Despite facing some challenges, Nigeria’s eNaira project is drawing international interest
eNaira, Nigeria’s digital currency project, is drawing the interest of leading financial institutions, and other central banks are considering launching a similar project, according to a report by the International Monetary Fund (IMF).
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The current BTC to Naira is 1,94,58,347.76 NGN
Remittances will be boosted by the eNaira
Nigeria’s eNaira has recently drawn interest from around the globe, according to a report by economist Jack Ree. One of the reasons for interest in the project is the fact that the Nigerian apex bank has control over the digital currency, unlike other crypto assets.
According to the article, unlike volatile digital coins like Bitcoin, Ethereum, and others whose value has been falling in the past few days, eNaira’s value is tied to that of the physical naira.
In response to Nigeria’s central bank’s claim that its project would boost remittance and increase financial inclusion for the West African country, IMF said in its report;
By obtaining eNaira from international money transfer operators and transferring it to recipients in Nigeria by wallet-to-wallet transfers free of charge, the e-naira will lower remittance transfer costs for the Nigerian diaspora.
Even with all of these positives, the report identified that the Naira could pose some risks to the monetary policy implementation in Nigeria. According to the report, the “eNaira wallets may be perceived, or may even operate, as a deposit at the central bank, which may reduce deposit demand at commercial banks.”
Other challenges the project faces include managing cybersecurity risks and operational risks associated with the Naira.
The Nigerian Central Bank’s Digital Currency: Five observations
CBDC pilot tests have been conducted by other countries and regions, such as China and the Eastern Caribbean Currency Union. Considering the size and complexity of Nigeria’s economy, this launch has drawn substantial interest from the outside world-including central banks.
1. What is eNaira
In the same way as coins or cash, the eNaira is a liability of the CBN. Bitcoin and Ethereum use the same blockchain technology and, like them, eNaira is stored in digital wallets and can be used for payment transactions; it can also be transferred digitally and virtually for free to anyone in the world with an eNaira wallet,increasing the price of BTC to Naira. However, there are some important differences. To begin with, the central bank controls access rights to the Naira. Second, unlike these crypto-assets, eNaira is not a financial asset in itself, but rather a digital form of a national currency, linked to the physical naira.
2. What is the purpose of the eNaira?
The CBN believes that the eNaira has multiple benefits, which are expected to materialize as the eNaira becomes more widespread and is supported by a robust regulatory framework. There are multiple advantages, including:
- Inclusion of more people in the financial system. It is currently only available to people with bank accounts, but its coverage is expected to eventually extend to everyone with a mobile phone, regardless of whether they have a bank account.
In Nigeria, there are 38 million adults without bank accounts (36 percent of the adult population), and allowing those with mobile phones access to digital Naira would increase financial inclusion and facilitate more direct and effective implementation of social transfers, making the volume of BTC to naira easier. It is anticipated that up to 90 percent of the population will be able to use the Naira as a result of the move.
- Facilitating remittances. With remittance receipts of $24 billion in 2019, Nigeria is one of the top remittance destinations in sub-Saharan Africa. Money remittances are typically made through international money transfer operators (e.g., Western Union), with fees ranging from 1 percent to 5 percent of the value of the transaction.
Obtaining the eNaira from international money transfer operators and transferring it to recipients in Nigeria by wallet-to-wallet transfers will lower remittance transfer costs for the Nigerian diaspora. The use of eNaira wallets for remittances would be enhanced by reforms to the exchange rate, including a unified market-clearing rate that reduces the gap between official and parallel exchange rates. - Informality has been reduced. Nigeria has a large informal economy, with over half of its GDP and 80 percent of its employment generated by informal transactions. Unlike token-based crypto assets, eNaira transactions are fully traceable, as they are account-based.
Digital Naira will likely bring more transparency to informal payments and strengthen the tax base as it becomes more widespread and embedded in the economy. Through greater financial inclusion, informal and formal businesses may also benefit from Naira adoption.
3. What are the risks involved?
eNaira is similarly vulnerable to monetary policy implementation, cyber security, operational resilience, and financial integrity and stability risks as other digital currencies. eNaira wallets, for example, may be viewed as deposits at the central bank, which may reduce demand for deposits in commercial banks, hence increase the volume of BTc to naira .With the Naira relying on digital technology, it must manage cybersecurity and operational risks.
4. What are the authorities doing to mitigate the potential risks?
Risk management measures have been taken by the authorities. In order to mitigate risks associated with diminishing the roles of banks and other financial institutions, funds are transferred from bank deposits into eNaira wallets on a daily basis and up to a certain balance. Using a tiered identity verification system, as well as more stringent controls applied to relatively less verified users, mitigates financial integrity risks, such as those relating to the potential use of Naira as a currency for monetary laundering.
For now, only people with a bank verification number can open a wallet, but over time, coverage will be expanded to people with registered SIM cards and to those with mobile phones without ID numbers. There would be tighter limits on transactions and balances for the latter categories of holders. Yet, wallet holders who meet the highest identity verification standards cannot store more than 5 million naira (about $12,200) each in their eNaira wallets. Regular IT security assessments are also expected to be carried out to ensure cybersecurity.
5. Is there anything the IMF can do?
Technical assistance and policy advice are available from the IMF. In addition to providing reviews of the product design, the Monetary and Capital Markets Department of the IMF has been involved in the Naira rollout process. In its 2021 Article IV mission, the IMF stressed the need to monitor macro-financial risks associated with central bank digital currencies. Among other things, the IMF is prepared to collaborate with the authorities on data analysis, cross-country studies, sharing the Naira experience with other countries, and discussing further evolution of the eNaira including its design, regulatory framework, and other aspects.
