The first ever central bank digital currency (CBDC) of a mega-economy, Nigeria’s eNaira, is already faltering

Launched into great fanfare in October 2021, Nigeria’s eNaira has so far had little impact on the country’s economy and its citizens.

Back in 2015, when the global war on cash was on its way, I noted in an article for WOLF STREET that while the countries closest to transitioning to a fully cashless system were in Northern Europe, the most important testing ground for the cashless economy was on the After half a world. , in sub-Saharan Africa. This has been proven. In October 2021, Nigeria became the first major country on the planet to launch a central bank digital currency (CBDC), called eNaira. Until then, the only central trading centers present were sand dollars for the Bahamas and the so-called DCash for the eastern Caribbean islands.

little effect

However, despite being launched with great fanfare, Nigeria’s eNaira has so far had little impact on the country’s economy and its citizens. Only about 700,000 people have downloaded the eNaira wallet – a completely disappointing number in a country of 225 million people. eNaira transactions also failed to recover despite the fact that every merchant must now accept payments in the digital system. One reason for this appears to be that Nigerian lenders are holding back the adoption and use of central bank digital currency due to their own concerns about losing revenue from their traditional banking services.

At least that’s what CBN Governor Godwin Emily said. “There is apathy” in banks and fintech companies due to the lack of income-generating opportunities, Imfiele told reporters in Abuja, the country’s capital, last week. eNaira deposits are not considered cash on the bank’s books, and their use conflicts with revenue earned from mobile banking.

There is no doubt that Nigerian commercial banks are also – and justifiably – wary about the existential threat that a widely adopted eNaira could pose to their core business model. As was pointed out in a previous post, one of the possible outcomes of the introduction of digital central bank currencies, whether intentional or unintentional, is the de-intermediary of commercial banks, which will suddenly face unfair competition from major market regulators, which not only set market rules, but It has unlimited limits. The ability to make money.

In an extreme scenario, commercial banks could disappear altogether (although one can imagine some well-positioned institutions finding a new role in the emerging model). Burkhard Balz, member of the Executive Board of Deutsche Bundesbank, put forward in a speech at the China Europe Financial Summit, in October 2020:

“What if, in times of crisis, bank deposits are quickly withdrawn and converted into digital euros? We call this scenario ‘the operation of the digital bank.’ The result may be destabilization of the entire financial system.”

As mentioned in a previous article, the IMF is deeply involved in the development of digital central bank currencies, including by providing technical assistance to many of its members, just as its Bretton Woods partner, the World Bank, is heavily involved in spreading digital identity programs across the South. Earth. According to IMF chief Kristalina Georgievan, “An important role of the Fund is to promote the exchange of experiences and support the interoperability of digital currencies for central banks.”

under close watch

As noted by the International Monetary Fund in its November 2021 report, the eNaira offering is being closely watched by the outside world – including by other central banks. The new digital currency is the responsibility of the Central Bank of Canada, as are coins and banknotes. But unlike coins and notes, they run on the same blockchain technology as Bitcoin and are stored in digital wallets. According to the International Monetary Fund, it can be “transferred digitally and at virtually no cost to anyone in the world with an eNaira wallet.” This appears to be a major point since eNaira is expected to play an important role in facilitating remittances for Nigerians in the diaspora.

But the fund pointed out two important differences between eNaira, fiat currencies, and cryptocurrencies like Bitcoin:

First, eNaira features strict proper access controls by the central bank. Second, unlike these crypto assets, eNaira is not a financial asset per se but a digital form of a national currency and derives its value from the physical naira, to which it is tied at parity.”

This is where the problems start to appear. First, the Central Bank of Nigeria’s access controls do not appear to be as strict as the IMF had hoped. Indeed, the International Monetary Fund warned in a research paper last February that criminals could exploit the naira. The authors of the paper urged the central bank to remain alert to the risks posed by cybersecurity as well as the ongoing challenges in implementing monetary policy, financial safety and stability, operational flexibility, and bank financing:

There are cybersecurity risks associated with eNaira. Unforeseen legal issues, including private law aspects of their operations (for example, the precise nature of the law
relationship between wallet providers and CBDC holders), may expose eNaira to litigation and operational risk

The potential expansion of the use of eNaira in cross-border fund transfers and agency banking networks could create new money laundering/terrorist financing risks…”

In other words, it appears that the central bank’s Know Your Customer (KYC) processes are not doing well. The paper also noted the risks that CBN’s eNaira could pose to the financial health of Nigeria’s commercial banking sector:

eNaira wallets may be seen as more secure and convenient than commercial bank deposits, which poses some non-intermediary risks. The Central Bank of Nigeria mitigates this by subjecting the transfer of funds from bank deposits to eNaira wallets to daily transaction limits.

Another big problem facing Africa’s first digital live streaming digital currency is that it derives its value from the physical naira, whose value has done nothing but collapse since the launch of eNaira. At 415 units to the dollar, the currency is approaching its lowest point ever – and that depends on the official exchange rate! According to local reports, the black market exchange rate, which is the rate at which most people have to convert local currency into hard currency, is close to 700 naira to the dollar – a record low.

Things got so bad that CBN Governor Godwin Emviel was called to a Senate committee to explain why Naira, now in its ninth consecutive year of depreciation, had experienced a long streak of losses and why inflation hit five years. A rise of 18.6%. You may also be asked why the official exchange rate system in Nigeria now has a second competitor to contend with: the crypto-naira exchange rate.

Nigerians are increasingly accumulating cryptocurrencies in an attempt (perhaps in vain) to protect the value of their assets from the weakening of the naira. This in turn exacerbates the decline in fiat currency, as Bloomberg reported on Wednesday:

Africa’s largest economy operates on a multiple exchange rate system dominated by an official rate, which is tightly managed by the Central Bank of Nigeria. There is also an unauthorized black market, where prices are largely determined by supply and demand, making it a more fair reflection of the value of the naira. A third rate, the crypto exchange rate, has emerged as Nigerians increasingly accumulate digital assets due to the scarcity of local currency from official sources exacerbated by three cuts since 2020.

Aminu Gwadabe, head of the Bureau de Change Operators Association of Nigeria, said over the phone that more people are buying cryptocurrency because they are losing faith in naira. “The price of the US dollar in the crypto floor is used to determine the value of the local currency,” Guadabe said.

While the central bank has banned financial institutions from facilitating cryptocurrency trading in Africa’s largest economy, many Nigerians are still exchanging digital currency in a peer-to-peer market where transactions are priced in dollars.

According to Gemini’s Global State of Crypto Report 2022, 26% of Nigerians now own some form of crypto-asset. Needless to say, the continued growth in demand for cryptocurrencies in Nigeria does not bode well for eNaira’s prospects. Nor is the country’s commercial banking sector opposed to the central bank.

brake application?

It is not only banks in Nigeria that are sounding the alarm about central bank digital currencies. In the US, the National Association of Federally Secured Credit Unions (NAFCU) recently warned that issuing digital dollars could erode financial stability, arguing that the costs and risks associated with introducing a central bank digital currency are likely to outweigh the benefits that have been promoted. Interestingly, even the World Bank has recently stepped in, warning that central bank digital currencies can pose risks to financial integrity, privacy and data protection, which is a bit rich from an institution that has spent the past eight years driving the adoption of digital identity programs worldwide. . Global South, including Nigeria:

“The introduction of central bank digital currency could disrupt the existing financial intermediation structure. In addition, depending on the design and country context, central bank digital currency can pose risks to financial stability, financial integrity, data protection and privacy, and cyber resilience. It could have implications for the legal and regulatory framework, increased central bank responsibilities, and could also lead to currency substitution, particularly in the context of cross-border central bank currencies.”

These words may reflect the growing caution among the broader financial community and perhaps even some central banks regarding central bank digital currencies as the myriad dangers they pose, including to commercial banks, become apparent. The UK-based economist and author of the critically acclaimed book, yen princesRichard Werner certainly seems to think so. In an interview with the Reinvent Money podcast, he cites a recent article on financial times Which argues that central banks should focus for now on developing wholesale central bank digital currencies rather than retail. There is a big difference between the two:

  • Direct access to Wholesale CBDCs It is limited to selected banks and financial institutions that have deposits in the Central Bank. It is primarily intended to settle interbank transfers and related wholesale transactions. Individual and corporate clients can access central bank funds only through financial intermediaries. This is the model that the People’s Bank of China is putting forward with its digital experimental yuan schemes. As Werner points out, this approach ensures that banks, large and small, can continue to compete within a largely decentralized banking system that has played an integral role in China’s rapid industrialization and growth.
  • On the contrary, Retail or general purpose merchandise digital currencies Open to a much wider class of agents, including individuals and businesses, all of whom will be able to maintain the equivalent of a checking account at a central bank (as long as they have a smartphone and do not engage in wrong types of behaviour). Once a customer opens an account, the central bank creates digital money in the account. These funds are the direct responsibility of the central bank, unlike a private bank. Using a digital money wallet or some other application, the customer can then engage in direct transactions between Federal Reserve accounts.

It is the latter (the retail CBDC) that poses a threat not only to many of our fundamental freedoms, including the freedom to privacy and the freedom to deal, but also to the existing banking system. As Werner puts it, retail central bank digital currencies to some extent signify the end of banking as we know it: “All you need is a shock or a crisis. All the money will move from bank deposits to the central bank and the banking system will shut down. This would create what Werner calls it “unilateral banking,” in which only one lender, the central bank, can operate.

If Werner is right and central banks have already started to apply the brakes on experimenting with central bank digital currencies, that is cause for cautious optimism. This means that we may have more time to build up an opposition to technological development that, in the words of the Washington-based analyst N.S. Lyons, arguably represents “the single largest expansion of totalitarian power in history.” But time is still of the essence. After all, as Werner notes, once central bank wholesale currencies are operational, it won’t take many central banks to upgrade to a retail central bank digital currency model.

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