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. The paper also flagged the risks the CBN’s eNaira could pose to the financial health of Nigeria’s commercial banking sector:
eNaira wallets may be perceived as safer and more convenient than commercial bank deposits, which poses some disintermediation risks. The CBN is mitigating this by subjecting the transfer of funds from bank deposits to eNaira wallets to daily transactions limits.
Another big problem for Africa’s first ever CBDC is that it draws its value from the physical Naira, whose value has done nothing but crumble since the eNaira’s launch. At 415 units to the dollar, the currency is close to its lowest point ever — and that is based 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 the local currency into hard currency, is closer to 700 Naira to the dollar — a record low.
Things have gotten so bad that CBN Governor Godwin Emefiele has been summoned before a senate committee to explain why the Naira, now in its ninth consecutive year of plunging value, has been on such a long losing streak and why inflation has reached a five-year high of 18.6%. He may also be asked why Nigeria’s official exchange rate system now has a second competitor to contend with: the crypto-Naira exchange rate.
Nigerians are increasingly accumulating cryptocurrencies in a (probably vain) attempt to protect the value of their assets against a weakening Naira. This in turn is exacerbating the slump in the fiat currency, as Bloomberg reported Wednesday:
Africa’s largest economy operates a multiple exchange rate system dominated by an official rate, which is tightly managed by the Central Bank of Nigeria. There’s also an unauthorized black market, where the rates are largely determined by supply and demand, making it a fairer reflection of the naira’s value. A third, the crypto exchange rate, has emerged as Nigerians increasingly accumulate the digital asset due to scarcity of the local currency from official sources compounded by three devaluations since 2020.
More people are buying cryptocurrencies because they are losing confidence in the naira, Aminu Gwadabe, president of the Association of Bureau de Change Operators of Nigeria, said by phone. “The USD rate on the crypto floor is used in determining the value of the local currency,” Gwadabe said.
While financial institutions are banned by the central bank from facilitating cryptocurrency trades in Africa’s largest economy, many Nigerians still exchange the digital currency in the peer-to-peer market where transactions are priced in dollars.
According to Gemini’s 2022 Global State of Crypto report, 26% of Nigerians now own some form of crypto asset. Needless to say, the continuing growth in demand for crypto currencies in Nigeria does not augur well for the eNaira’s prospects. Nor does the opposition of the country’s commercial banking sector to the CBDC.
Applying the Brakes?
It is not just banks in Nigeria that are raising the alarm about CBDCs. In the US, the National Association of Federally-Insured Credit Unions (NAFCU) recently warned that the issuance of a digital dollar could erode financial stability, arguing that the costs and risks associated with introducing a CBDC are likely to outweigh the touted benefits. Interestingly, even the World Bank recently chimed in, cautioning that CBDCs could pose risks to financial integrity, privacy and data protection, which is admittedly a bit rich coming from an institution that has spent the past eight years driving adoption of digital ID programs across the Global South, including in Nigeria:
“The introduction of CBDC could disrupt the existing financial-intermediation structure. In addition, depending on design and country context, CBDC could pose risks to financial stability, financial integrity, data protection and privacy, and cyber resilience. Further, it can have implications for the legal and regulatory framework, increased responsibilities of the central bank, and could also lead potentially to currency substitution, especially in the context of cross-border CBDC.”
These words may reflect growing caution among the broader financial community and perhaps even some central banks regarding CBDCs as the myriad dangers they pose, including to commercial banks, become apparent. The UK-based economist and author of the critically acclaimed book, Princes of the Yen, Richard Werner certainly seems to think so. In an interview with the Reinvent Money podcast, he cites a recent article in the Financial Times which argues that central banks should for the moment focus on developing wholesale rather than retail CBDCs. There is a big difference between the two:
- Direct access to wholesale CBDCs is restricted to banks and select financial institutions that hold deposits at the central bank. They are primarily intended for the settlement of interbank transfers and related wholesale transactions. Individual customers and businesses can only access the central bank money through financial intermediaries. This is essentially the model the People’s Bank of China is rolling out through its digital yuan pilot schemes. As Werner points out, this approach ensures that banks, both large and small, can continue to compete within a largely decentralized banking system that has played an instrumental role in China’s rapid industrialization and growth.
- By contrast, retail or general-purpose CBDCs are open to a much broader class of agents, including individuals and businesses, all of whom will be able to hold the equivalent of a current account at the central bank (as long as they have a smart phone and don’t engage in the wrong sorts of behavior). As soon as a customer opens an account, the central bank creates digital money in the account. That money is a direct liability of the central bank, as opposed to a private bank. Using a digital money wallet or some other app, the customer can then engage in direct transactions between Fed accounts.
It is the latter (retail CBDC) that poses a threat not only to many of our basic freedoms, including the freedom to privacy and the freedom to transact, but also to the current banking system. As Werner puts it, retail CBDCs would more or less mean the end of banking as we know it: “All you need is a shock or a crisis. All the money would move from the bank deposits to the central bank and the banking system shuts down.” This would lead to the creation of what Werner calls “mono-banking,” in which just one lender, the central bank, is able to operate.
If Werner is right and central banks are indeed beginning to apply the brakes on their CBDC experiments, it is cause for cautious optimism. It means we probably have a little more time to build opposition to a technological development that, in the words of the Washington DC-based analyst NS Lyons, arguably represents “the single greatest expansion of totalitarian power in history.” But time is still of the essence. After all, as Werner notes, once wholesale CBDCs are up and running, it won’t take much for central banks to upgrade to a retail CBDC model.