Nigeria’s Central Bank Digital Currency (CBDC) project, the eNaira, brings with it both opportunities and challenges. In essence, a CBDC is a digital representation of a country’s fiat currency, regulated and issued by the central bank. Unlike cryptocurrencies, CBDCs are state-operated and not tied to any physical commodity.
The Central Bank of Nigeria (CBN) has been at the forefront of this project since its launch in 2021, but it recognizes that there are five fundamental risks associated with introducing a CBDC like the e-naira. These risks are outlined in the CBN’s recent report titled “ECONOMICS OF DIGITAL CURRENCIES: A BOOK OF READINGS”.
Disruption of the banking sector’s intermediation role
According to CBN, the introduction of CBDCs carries the potential to impact the operational dynamics of commercial banks, posing challenges to their core functions.
Specifically, if a considerable fraction of bank deposits transitions to CBDCs, banks might encounter profitability and lending constraints.
To prevent such circumstances from arising with the e-naira, Nigeria has implemented regulations to restrict the transfer of funds from banks to the eNaira wallet, safeguarding the stability of the banking sector.
Operational cost for the CBN
The next risk highlighted by the apex bank is the investments needed to power the CBDC. Due to the initial cost of setting up a CBDC, which includes consideration of a 24/7 infrastructure, the apex bank of any nation has a huge burden to bear.
For the CBN, “the cost of deploying a CBDC would thus depend on whether the CBDC would run on the more expensive Distributed Ledger Technology (DLT) real-time 24-hour payments and settlement system or the existing legacy infrastructure.”
CBN believes eNaira can harm commercial banks.
Cybersecurity risk
The next risk highlighted by the apex bank is the investment needed to power the CBDC. Due to the initial cost of setting up a CBDC, which includes consideration of a 24/7 infrastructure, the apex bank of any nation has a huge burden to bear.
For the CBN, “the cost of deploying a CBDC would thus depend on whether the CBDC would run on the more expensive Distributed Ledger Technology (DLT) real-time 24-hour payments and settlement system or the existing legacy infrastructure.”
Internet irregularities
With an internet penetration rate of 51% as of June 2023, which is largely concentrated in urban areas, there is a challenge of having disruptions to operations for a CBDC that is built to rely on the internet.
To address this, the CBN said CBDCs should have offline capabilities, enabling financial inclusiveness for those without internet-enabled devices. In Nigeria, options like USSD codes and hardware wallets are being explored.
Financial exclusion and Illiteracy
One of the risks outlined by CBN is the potential exclusion of certain individuals from the financial system when implementing a Central Bank Digital Currency (CBDC). This exclusion may occur due to factors such as the chosen mode of operation and a lack of financial education regarding the utilization of the infrastructure.
In order to address this issue, the CBN proposes various strategies. For instance, the eNaira will leverage agent networks, utilize USSD technology in local languages, and facilitate the use of hardware wallets to reach populations in rural and unbanked areas.
Furthermore, the CBN acknowledges the importance of striking a balance between control and innovation in the financial market. While maintaining influence over the economy, the CBN recognizes the significance of embracing innovative technologies like programmable CBDCs and smart contracts facilitated by blockchain technology.
By carefully navigating these risks and considerations, the successful implementation of the eNaira can effectively promote financial inclusion and contribute to the growth of Nigeria’s economic landscape.
