Nigeria Pilots Digital Currency: Following China's Lead

The Challenge to Central Banks from Cryptocurrency

Globally, central banks maintain control over the money supply and its circulation. However, the significant growth of cryptocurrency is challenging their traditional authority, control, and influence.

In response, central banks worldwide are now developing their own digital currencies.

Nigeria Launches Africa’s First CBDC

Nigeria is at the forefront of this trend on the African continent. Benefiting from substantial local engagement and interest in cryptocurrency – ranking as the second-largest crypto trading market after the U.S. – Nigeria has joined this initiative this week.

Following a three-year development period, the nation’s central bank is initiating a pilot program for the first digital currency in Africa today.

Global CBDC Development

Nigeria is now among 14 other nations piloting their own Central Bank Digital Currencies (CBDCs). These include countries like China, Sweden, and South Korea.

Currently, a total of 81 countries are exploring CBDCs in various stages of development.

To date, only five nations have fully launched their CBDCs: the Bahamas, Grenada, Saint Kitts and Nevis, Antigua and Barbuda, and Saint Lucia.

The eNaira: Nigeria’s Digital Currency

The newly introduced virtual currency, named the eNaira, is both supported and issued by the Central Bank of Nigeria (CBN).

Similar to many governments, Nigeria is implementing a virtual currency due to its cost-effectiveness compared to physical cash. It also aims to improve financial access for the unbanked population and potentially reduce illegal financial activities.

Concerns Regarding Government Surveillance

Despite the benefits associated with central bank-issued digital currencies, concerns exist regarding their potential misuse by governments. Specifically, there are worries about how these currencies could be utilized for surveillance purposes by regimes with a history of monitoring their citizens.

An Overview of the eNaira

Prior to the initial rollout, the Central Bank of Nigeria (CBN) selected Bitt Inc., a company based in Barbados, in August to oversee the development and implementation of this digital currency.

Bitt Inc. possesses relevant experience, having previously supported the Eastern Caribbean Currency Union (ECCU) in the creation and launch of DCash.

DCash is the digital currency currently utilized by Antigua and Barbuda, Grenada, Saint Kitts and Nevis, and Saint Lucia – representing four of the five nations that have fully implemented their own Central Bank Digital Currencies (CBDCs).

On September 27th, the CBN unveiled the official eNaira website, providing comprehensive details regarding access and usage for Nigerian citizens.

Initial access will require downloading the eNaira mobile application from either the Apple Store or the Play Store.

Alternatively, users can utilize a QR code available on the website to gain access to the service.

Following registration, users are required to establish a digital wallet – known as the Speed Wallet – for the purpose of storing, transmitting, and receiving funds.

The platform offers multiple wallet tiers, designed to accommodate a diverse range of users, including those with and without traditional bank accounts, and varying levels of identification.

Four key features of the eNaira are highlighted on the website:

• A unified payment system enabling transfers from the eNaira wallet.
• Bank account management tools for balance checks and transaction history review.
• A contactless payment option allowing for in-store purchases via QR code scanning.
• Peer-to-peer (P2P) payments, facilitating money transfers between users through linked bank accounts or cards.

P2P payments allow for direct transfers between individuals.

The system supports transactions linked to a user’s existing bank account or card.

The Shift from Cryptocurrency to Central Bank Digital Currencies (CBDCs)

Cryptocurrencies, such as bitcoin, demonstrate the possibilities of a digital monetary future, despite originating outside the established global banking infrastructure. Their increasing adoption has instigated competition with traditional financial institutions regarding the evolution of money.

Criticism of cryptocurrencies generally centers on issues of potential fraud and price instability. However, this hasn’t prevented nations like El Salvador from recognizing bitcoin as legal tender. For countries perceiving bitcoin and similar digital assets as a risk to their national financial systems, CBDCs present themselves as a direct alternative to growing interest in non-fiat currencies.

“Central banks now view CBDCs as essential. Money serves as a mechanism for governance. They are unwilling to permit the primary instrument of control to diminish, as the emergence of privately issued cryptocurrencies like bitcoin and Ethereum directly challenges the authority of central banks globally. CBDCs are their response, though perhaps not a robust one,” explained Chimezie Chuta, founder and coordinator of Blockchain Nigeria User Group, in an interview with TechCrunch.

While cryptocurrencies operate with considerable independence, digital currencies issued by central banks maintain equivalent value to their physical counterparts. In Nigeria, for example, the eNaira will be valued in relation to the naira, experiencing fluctuations against the U.S. dollar, mirroring the naira’s own exchange rate behavior.

A key distinction between CBDCs and cryptocurrencies lies in the fact that the former are subject to regulatory oversight and governmental control – a common characteristic of policies in countries like China and Nigeria.

China has been developing a national digital currency, the digital yuan, since 2014. This initiative is spearheaded by the People’s Bank of China (PBOC), following a 2013 prohibition on banks and payment firms offering services related to bitcoin and other cryptocurrencies.

In 2017, China further restricted activities by banning cryptocurrency mining, initial coin offerings (ICOs), and the operation of trading platforms facilitating conversions between legal tender and cryptocurrencies.

Despite these prohibitions, both bitcoin and other cryptocurrencies have experienced considerable growth within China. Consequently, stricter regulations were implemented this May, preventing fintech companies from providing services related to account creation, registration, trading, clearing, and settlement for crypto platforms.

Previously, China’s restrictions focused solely on domestic crypto platforms and did not prevent individuals from holding cryptocurrencies on offshore exchanges.

However, this changed last month when the Chinese government declared all transactions involving cryptocurrencies – including mining – illegal. It also prohibited offshore crypto exchanges, such as Binance, from serving customers within mainland China.

“While not unexpected, given China’s past ‘bans’ on crypto, this time the stance is unequivocal,” stated Henri Arslanian, PwC’s crypto leader, via Twitter. “All crypto transactions and crypto services are prohibited in China. There is no room for debate, no ambiguity.”

Some analysts suggest that these bans and restrictions imposed by China are intended to pave the way for the full launch of the digital yuan in 2022. This is a plausible interpretation, despite the Chinese government’s stated rationale that the digital yuan was introduced to replace some physical cash in circulation, particularly in a nation where WeChat and Alipay handle eighty percent of all digital payments.

Concerns Regarding Increased Crypto Regulation and Surveillance

The People's Bank of China (PBOC), alongside governmental bodies, may be aiming to recapture a portion of the online payments market currently dominated by Alipay and WeChat. This effort centers around the digital yuan, with initial trials and implementation beginning in April 2020 across cities like Shanghai, Chengdu, and Beijing.

Similar to the eNaira, access to the digital yuan is exclusively granted through a mobile application developed and managed by the central bank. To date, over 7 million individual digital wallets and 1 million business wallets are in use. Trial transactions have totaled $5.3 billion, as reported by Business Insider.

Nigeria's Crypto Usage Despite Restrictions

Despite not being a significant nation for cryptocurrency mining, Nigeria exhibits remarkably high levels of crypto adoption. Paxful data indicates that Nigeria ranks second only to the United States in terms of Bitcoin trading volume, with many citizens utilizing cryptocurrency as a safeguard against the devaluation of the naira.

In May, traceable cryptocurrency transactions in Nigeria reached $2.4 billion, according to Chainalysis. This substantial figure is particularly noteworthy considering the Central Bank of Nigeria (CBN) imposed a ban on cryptocurrency transactions in February, prohibiting financial institutions from facilitating such activities and mandating the closure of related accounts.

Digital Currencies: A Parallel Development

Mirroring China’s approach, Nigeria subsequently initiated a pilot program for its own digital currency. However, unlike China, Nigeria is predominantly a cash-based economy. This characteristic, alongside the potential for enhanced financial inclusion, is a key factor driving the rollout of digital currencies in smaller nations like the Bahamas.

Introducing a digital currency in Nigeria appears logical in theory. Nevertheless, many Nigerians express skepticism regarding its practicality, while others suspect it is a governmental strategy to discourage cryptocurrency usage.

Further concerns arise regarding potential surveillance and a comprehensive crackdown on crypto activities within the country.

The Potential for Increased Monitoring with CBDCs

Governments typically employ Financial Intelligence Units to oversee financial transactions and identify suspicious monetary activity. However, Central Bank Digital Currencies (CBDCs) could significantly amplify these capabilities.

The CBN shares this objective, previously stating that the eNaira will reduce fraudulent activities and money laundering due to the “trackable unique ID of each eNaira.”

Chuta explained, “Banks and telecommunications companies already possess our essential information through verification procedures. But CBDCs will intensify monitoring and surveillance, enabling them to trace money flow in a digital environment and conduct forensic analysis of each user’s transactions on the ledger.”

Surveillance Infrastructure and Potential Crackdowns

Reports surfaced in June indicating that Nigeria was engaging in discussions with China regarding the construction of an internet firewall. China’s “Great Firewall” serves as the foundation for the government’s online censorship and surveillance operations.

While Nigeria may lack the resources to replicate such a firewall, some speculate that the eNaira could be designed for similar purposes, albeit on a smaller scale.

A crypto user, requesting anonymity, told TechCrunch, “CBDCs are trackable, and I believe it could be useful for the government if they decide to implement unwarranted surveillance.”

Furthermore, increased crypto restrictions could be enacted if the adoption of the eNaira falls short of expectations or if the government attempts to establish it as the exclusive digital currency for transactions within the country.

For example, recent directives from China led Huobi and Binance, two of the world’s largest cryptocurrency exchanges, to suspend new user registrations, with Huobi planning to retire existing accounts by year-end.

Potential Restrictions on Crypto Platforms

It remains uncertain whether the Nigerian government can exert similar control. However, a successful ban on offshore crypto platforms servicing Nigerian users would severely impact peer-to-peer activities, which have been instrumental in the growth of cryptocurrency within Nigeria.

A growth lead at a Nigerian cryptocurrency exchange platform stated, “The government, in general, presents a threat to crypto. These are the situations where someone with real-world authority can imprison you for trading crypto. If a government genuinely decides to prohibit crypto use within its borders, crypto would be stifled to the point where it might become pointless.”

Stated Intentions and Potential Benefits of the eNaira

Currently, both Nigeria and its central bank appear to have positive intentions regarding the eNaira. CBN Governor Godwin Emefiele asserts that the eNaira will facilitate cheaper and faster remittance inflows and boost cross-border trade.

The eNaira is projected to offer a superior alternative for Nigerians in the diaspora to remit funds, potentially increasing remittances to the country, which reached $17 billion last year.

Recent news highlighted expanding operations of Chinese banks in Nigeria, which could be crucial for enhancing cross-border trade between the two nations. China is Nigeria’s largest trading partner, with transaction volumes exceeding $20 billion this year, up from $19.2 billion in 2020. A currency swap agreement was previously explored three years ago, but ultimately unsuccessful. Chuta believes that the countries’ digital currencies could serve as effective substitutes.

According to Nigeria’s central bank, the eNaira will also improve “payment efficiency, revenue and tax collection, and targeted social interventions.”

Challenges and Uncertainties

Whether Nigeria’s central bank will achieve these goals remains to be seen, as no country, in either pilot or full implementation, has yet achieved widespread success. The eNaira’s phased rollout is planned across four cities: Port Harcourt, Abuja, Kano, and Lagos.

However, considering the historical performance of similar government-led initiatives, the likelihood of a complete rollout appears limited.