As a way of enabling the use of blockchain, a technology associated and popularized by cryptocurrencies such as Bitcoin, the Federal Government of Nigeria launched the eNaira on October 25, 2021 for use in mainstream finance. It is Africa’s first central bank digital currency (CBDC) as well as one of the 11 active ones globally. It is also another way to rival cryptocurrencies, which have become increasingly popular among young Nigerians. According to the Central Bank of Nigeria (CBN), its aims are to aid financial inclusion in Nigeria, cross-border transactions, and direct payments from the government to citizens.
CBDC are digital versions of a country’s currency. As the name implies, digital currencies exist only in digital format. An example of a digital currency is Bitcoin or Ethereum. They use complex encryption techniques to secure transactions and control the creation of new currencies. They also operate on the blockchain, which is a digital ledger that stores the transaction history of digital currencies. When a central bank like the CBN decides to create something like Bitcoin, it is called a CBDC.
Reasons for creating a digital currency in Nigeria.
Central banks create digital versions of their currencies to enjoy some of the benefits that come with cryptocurrencies such as Bitcoin and Ethereum. One advantage that they have is their low transaction cost because there are no intermediaries involved. In fiat currencies (like naira or dollar) that go through many intermediaries, there is an increase in transaction costs. Depending on the type of transaction, the intermediaries are usually banks, a card scheme like Visa or Mastercard, or even the Nigerian Inter-Bank Settlement System (NIBSS). But with a digital currency, a secure and direct link is created between the two parties to the transaction. This reduces cost, makes cross-border transactions seamless and reduces transaction time.
So, one of the reasons why it was created was because of the FOMO (fear of missing out) that was around digital means of exchange. According to a 2021 study by the Bank of International Settlements (BIS), 90 percent of the central banks in the world were considering creating CBDC. The means of exchange has features that can help a country’s financial system. The eNaira operates on a blockchain like Bitcoin. Transactions are carried out on a blockchain network, allowing eNaira users to send the currency peer-to-peer (P2P) without any intermediaries.
Nigeria CBDC is different from decentralized currencies like Bitcoin.
Both are carried out on the blockchain even though they operate differently. The former is decentralized because it operates on a public blockchain (the Bitcoin network), while the latter is centralized and operates on a centralized or private blockchain. Public blockchains are accessible to anyone. This means that anyone can check Bitcoin’s transaction history on blockchain.com. Public blockchains also allow anyone anywhere with an Internet connection to create a wallet without any KYC (Know Your Customer prompt) and initiate transactions within seconds.
However, Nigeria’s CBDC operates on a private blockchain where only the CBN has access. This is because the apex bank wants to control onboarding, KYC and the creation of the currency. So, the central bank uses the Hyperledger Fabric, a system that allows private organizations to create their private blockchain. The cryptocurrency has the same value as the naira, that is, one eNaira is equal to one naira. The CBN maintains this rate by backing the available digital amount with a naira reserve and provides its core ledger using a platform model. Other financial players in the country will be granted access to build on the platform via APIs.
Mixed criticism trails its creation since 2021.
Banks and other financial institutions are tasked with the distribution of the eNaira. They do this by creating additional payment functionality for the eNaira, thereby creating a payment ecosystem for it. To open a wallet, a user needs a National Identification Number (NIN), a phone number, and a Bank Verification Number (BVN) on the Speed Wallet app or using the USSD code *997*50#. Meanwhile, mixed criticism has been expressed on social media since its creation. While some believe that it will herald the cashless policy dreamed off not so long ago, others have said that it is a way for the government to track dissidents.