to many of its members members, much as its Bretton Woods partner institution, the World Bank, is deeply involved in the roll out of digital identity programs across the Global South. According to the IMF’s President Kristalina Georgievan, “an important role for the Fund is to promote exchange of experience and support the interoperability of CBDCs.”
Under Close Observation
As the IMF noted in a November 2021 report, the roll out of the eNaira is being closely watched by the outside world — including by other central banks. The new digital currency is a liability of the CBN, like coins and notes. But unlike coins and notes, it runs on the same blockchain technology as Bitcoin and is stored in digital wallets. According to the IMF, it can be “transferred digitally and at virtually no cost to anyone in the world with an eNaira wallet.” This is apparently a key point given the eNaira is expected to play a significant role in facilitating remittances by Nigerians in the diaspora.
But the Fund flagged two important differences between the eNaira and cash and crypto currencies like Bitcoin:
“First, the eNaira features stringent access right controls by the central bank. Second, unlike these crypto-assets, the eNaira is not a financial asset in itself but a digital form of a national currency and draws its value from the physical naira, to which it is pegged at parity.”
This is where the problems begin to appear. First, CBN’s access right controls do not seem to be quite as stringent as the IMF had hoped. As a matter of fact, the IMF warned in a paper this February that the eNaira could even be exploited by criminals. The paper’s authors urged the central bank to stay vigilant to the risks posed by cyber-security as well as ongoing challenges in monetary policy implementation, financial integrity and stability, operational resilience, and bank funding:
There are cybersecurity risks associated with the eNaira. Unforeseen legal issues, including for private law aspects of its operations (e.g., the exact nature of legal
relationship between the wallet providers and CBDC holders), may subject eNaira to litigation and operational risks
Prospective expansion of eNaira use to cross-border fund transfers and agency bank networks may cause new money-laundering/financing of terrorism risks…”
In other words, it would seem that the central bank’s Know Your Customer (KYC) processes are not up to scratch.
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