The Central Bank of Nigeria (CBN) began its CBDC journey in 2017, with extensive study, consultations, identification of use cases and the testing of the CBDC concept in a Sandbox environment. Nigeria launched its CBDC, eNaira on October 25, 2021. This was the 2nd ever CBDC fully open to the public after the Bahamas.
The first phase focused on those with bank accounts and that the second phase was intended to drive financial inclusion by onboarding the unbanked and underserved users, leveraging offline channels.
According to the CBN, the eNaira is envisaged to bring multiple benefits, which are expected to materialize gradually as the eNaira becomes more widespread and is supported by a robust regulatory system.
Use-Cases:
- Financial Inclusion
55% of Nigerian adults did not have a bank account, according to the World Bank’s Global Findex Database 2021. The data also showed that just 35 per cent of Nigerian adult women had an account. Allowing those who have access to either a feature or a smart mobile phone.
2. Improved Financial Stability & Monetary Policies
eNaira being centrally controlled will allow for better control and management of the currency in circulation. This will also ensure strengthening effectiveness of monetary policies.
3. Cheaper and faster remittance inflows
In sub-Saharan Africa, Nigeria stands as one of the prominent destinations for remittances, having received $24 billion in 2019. Typically, remittances are facilitated by international money transfer operators such as Western Union, which charge fees ranging from 1 to 5 percent of the transaction value. eNaira will enable the Nigerian diaspora to easily send funds to Nigeria by acquiring eNaira from international money transfer operators and transferring them to recipients within Nigeria through wallet-to-wallet transfers, which will be free of charge. Implementing exchange rate reforms, including the establishment of a unified market-clearing rate, would further encourage the utilization of eNaira wallets for remittance purposes, as it would reduce the disparity between official and parallel market exchange rates.
4. Empowerment and Poverty Reduction
With eNaira, Government will be able to reach out to the poorest of the citizens who are otherwise exploited or unreachable via offline channels. This will enable direct welfare disbursements to citizens.
5. Efficiency of payment systems
Because of no intermediaries, the commissions and processing costs will be stripped off from the system thus enabling lower transaction costs to citizens.
6. Increasing revenue and tax collection
In Nigeria, a substantial informal economy exists, where transactions and employment represent more than half of the country’s GDP and 80 percent of its total employment. Unlike token-based crypto asset transactions, the eNaira operates on an account-based system, allowing for transactions to be fully traceable in principle. As the eNaira becomes more widely used and integrated into the economy, it has the potential to introduce increased transparency to informal payments and therefore contribute to a stronger tax base.
Design Considerations:
The CBN has taken thorough deliberation of the entire payments and financial system ecosystems while introducing the eNaira. The eNaira has been meticulously designed to complement and enhance these ecosystems, with a focus on its continuous development over time.
The eNaira follows a hybrid or a two-tiered CBDC architecture. With this architecture, the CBN is responsible for issuing the eNaira while it leverages the existing financial system and actors such as the financial institutions, to engage with users for the distribution of the CBDC, facilitate payments, resolve disputes, and fulfill any other roles as determined by the CBN.
The CBN maintains the full control over the eNaira payment system. The CBN retain its responsibility for issuing the digital currency, managing the associated wallet, and overseeing a central ledger that records all transactions. Users are identified based on existing identity frameworks. The network is permissioned to prevent intrusion and allow only legitimate entities.
Solutions:
Central bank has engaged Barbados based fintech company Bitt as a technical partner. The eNaira infrastructure is based on the distributed ledger technology and this will support the two-tiered model architecture which the CBN has adopted. The Hyperledger Fabric variant of the DLT has been adopted for use. This lets CBN gain the capability to efficiently support and oversee the wallets associated with the eNaira. Financial institutions and other regulated market participants play a crucial role as network nodes, facilitating transaction processing, confirming transactions, ensuring record immutability, and, importantly, distributing eNaira to users.
Results:
The total number of CBDC wallets grew more than 12 times compared with October 2022 and was around 13 million in March 2023.
The Nigerian government tried number of techniques to boost adoption. In August 2022, it removed access restrictions so that bank accounts were no longer required to use the CBDC. Then, in October 2022, it offered 5% discount if people used the CBDC to pay for cabs. Furthermore, eNaira payouts in government initiatives and social schemes were meant to stimulate CBDC adoption. None of these proved to be effective. Then Government decided to take harsh steps — In December 2022, the Central Bank of Nigeria began restricting cash withdrawals to 100,000 naira (US$225) per week for individuals and 500,000 naira ($1,123) for businesses. Further, at the same time, CBN began replacing old banknotes to reduce cash hoarding, black market activity and counterfeiting. Yet cash payments still make up almost 90% of Nigeria’s informal economy.
Nearly 18 months after launching eNaira, Nigeria is seeing increased adoption in the CBDC as national fiat reserves face severe shortages. The value of eNaira transactions increased 63% to 22 billion Nairas ($47.7 million). However, it’s just the lack of physical cash that forced Nigerians to use the eNaira. The real test would be when the cash circulation resumes to normal, whether citizens continue using eNaira or get back to using cash.
One thing the government needs to understand is the utility it brings to the citizens versus the harm it causes with eNaira. If people really want to use digital money, they can always use existing forms – debit cards, payment apps, prepaid cards, and even credit cards. Less than 0.7 percent of the population has used CBDC since the launch. To put this number into perspective, more than 50% of Nigerians have used cryptocurrency.
One challenge is that it requires you to have a smartphone and internet access and you are trying to access the poorest of the population digitally. Most of this population cannot afford this setup in the longer run. Further, poor people would not want to pay taxes and therefore would rather prefer doing transactions anonymous to the government.
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