The latest in the Central Bank of Nigeria’s (“CBN”) drive to instill a cashless economy is the introduction of the eNaira. While there are considerably many other reasons for the introduction of the eNaira, it is deducible that the initiative was a targeted response at the rise in cryptocurrency adoption in Nigeria and an attempt to latch onto the growing trend of CBDC research and adoption by reserve banks across the world. Launched on the 25th of October 2021, several issues arise from the design and implementation of the e-naira project some of which will be addressed in this article. Furthermore, this article examines the lingering question of the necessity or otherwise of the eNaira and impediments to its implementation.
What is eNaira and how will it work?
To put in simple terms, the eNaira is a digital fiat currency i.e. a digital form of the Naira. It is a monetary value issued by the CBN, stored electronically and accepted as a legal tender for the purpose of payments in Nigeria. The concept of a so-called Digital Naira is not new as prior to the introduction of the eNaira Nigerians have held money in digital wallets and in bank accounts managed via their respective bank and mobile money applications.
What makes the eNaira different is that it is the Central Bank of Nigeria’s Digital Currency (CBDC) which is a direct liability of the CBN. This is different from the monies managed on our bank apps which are direct liabilities of our respective banks.
The administration of the eNaira is to be done through a Digital Currency Management System (DCMS) created and managed by CBN to which banks and other Financial Institutions will be plugged in at the backend to provide wallet services to their customers. Much of the provisions on how it will function mirror the current stance of the CBN on mobile money and electronic payments.
For instance, the Guide to Charges by Banks, Other Banks, and Non-Bank Financial Institutions will apply to eNaira transactions and all participating Financial Institutions are expected to comply with the Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT) regime.
The power of the CBN to create this new medium of exchange is derived from Sections 2, 18, and 19 of the Central Bank of Nigeria Act. By these provisions, the CBN has as one of the core mandates the power to issue legal tender currency in Nigeria subject to the sanction of the President. These cited provisions do not specifically mention digital currencies because the law was enacted during the brick-and-mortar era where digital and virtual currencies were not in contemplation. However, a leeway may be found under section 19 of the act which provides that currency notes and coins issued by the bank shall be in a form and design approved by the President on the recommendation of the Board of Directors of the CBN.
Motivations for the eNaira project
Cashless economy
The eNaira is expected to supplement the digital payments system in a further drive to reduce reliance on cash as a medium of payments. This becomes necessary in the wake of Covid19, government lockdown, and the recent goal of minimizing physical contacts. Digital payments dispense with the need for physical presence and enable long-distance commercial engagements. There is however skepticism that low-income earners would builk at the eNaira as some cannot afford the technology so the preference and reliance on cash would likely continue.
Financial Inclusion
Another core motivation for the introduction of the eNaira is the perceived need to improve banking experiences for the underbanked in society. Although it is brought under the broad heading of financial inclusion, it remains to be seen how this benefits or can be used to draw in the underbanked into the banking system. The Guidelines disclose the desire of the CBN to adopt the existing AML/CFT regime to the eNaira and given the proof of identification requirements it remains to be seen how this can drive inclusion of the unbanked who for the most part have been impeded by lack of official identity.
According to an April 2021 report by the Nigerian Communications Commission only 77,605,500 people had access to the internet. In a nation of an estimated 200 Million in Population, this potentially leaves about two-third of the popula tion still out of the cashless economy the CBN is building. Nonetheless, it is laudable to an extent as it improves service delivery and encourages further interest in the centralized financial sys- tems for digital nomads and millennials who form the core of the underbanked in the Nigerian polity. USSD channel integration with the eNaira as contemplated by the CBN could also prove very useful in driving this objective.
Recent developments on the Know-Your-Cus- tomer (KYC) regime also has some significance on the financial inclusion discourse. It appears from the guidelines that the CBN is creating a new tier for the eNaira called Tier 0. The docu- mentation requirements for Tier 0 is very simpli- fied and requires less stringent identification requirements. A passport photograph, personal information and phone number are all that’s needed. The difference between Tier 0 and Tier 1 Identification requirements is that the phone number used for existing tier 1 will need to be linked to an NIN while the newly introduced tier 0 doesn’t need a phone number linked to an NIN.
This is an important innovation given the fact that as at 21 April barely 52 Million Nigerians have been onboarded on the NIN database. This NIN linkage requirement could impact financial inclu- sion objectives negatively if not implemented progressively.
Payment Efficiency
CBDCs herald good news in the world’s shift towards faster, cashless, and contactless pay- ments. As COVID-19 and the lockdown measures have exposed further the need to increase virtual engagements in the social and financial sphere, it appears that the eNaira could help enhance that socio-economic goal. Reconciliation processes for payments i.e. clearing and settlements are streamlined in a CBDC model as the bulk of work done by clearing and settlement agencies would be done by algorithms. This does not only make for faster payments but also minimizes systemic risks. Through each consumer wallet, payments may be made easily just like it is done through the various banking and payments applications. What separates the eNaira in this regard is the finality of settlement feature although it may not hold so much significance to the end-user, it is very significant to the financial institutions. Through the finality of settlement methodology, the eNaira might introduce quicker and more efficient payment at the consumer level and in relation to participating institutions.
Encouraging Remittances by reducing cost
The past few years have been quite tumultuous for Nigeria’s foreign exchange and significant investments or purchasing ability has been lost to the inability to access or exchange currencies. The eNaira may ameliorate this problem at the retail level which may sum up to significant dollar reserves when aggregated depending on how well it is managed. The eNaira takes a less strin- gent approach towards foreign exchange involv- ing International Money Transfer Organizations (IMTOs). The system adopted in the eNaira framework, as presented to Banks in the Project GIANT document, provides IMTOs with two options. The first involves a partnership with a local bank and the second involves a direct request from the CBN.
Although we envisage that the current may allow for future inter-CBDC exchanges, the interoperability of DCMS across the world is not certain at the moment. We expect that this will be considered as more countries adopt CBDCs within their National frameworks. If implemented in the long run, it might help solve some of the current challenges with funds transfers, aid quicker inter country settlement and boost foreign trade. We also expect that merchants will find creative ways to explore the use of the eNaira through conversion to other CBDCs in countries with less stringent rules around international transfers and perhaps cryptocurrency through P2P exchanges.
Potential for control
One of the key motivations behind the CBDC rollout is the need to curb and perhaps compete with the crypto revolution and the emergence of digital currencies. Unlike Cryptocurrencies, CBDCs present a centralized and controlled currency regime. This may be a pitfall in the adoption upon rollout as more citizens are exposed to the relative privacy and anonymity perks of cryptocurrency. The eNaira presentation discloses the powers of the CBN to monitor, control, and even destroy the eNaira. Prior to now, the CBN had less level of control in relation to the fiat currency even with the denomination numbering system that had been created. With the eNaira, the CBN may access wallets, limit the purchasing ability of eNaira holders and even destroy the eNaira.
Tracking Financial Crimes
CBDCs present central and reserve banks a better opportunity to track financial crimes such as money laundering, terrorist financing and tax evasion. This is the other side of the privacy restriction coin as earlier discussed. It potentially serves as a method for collecting data on users digitally for storage and surveillance.
Participants in the eNaira ecosystem
The Central Bank
As earlier mentioned, the CBN manages the DCMS and regulates the operations of the eNaira. Furthermore, the Guidelines provide that it shall be responsible for minting, issuing, redeeming and destroying the eNaira; setting the technical, operational and regulatory standards for its operations; monitoring compliance, and settling unresolved disputes between the participants. There are speculations of a long term plan of the CBN to gradually yield some of its functions under the current framework to other industry participants after it has piloted the initiative for a reasonable period.
Licensed Financial Institutions
Financial Institutions (FIs) such as Banks, International Money Transfer Operators (IMTO) and Mobile Money Operators (MMO) are to serve as intermediaries between the Central Bank and the customers. They are to be onboarded to the system automatically by the CBN. Their role includes the integration of eNaira wallet features into their digital banking channels, requesting for eNaira from the CBN for disbursement to customers and for themselves, dispute resolution with customers etc. There is need for a proper delineation of participating Financial Institutions and the scope of their participation.
Government Ministries, Departments, and Agencies (MDA)
The eNaira also allows for the participation of MDAs for making and receiving payments in eNaira. This is laudable in that it allows for better monitoring of government spending. The API of the Federal Inland Revenue Service is also expected to be integrated into the system for verification of tax clearance or identity number which makes for a smoother and faster payments system. This has the potential of making efficient government-to-person payments particularly social assistance payments in such a manner that is traceable and verifiable.
Merchants
Under the eNaira framework, the merchants are the traders whose participation includes publicizing and collecting the eNaira as alternative forms of payment, providing cashback services to their customers, and protecting their eNaira wallet credentials from fraudulent access. They are to be onboarded by the FIs after they had downloaded the Speed Merchant wallets from the app stores, subject to their fulfillment of the requirements set under the Guidelines.
From a payments perspective, we may consider PSPs as payment facilitators or merchant aggregators, placing them as pseudo-agents of the merchants themselves. They are responsible for empowering merchants with the ability to accept payments from multiple channels and assisting merchants to comply with the relevant bank, scheme, and regulatory requirements as well as prevent fraud. One way we might see PSPs participating in the framework ahead of when CBN officially extends eNaira to them is to offer their merchants the ability to accept eNaira as a payment option at checkout.
Consumers
Given the retail nature of the eNaira, the general populace qualifies as consumers of the currency. This is a core difference between the retail CBDC and wholesale CBDC models. While the wholesales allow for the participation of a select few who carry out behemoth transactions, retail CBDCs like the eNaira supports retail level transactions capable of being carried out by anyone. This reflects further in the transaction limits per tier set in the Guidelines and promotes the financial inclusion motivation of the CBN.
Perceivable Advantages of the eNaira
Interoperability
Inter-wallet exchanges and Inter-bank settlements in the Nigerian payments ecosystem have had some interoperability issues over the years. It brings to fore the role of regulators not merely as gatekeepers of the ecosystem but as the promoters of the interoperability of FinTechs and the key players in the financial ecosystem. The eNaira could potentially solve this problem with its central management system and the CBN’s more inclusive role in the operations. Furthermore, the finality of settlements could drive this objective.
Operational Cost Reduction for Financial Institutions
A CBDC financial regime dispenses with the need for MMOs to partner with legacy banks for escrow services since it is a direct liability of the Central bank and their license permits wallets operations. Taking away the surrounding costs of managing those accounts and interbank settlement means more profitability for MMOs as well as efficient service delivery. For Banks and MDAs, the eNaira leaves a trail that makes the collection of required data easier and less expensive to track. IMTOs can also easily access forex with fewer bottlenecks through digital channels.
Risk Management and Ease of Compliance
Given the programmability of CBDCs, it may be much easier to implement a more transparent governance system. This is because a lot of the required information is automatically recorded and visible on the dashboard where retail transactions can be monitored and suspicious transactions detected. Flowing from this, compliance and regulatory oversight may become relatively easier. Furthermore, FIs can program the eNaira wallets in such a manner as to restrict certain transactions based on set thresholds. They can also add triggers to require extra information to validate certain transactions.
Parity of Value with the Fiat
As is the case with almost every other CBDC in the world, the eNaira shares a similar value with cash. Thus, every one Naira in Cash exchanges for one eNaira and vice versa. The likelihood of dismissing its domestic exchange value is how ever not impossible as pilot programs of the e-Yuan in China have shown that in a drive to fuel adoption, additional incentives for cash exchang- es can be implemented as an interim measure. Besides, it may be a significant point in CBN’s drive towards implementing a cashless economy in the long run.
Indestructibility
Unlike cash that is capable of being torn, burnt, or mutilated, the eNaira is indestructible at the hand of the consumers. By the provision of the Guide- lines, only the CBN has the power and perhaps even the technical ability to destroy the eNaira. Questions may however arise as to the security of the system and potential damages that may be caused by intrusive access to the DCMS. We hope the DCMS never gets compromised.
Cost-Effectiveness
The cost-effectiveness of the eNaira can be viewed from the institutional and consumer levels. At the institutional level, it reduces the cost of issue, circulation, and access to money by potentially reducing the demand for cash. FIs also potentially reduce their cost of tracking and record keeping due to the nature of technology adopted. For the consumer, it could potentially reduce transaction processing costs thus increasing consumer trust and adoption.
The presentation to banks earlier disclosed the intention of the CBN to drastically reduce trans- action costs to near zero. While this may be a perk at the consumer level, it may have some ripple effects on the operations of Financial Insti- tutions. With a proposed zero merchants’ service charge, payment service providers would be forced to provide the service as value-added which may adversely affect their profit margins.
The current position in the Guidelines is that for the first 90 days of operations, all transactions would be free of charge. At the expiration of the 90 days, participating institutions are to revert to the existing framework on Guide to Charges by Banks, Other Financial and Non-Bank Financial Institutions.
Cross-border Remittances
As earlier mentioned, through IMTOs, the eNaira could increase the efficiency of cross-border remittances by offering new payment channels to IMTOs. As CBDCs become increasingly adopted by other countries, a global CBDC regime may emerge to make remittances even more seamless. As earlier stated, with an increase in adoption comes the inevitability of creative ways to navigate issues that may arise in cross-border payments and make arbitrage profits.
Agent Banking and Trustee Arrangement
Another key innovation under the Guidelines is that it allows the option of opening of eNaira wallets as trustees. This may prove useful in the drive towards financial inclusion as it enables a working space for agent banking initiatives. This is in line with the CBN’s vision under the Three tiered KYC system and its Framework for the Regulation of Agent Banking in Nigeria. Persons who do not fall under any of the tiered categories may still enjoy limited banking services through agents and trustees of their appointment.
Financial Inclusion
The rollout of the eNaira is also driven towards increasing Nigeria’s financial inclusion rate. Although how it may drive inclusion for the financially excluded based on the technical requirements remains to be seen, the payments efficiency perk may help improve financial service delivery to the underserved.
Is the eNaira necessary?
There is a noticeable scramble around the world by central banks to introduce the Central Bank Digital Currencies (“CBDCs”) in response to the technological disruption of the financial industry. While it appears in part to be a laudable adoption of technology by regulators, analysts and experts around the world are questioning its necessity in modern finance and whether it’s just a solution to a non-existent problem. It’s admittedly too early to call but given its relative advantages on paper, it is worth a try. However, all regulatory grey areas need to be fixed and a proper risk-based man- agement mechanism should be applied. This would help to understand the risks as they arise and decide on whether to fix or discontinue the framework.
The Financial Crimes Test
The distribution model adopted by the Guidelines ensures that the role of distribution is out-sourced to FIs, MDAs, and other participants distinct from the Central Bank. This model essentially carries over the potential Money Laundering and Terrorism Financing risks to these distributors. Further to this, the Guidelines already provide that the existing AML/CFT regime would apply to the eNaira framework. This is likely based on an assumption that the eNaira poses no new or specific financial crime risk not known or addressed by the normative system. This assumption may prove costly but it is expected that the omnibus provisions of the Guidelines that allow the CBN to issue new regulations from time to time may be leveraged to cover any loophole that may be brought to light as the eNaira becomes operational.
Potential for Control
One of the core concerns with the adoption of CBDCs is that there is a strong likelihood that it supports government intrusion into the private financial lives of its citizens. This may slow down the adoption of the eNaira to those who are not apathetic to privacy matters. Nonetheless, it appears to be a global problem with CBDCs as China had previously announced that it would adopt the controlled anonymity approach with respect to its e-yuan. This means that sensitive and personal information is hidden from counterparties but traceable by law enforcement agents. There is a likelihood this may be the stance of the CBN too but there is yet no information from the available Guidelines.
Possible Teething Problems in Implementation
Technical Requirements and Offline Accessibility
An easy pro-cash response to digital payment mediums is that it is easy to access, requires no technical ability, and does not rely on mobile networks or the internet. This raises questions that digital currencies and CBDCs like the eNaira must answer in the quest for installing a cashless economy and engendering financial inclusion. In a country where digital literacy, purchasing power as well as internet and broadband penetration, the eNaira may just be a luxury worth chasing only for the minority with the know-how. Nonetheless, if the eNaira would experience significant success in the Nigerian social space, its design must take cognizance of these facts. While the app is not yet accessible, it is important that the central bank explores offline access, if it’s not already being considered.
The Risk of Disintermediation
There is a need to consider the potential impact of the rollout of the eNaira on the Monetary Policy of the country and the viability of its Financial Institutions. How deposits in eNaira would be managed is a question yet unanswered with the buck most likely falling on the CBN being the manager of the DCMS. This could potentially reduce retail deposits which could, in turn, impact the viability of Deposit Money Banks as adoption increases. There is also the potential of the emergence of a grey market where eNaira would be exchanged for cash at a premium in a market frenzy induced by a banking crisis. More citizens would trust a direct liability of the CBN over that of a DMB during a banking crisis.
While the Guidelines state that FIs are participants in the eNaira regime, the scope of FIs that can participate is narrow with just Mobile Money Operators and International Money Transfer Operators (IMTO) being the key winners. This creates some sort of disintermediation problem for the commercial banks as their ability to use available funds for credit intermediation may be impeded by the increased access of MMOs and other peripheral FIs to eNaira Liquidity. In simple speak, DMBs may hold less money under the eNaira regime as MMOs and other service providers previously reliant on them for escrow account openings and other services will be needing less of commercial banks.
As the e-Naira gains traction, the problem would become even more apparent if the specific role of each FI is not appended into the framework with clear considerations for viability and profitability.
Dealing with Counterfeits and Double Spending
A recurrent issue in public discourse about CBDCs and virtual currencies is dealing with the incidence of fakes and double-spending. While there is a high chance that digital currencies are not as susceptible to the problem of counterfeiting as cash, the likelihood is still not dismissible. Double spending is another risk the CBN ought to consider in the implementation of the eNaira. The double-spending problem is a situation where an original token is spent many times before the transaction is cleared. It is enabled by the fact that at the backend of these CBDCs are files that are replicable and thus capable of being falsified.
The Question of the Stability of the Financial System
A question that could be asked is whether the operations of the eNaira could destabilize the financial system for a range of reasons including its modification of the role of Deposit Money Banks (DMBs) and Mobile Money Operators (MMOs) especially because they also have their wallet and electronic money services in play.
Could the CBN be competing with Fintechs?
One key feature of CBDCs is that it puts the Central Bank in the arena as a key player in the payments system. Previously, central or reserve banks only played the role of the regulator but they now have some interest or share some risk in the payments system with the advent of CBDCs and the eNaira poses this same problem. The question thus arises on whether the CBN looks to compete with Fintechs and whether it can still play its unbiased role as a regulator even while dealing in the arena. Although the CBN has made it clear that it is only piloting the e-Naira and will subsequently hand it over to the ecosystem, this is not the view of many, especially with the recent restriction placed on cryptocurrency transactions.
Other Issues
Privacy
One of the key arguments advanced against the rise in CBDCs is the potential for regulator and government surveillance. The Chinese government has adopted a controlled anonymity approach which, though guarantees anonymity for the user, allows for some regulator monitoring on transactions on which the CBDC is used.
This potential for control is a hard sell for less forceful regimes like Nigeria and may reduce the adoption potential given the parity of value with the fiat currency which is by contrast difficult to trace. Nothing in the eNaira design discloses the position of the CBN on the privacy and security of eNaira users.
Cybersecurity
To effectively implement the eNaira, a robust cybersecurity infrastructure must be put in place. A compromise to the DCMS may prove very costly. The CBN and other participants in the ecosystem have to perform periodic Information Security Audit to ensure that there are no leaks or entry points to the system. The CBN Governor was reported to have said that the eNaira would be designated as a Critical National Infrastructure implying that comprehensive security checks will be conducted on it.
It is expected that the system will ride on existing payment rails. As such it is prudentl that the CBN considers downtimes and how it might impact on the ecosystem. Furthermore, there should be a periodic and continuing risk assessment framework designed to mitigate exposures and ensure resilience from the moment the eNaira becomes operational.
KYC requirements
The Guidelines provide zero transactions and balance limits for merchants. This is an improvement from the one and 5 million naira prescribed as transaction and wallet balances respectively which would have been too low. However, zero transaction and balance limits may increase the risk of money laundering and also raises concerns as to whether the eNaira is indeed intended to be retail based.
Merchant Service and Customer Transactions Pricing
The Guidelines set the transaction charge to be in accordance with the Guide to Charges by Banks, other Financial and Non-Bank Financial Institutions. Although, this is to take effect after the first ninety (90) days where all transactions are to be facilitated free of charge. The proposed zero-cost Merchants service charge under phase 1 of the eNaira implementation as earlier presented to banks is likely to be a disincentive to other FIs apart from traditional banks who may offer P2B as a value-added service. MMOs and Payments Service Providers may not find it to be a profitable venture. As such, this backtrack from that position is a welcome development.
Customer onboarding – Periodic transmission of BVN? Or batch slots for banks?
There is a need for a definition of information sharing terms and responsibilities between the participants in the eNaira framework. Are the unique identifiers (BVN, NIN) going to be shared by the participating FIs with the CBN? If so, would a periodic transmission model be adopted or batch slots would be given to banks?
Who qualifies as banks – Commercial banks or MfBs?
There is also the question of whether Microfi- nance Banks would also qualify to participate in the eNaira distribution given the nuance of their licence category. On the one hand, MfBs are designed for retail transactions which is the operational basis of the eNaira, on the other hand, the lack of technical know how and the In the event that they are able to participate, particularly as the scope of FI within the Guidelines is not clearly delineated, would the transaction and wallet limits under the Guidelines apply solely or in congruence with their limits set under the MfB regulations?
We expect that the use of the word “Bank” in the Guidelines would be construed widely enough to include MfBs, Payments Service Banks, Deposit Money Banks and other banks permitted to take deposits under the extant regulations. This could positively drive participation of Fintechs, Neo-banks and Challenger banks in the eNaira Framework
Conclusion
It’s early days to judge the viability of the CBDC but on paper, it signals a drive towards a digital finance infrastructure. For the eNaira to be a successful project, the CBN has to be prepared for robust risk-based management, oversight, and constant regulatory updates to fit the need as they arise. Successful implementation could also put to rest some cryptocurrency skepticism by the regulators and FIs although based on the current framework, it may be hard to compete with Crypto and decentralized Financial Instruments.
