Central banks control the circulation and supply of money globally, but the phenomenal rise of cryptocurrency poses a threat to their authority, control and power.
So central banks around the world are now producing their own digital currencies. In a groundbreaking move for the African continent, buffered by local activity and interest in cryptocurrency -- after the U.S., it is the second-largest market for crypto trading -- Nigeria joins that list this week.
After being in the development phase for the last three years, its central bank is piloting the first digital currency in Africa today.
It joins 14 other countries now in the pilot stages with their own central bank digital currencies (CBDCs), including China, Sweden and South Korea, with a total of 81 countries in other stages of exploring CBDCs.
Only five have fully launched them: the Bahamas, Grenada, Saint Kitts and Nevis, Antigua and Barbuda, and Saint Lucia.
The virtual money, dubbed the eNaira, is backed and issued by the country’s apex bank, the Central Bank of Nigeria (CBN). Like most governments, Nigeria is introducing a virtual currency because it is more cost-efficient than physical cash, helps the unbanked have easier access to money, and can, in some way, limit illicit activities.
But despite the advantages that come with central bank-issued digital currencies, there are fears surrounding how they could be used by governments with a track record of surveilling or attempting to surveil their citizens.
What we know so far about eNaira
Heading up to this pilot launch, CBN picked Barbados-based Bitt Inc in August to develop and roll out the digital currency.
The company has a track record: It assisted the Eastern Caribbean Currency Union (ECCU) to design and launch DCash, the digital currency used by Antigua and Barbuda, Grenada, Saint Kitts and Nevis, and Saint Lucia -- four of the five countries that have fully launched their own CBDCs.
On September 27, the CBN launched the eNaira website, detailing necessary information on how Nigerians can access and use the virtual currency.
First, Nigerians will have to download the eNaira mobile application on the Apple Store or Play Store. They can also opt to scan a QR code on the website to access the service.
After registration, users must register and create a wallet -- called the Speed Wallet -- to store, send and receive money. Several tiers of wallets are available on the platform catering to various users with or without bank accounts and different identification levels.
The website lists four main eNaira features: a unified payment system that allows customers to move money from their eNaira wallet; a bank account management feature that lets users check balances and transaction history; a contactless payment service so users can make in-store payments by scanning QR codes; and P2P payments, in which users send money to each other via a linked bank account or card.
Cryptocurrency to give way to CBDCs
Cryptocurrencies like bitcoin highlight the potential of money’s digital future despite being created outside the confines of the traditional global banking system. And its sharp rise in adoption has led to a scuffle with legacy institutions in determining the future of money.
The argument against cryptocurrencies has typically focused on concerns around fraud and volatility. That hasn’t stopped some countries, like El Salvador, from using bitcoin as a legal tender. For others that see bitcoin and cryptocurrencies as a threat to their national banking and financial systems, CBDCs act as direct replacements for rising interest in something other than fiat.
“The concept of CBDCs has become a necessity for central banks. Money is a tool for controlling people. They do not want to allow the primary tool of control to be eroded because the entrance of privately issued cryptocurrencies like bitcoin and Ethereum is a direct challenge to central banks’ authority everywhere in the world. CBDCs come in as their response, albeit weak ones,” Chimezie Chuta, founder and coordinator of Blockchain Nigeria User Group, told TechCrunch.
While cryptocurrencies are pretty independent, digital currencies hold the same value as their paper counterparts. In Nigeria’s case, the eNaira will be pegged to the naira, with its value fluctuating against the U.S. dollar, just as the naira does.
Another significant difference between CBDCs and cryptocurrencies is that the former is subjected to regulation and control -- common themes at the heart of governments in China and Nigeria.
Since 2014, China has been working on a national digital currency (digital yuan), an effort championed by its central bank, the People’s Bank of China (PBOC), a year after the Chinese government banned banks and payments companies from providing bitcoin and cryptocurrency-related services.
In 2017, China banned mining, initial coin offerings (ICOs) and cryptocurrency trading platforms from converting legal tender into cryptocurrencies and vice versa.
But despite the bans, bitcoin and other cryptocurrencies have gained significant traction in the Asian country since then, so it made tighter laws this May by banning fintech companies from offering services around account openings, registration, trading, clearing and settlement to crypto platforms.
Up until now, China had targeted only local crypto platforms and had not barred individuals from holding cryptocurrencies in offshore exchanges.
But that changed last month when the Chinese government declared all transactions involving cryptocurrencies (including mining) illegal. It also stated that it was illegal for offshore crypto exchanges like Binance to provide services to people in mainland China.
“Whilst this is not a surprise as China has ‘banned’ crypto many times in the past, this time there is no ambiguity,” PwC crypto leader Henri Arslanian tweeted. “Crypto transactions and crypto services of all kinds are banned in China. No room for discussion. No grey area.”
Some analysts have said these bans and restrictions by China are geared toward the Asian country’s full release of the digital yuan in 2022. That’s plausible, despite the Chinese government’s claims that it launched the digital yuan to replace some cash in circulation in a country where WeChat and Alipay are responsible for four out of five payments carried out digitally.
More crypto crackdown and surveillance?
The PBOC, with the help of the government, might be attempting to take back some online payments market share from the duopoly (Alipay and WeChat) with the digital yuan, whose trials and rollout started from April 2020 in Shanghai, Chengdu and Beijing.
Like the eNaira, users can only access the digital yuan by downloading a mobile app developed and controlled by the central bank. So far, there are more than 7 million individual digital wallets and 1 million company wallets using the digital yuan. Transactions totaling $5.3 billion have been made from the trials, according to Business Insider.
Although Nigeria isn’t a crypto mining country, its people are heavy crypto users. The West African country is second only to the U.S. for bitcoin trading, according to Paxful, as many Nigerians use the cryptocurrency to protect their savings against naira depreciation.
In May, Nigerians traded $2.4 billion worth of traceable crypto, per data from Chainalysis. It’s an astonishing figure, considering that in February, the Nigerian government via the CBN banned cryptocurrency transactions, prohibited banks from taking part in such transactions, and ordered them to close accounts of Nigerians using cryptocurrency.
And, similar to China, Nigeria’s following action tilted toward piloting its digital currency. But unlike China, Nigeria is a cash-dominated society. It’s one of the main reasons (including the potential to improve financial inclusion) why smaller countries such as the Bahamas have rolled out digital currencies. For these purposes, the introduction of a digital currency in Nigeria makes sense on paper.
However, many Nigerians have reservations about its usefulness, while others understand that it’s the government’s ploy to reduce incentives for people who want to use crypto. But then, there are other subtle factors to be worried about: surveillance and a full-scale crackdown on crypto activities in the country.
Typically, governments use Financial Intelligence units to monitor financial transactions and collect information on suspicious or unusual monetary activity. But CBDCs might take things up a notch.
Several publications have alluded that China’s government could use the digital yuan to advance surveillance of its people. According to its central bank, the PBOC, agencies operating digital yuan services are expected to “submit transaction data to the central bank via asynchronous transmission on a timely basis,” which will allow the bank to “track data and crackdown on laundering and criminal offenses.”
The CBN has a similar objective and has said before that the eNaira will minimize fraudulent activities and money laundering because of the “trackable unique ID of each eNaira.”
“Banks and telcos already have our necessary information via verification processes,” said Chuta. “But CBDCs will increase that monitoring and surveillance because now they can actually follow money flow in a digital environment and carry out a forensic analysis of each user’s transaction on the ledger that they are deploying.”
In June, a report from a local press said Nigeria was in talks with China to build an internet firewall. According to the publication, China’s “Great Firewall” is the center of the government’s online censorship and surveillance effort. And though Nigeria lacks the resources to build such a firewall for surveillance, some believe the eNaira might have been designed for the same purpose, albeit on a lesser scale.
“CBDCs are trackable and I think it might come in handy for the government if they decide to carry out unwarranted surveillance,” a crypto user who withheld his name told TechCrunch.
Also, as with the case of China, more crypto crackdowns could be triggered if, for instance, the adoption of eNaira does not take off as planned or if the government enforces the eNaira as the sole digital currency to be traded in the country.
Case in point: China’s new orders made two of the world’s largest crypto exchanges -- Huobi and Binance -- halt new registrations for users, and Huobi says it will retire current accounts by the end of the year.
It’s unclear if the Nigerian government can exercise such powers. Still, should it ban offshore crypto platforms from servicing and employing Nigerians and succeed, peer-to-peer activities (which has made crypto thrive in Nigeria) will take a severe hit.
“The government, in general, poses a threat to crypto. It’s situations like this where someone has real-world power and [can] put you in jail for trading crypto,” said a growth lead at a Nigerian cryptocurrency exchange platform. “If a government really decided to outlaw the use of crypto within their borders, crypto would be stifled such that at some point, it might not be worth it to use anymore.”
At the moment, though, it seems Nigeria and its apex bank have noble intentions with the eNaira. According to the CBN governor, Godwin Emefiele, the eNaira will lead to cheaper and faster remittance inflow and increase cross-border trade.
For remittances, the eNaira is assumed to provide a better alternative for Nigerians in the diaspora to send money home, in the long run increasing remittances into the country, which reached $17 billion last year.
News about Chinese banks expanding operations in Nigeria made the rounds last month and could prove pivotal to the effectiveness of cross-border trade between both countries. China is Nigeria’s biggest trade partner (volume transacted between them has passed $20 billion this year, increasing from $19.2 billion in 2020). Three years ago, both countries tried a currency swap agreement for better trade and, although nothing materialized, Chuta holds that the countries’ digital currencies can act as perfect substitutes.
“I think there can be interoperability that can be beneficial to both countries. When you want to transfer money from Nigeria to China, you would have to go through at least four different hoops and it takes like three or four days,” said Chuta. “But let’s say China and Nigeria’s CBDCs interoperate, it means that if I want to send money to a Chinese supplier, I simply swap eNaira to Chinese yuan on my app and push it to the supplier who gets it at a fraction of the amount I would’ve typically done with the traditional transfer bodies.”
According to Nigeria’s central bank, the eNaira would also improve “payment efficiency, revenue and tax collection, and targeted social interventions.”
Will Nigeria’s apex bank achieve all this? It’s too early to say, since no country, either in pilot or fully launched mode, has achieved success at a massive scale yet. The eNaira’s staggered rollout is expected to take place across four cities in the country -- Port Harcourt, Abuja, Kano and Lagos. But given how similar government-led initiatives have fared in the past, the odds of achieving full-scale rollout are slim.