5 observations on Nigeria’s Central Bank Digital Currency eNaira by IMF

The International Monetary Fund (IMF) has issued a statement regarding its observation on eNaira, the new digital currency of Nigeria’s central bank (CBDC).

The IMF, in the statement, said: “The Central Bank of Nigeria (CBN) officially launched the ‘eNaira’, a central bank digital currency (CBDC), on October 25, 2021. This is the second CBDC fully open to the public. public after the Bahamas.

“Other countries and regions, such as China and the Eastern Caribbean Monetary Union, have been piloting CBDC with a subset of their citizens.

“Given the size and complexity of the Nigerian economy, this launch is attracting substantial interest from the outside world, including central banks.”

Below, however, is what the organization labeled its five observations on the Central Bank of Nigeria’s digital currency.

1. What is eNaira?

Like coins or cash, eNaira is a liability of the CBN. ENaira uses the same blockchain technology as Bitcoin or Ethereum and, like them, eNaira is stored in digital wallets and can be used for payment transactions; and it can be transferred digitally and at virtually no cost to anyone in the world with an eNaira wallet. However, there are important differences.

First, eNaira has strict access rights controls by the central bank. Second, unlike these crypto assets, the eNaira is not a financial asset itself, but a digital form of a national currency and derives its value from the physical naira, to which it is pegged.

2. Why did Nigeria introduce eNaira?

According to the CBN, the eNaira is expected to bring multiple benefits, which are expected to gradually materialize as the eNaira becomes mainstream and is supported by a strong regulatory system. Key benefits include the following:

Increase in financial inclusion. For now, the eNaira wallet is provided only to people with bank accounts, but its coverage is expected to eventually expand to anyone with a mobile phone, even if they do not have a bank account.

A large number of people do not have bank accounts (38 million people; 36 percent of the adult population), and allowing those who have a mobile phone access to eNaira would increase financial inclusion and facilitate a more direct and effective implementation of the eNaira. social transfer programs. The measure is expected to allow up to 90 percent of the population to use eNaira.

Facilitation of remittances. Nigeria is among the key remittance destinations in Sub-Saharan Africa, with remittance income amounting to $ 24 billion in 2019. Remittances are generally made through international money transfer operators (eg Western Union) with fees ranging between 1% and 5% of the value. of the transaction.

ENaira is expected to reduce remittance transfer costs, making it easier for the Nigerian diaspora to send funds to Nigeria by obtaining eNaira from international money transfer operators and transferring them to recipients in Nigeria via free wallet-to-wallet transfers.

Exchange rate reforms, including a unified market compensation rate, that reduce the gap between official and parallel market exchange rates would improve incentives to use eNaira portfolios to send remittances. Reduction of informality.

Nigeria has a large informal economy, with transactions and employment equivalent to, respectively, more than half of GDP and 80 percent of employment.

ENaira is account-based and in principle the transactions are fully traceable, unlike crypto asset transactions based on tokens. Once eNaira goes mainstream and enters the economy, it can bring greater transparency to informal payments and strengthen the tax base.

Formal and informal companies can also benefit if the adoption of eNaira improves consumption through greater financial inclusion.

3. What are the potential risks?

Like digital currencies elsewhere, eNaira carries risks to monetary policy implementation, cybersecurity, operational resilience, and financial integrity and stability.

For example, eNaira portfolios can be perceived, or even function effectively, as a deposit with the central bank, which can reduce the demand for deposits with commercial banks.
Relying on digital technology, there is a need to manage cybersecurity and operational risks associated with eNaira.

4. What are authorities doing to mitigate potential risks?

The authorities have taken steps to manage the risks. The transfer of funds from bank deposits to eNaira wallets is subject to daily transactions and balance limits to mitigate the risks of diminishing the roles of banks and other financial institutions.

Financial integrity risks, such as those arising from the potential use of eNaira for money laundering, are mitigated by using a layered identity verification system and applying more stringent controls to relatively less verified users.

For example, for now only people with a bank verification number can open a wallet, but over time coverage will be extended to people with registered SIM cards and those with mobile phones but no ID numbers. The latter categories of holders would be subject to more stringent transactions and balance limits.

Still, wallet holders who meet the highest identity verification standards cannot have more than 5 million naira (about $ 12,200) each in their eNaira wallets. To address cybersecurity risk, regular IT security assessments are expected to be conducted.

5. What can the IMF do?

The IMF remains available to assist with technical assistance and policy advice. The IMF’s Monetary and Capital Markets Department has participated in the eNaira implementation process, including providing product design reviews.

The IMF’s Article IV mission from 2021 emphasized the need to monitor the risks and macro-financial impacts associated with a central bank’s digital currency.

The IMF is willing to collaborate with the authorities in data analysis, cross-country studies, share eNaira’s experience with other countries, and discuss eNaira’s evolution, including its design, regulatory framework, and other aspects.