Nigeria’s eNaira will pioneer crypto innovation in Africa

African central banks are looking to learn from Nigeria’s turbulent but historic launch of the continent’s first state-backed digital currency, eNaira.

Tanzania announced last week that it intends to launch its own digital currency in order to reduce transaction costs and increase citizen participation in the formal financial system.

In September, the South African central bank collaborated with the central banks of Singapore, Malaysia, and Australia to test the interoperability of cryptocurrencies in cross-border payments, as part of a major push to mainstream digital currencies as legal tender in Africa.

It is unclear when or if South Africa will formally introduce a digital currency, but there are indications that the government is taking it seriously, particularly in light of the Nigerian launch.

Kenya’s central bank governor, Patrick Njoroge, revealed last month that the regulator is also looking into using a Central Bank Digital Currency (CBDC) to settle cross-border payments.

“We see the benefits being more cross-border…” said the Governor of the CBK.

“The issue isn’t being first; it’s being right,” he said on the sidelines of a virtual Afro-Asian Fintech festival.

According to Chainalysis, a blockchain data provider, more African states are likely to develop digital currencies, even if only to avoid being “left out.”

Tanzania, for example, has stated that one of the reasons for the planned introduction of a CBDC is to “not be left out.”

“To ensure that our country does not fall behind in the adoption of central bank digital currencies, the Bank of Tanzania has already begun preparations to have its own CBDC,” central bank Governor Florens Luoga said at a finance conference in Dodoma.

CBDCs are both similar to and distinct from existing cryptocurrencies, according to Chainalysis. “They are paperless, similar to bitcoin, and backed, similar to stable-coins.” But, unlike bitcoin, they are centralized, and, unlike stable coins, they are issued by the government.”

According to Chainalysis, eight countries have already launched some form of CBDC, including the Bahamas, which debuted its Sand Dollar in October 2020 (with five other Caribbean nations quickly following suit); Cambodia, which debuted a cross-border, remittance-focused CBDC; and Nigeria, which debuted its e-Naira last October. Tanzania’s launch followed the publication of Chainanalysis’ report.

Chainalysis made a case for CBDCs in its most recent review, claiming that they will significantly reduce the cost of managing physical cash.

“CBDCs could provide secure access to savings and credit in countries with large unbanked populations.” CBDCs, when combined with mobile applications and digital identification tools, could enable greater participation in the financial system than ever before,” it said.

CBDCs, particularly in Africa, have the potential to make cross-border payments faster, cheaper, and more accessible by reducing the number of intermediaries required to complete a transaction.

However, Chainalysis contends that this is contingent on CBDC interoperability — international coordination is required to achieve this effect.

“Because of the centralized nature of a CBDC, central bankers could detect and block suspicious transactions, potentially seizing and removing illicit funds from circulation entirely,” according to the blockchain platform.

However, there is a caveat: the CBDC model may improve the government’s financial surveillance capabilities, particularly in dictatorial regimes where authorities can “exclude individuals or businesses from the financial system for any infraction.”

Chainalysis also warns that digital cash will result in the demise of commercial banks.

“Because they do not include commercial banks in their system designs, they risk depriving banks of their deposit base, destabilizing domestic banking systems,” it said, adding that “CBDC designs have countered this with mechanisms such as balance caps and zero-interest deposits.”

Despite some hiccups, the Central Bank of Nigeria (CBN) announced that 400,000 eNaira new wallets had been registered and 12,500 transactions had been completed just two weeks after its launch.

According to records, eNaira received 200,000 downloads just 24 hours after President Muhammadu Buhari announced the launch, causing the bank’s eNaira transaction app to crash.
Fintech entrepreneur and former Flutterwave CEO Iyinoluwa Adeboyeji attributes the eNaira’s problems to the coin’s hasty launch.

He believes the government should have done a phased rollout, in which people sign up gradually to avoid overcrowding the app.

Days after its launch, CBN’s technical partner, Barbados-Bitt Inc, announced plans to launch a new mobile app that will allow Nigeria’s unbanked population to access eNaira.

There are approximately 40 million Nigerians who do not have a bank account; the venture is expected to enroll millions in the medium-to-long term.

Osita Nwanisobi, a CBN spokesperson, recently announced that 80, 000 merchants from over 160 countries have also signed up.

With digital currencies becoming a reality and being taken seriously, the International Monetary Fund (IMF) has stated its willingness to assist states in implementing CBDCs.

On November 16, the IMF stated that it was willing to provide technical assistance and policy advice to Nigeria.

The Fund stated in a press release that, given the size and complexity of Nigeria’s economy, its e-coin is attracting significant interest from the outside world, including central banks.

“The IMF’s Monetary and Capital Markets Department was involved in the eNaira rollout process, including providing product design reviews.” “The IMF Article IV mission in 2021 emphasized the importance of monitoring risks and macro-financial impacts associated with a central bank digital currency,” it said.

“The IMF stands ready to work with the authorities on data analysis, cross-country studies, sharing the eNaira experience with other countries, and discussing the eNaira’s future evolution, including its design, regulatory framework, and other aspects.”