The eNaira has moved into its second phase with indications it is gaining wider acceptance. Central Bank of Nigeria (CBN) is driving the process, with a firm charge to the team implementing the initiative to make the country proud. Assistant Editor NDUKA CHIEJINA reports on the birth of eNaira as well as the benefits and possible risks involved in using eNaira for business transactions.
The Central Bank of Nigeria (CBN) officially launched the eNaira – a Central Bank Digital Currency (CBDC) – on October 25, 2021. It is the second CBDC fully open to the public after the Bahamas.
Like coins or cash, the eNaira is a liability of the CBN. The eNaira uses the same blockchain technology as the Bitcoin or Ethereum and can be stored in digital wallets used for payment transactions like the other two. It can be transferred digitally and at virtually no cost to anyone in the world with an eNaira wallet. Unlike the Bitcoin or Ethereum, the eNaira has been incorporated with stringent access right controls by the CBN. The eNaira is also not a financial asset in itself, but a digital form of a national currency that draws its value from the physical naira, to which it is pegged at parity.
The eNaira has been described as “a historic game-changer designed to open a new world of innovations, especially for people in the rural areas, who are at the bottom of the banking pyramid.” Giving the desire to make the eNaira available to the rural populace, the CBN Governor, Mr Godwin Emefiele, described the eNaira, as “a people-oriented and audience-centric digital currency with a face. Specifically, the eNaira seeks to evolve a fast, cheap, reliable and available payment channel.”
Deputy Governor, Economic Policy of the CBN, Dr Kingsley Obiora, who anchors the eNaira initiative at the CBN, said Nigeria is seeing a decline in the use of cash. “The minting of currencies in the CBN has been reducing in the last couple of years. There has also been an explosion in electronic business and e-business and we have seen the value of e-business grow from N393 billion in 2014 to about N2.4 trillion now.”
With the movement to e-business, Obiora said “the central banks in the world are responding to yearnings of citizens, which is why citizens in 96 per cent of central banks in the world are either working on digital currencies or they have done so already.”
Benefits of eNaira
At the launch of the eNaira in 2021, the CBN projected that the eNaira will bring multiple benefits that will manifest as the eNaira becomes more widespread and is supported by a robust regulatory system. The expected benefits of eNaira include the following: increase in financial inclusion. Its coverage is expected to expand to anyone with a mobile phone, even if they do not have a bank account. 38 million people; 36 percent of the adult population do not have bank accounts, and allowing those of them with a mobile phone to have access to the eNaira would increase financial inclusion and facilitate more direct and effective implementation of social transfers programmes. The CBN believes that the move would enable up to 90 per cent of population to use the eNaira.
Another expected benefit of eNaira is the facilitation of remittances. Remittances are usually made through international money transfer operators (e.g., Western Union) with fees ranging from 1 per cent to 5 per cent of the value of the transaction. The eNaira is expected to lower remittance transfer costs, making it easier for the Nigerians in the diaspora to remit funds to Nigeria by obtaining eNaira from international money transfer operators and transferring them to recipients in Nigeria by wallet-to-wallet transfers free of charge. Exchange rate reforms, including a unified market-clearing rate, that reduce the gap between official and parallel market exchange rates would enhance the incentives for using eNaira wallets to send remittances.
Reduced informality is another benefit that can be derived from the introduction of Naira. With over half of the nation’s GDP and 80 percent of employment Nigeria’s informal sector is huge. Once the eNaira becomes more widespread and embedded into the economy, it will bring greater transparency to informal payments and strengthen the tax base. Informal and formal businesses may also benefit if eNaira adoption enhances consumption through greater financial inclusion.
Some potential risks
The International Monetary Fund (IMF), in analysing the eNaira, said the digital currency “carries risks for monetary policy implementation, cyber security, operational resilience, and financial integrity and stability. For example, eNaira wallets may be perceived, or even effectively function as a deposit at the central bank, which may reduce demand for deposits in commercial banks.” Since the eNaira relies on digital technology, the IMF has urged the CBN “to manage cyber security and operational risks associated with the eNaira.”
On the part of the CBN, the transfer of funds from bank deposits to eNaira wallets is subject to daily transactions and balance limits “to mitigate risks of diminishing the roles of banks and other financial institutions. Financial integrity risks, such as those arising from the potential use of the eNaira for money laundering, are mitigated by using a two tiered identity verification system and applying more stringent controls to relatively less verified users.”
For example, only people with a Bank Verification Number can open a wallet, but over time coverage will be expanded to people with registered SIM cards and to those with mobile phones but no ID numbers. The latter categories of holders would be subject to tighter transactions and balance limits. Even so, wallet holders who meet the highest identity verification standards cannot hold more than 5 million naira each in their eNaira wallets. To address cyber security risk, regular IT security assessments are expected to be conducted.
The IMF has also warned about the potential expansion of the use of the eNaira for cross-border fund transfers and agency bank networks, which could lead to new money-laundering and terrorism financing risks.
There are also worries about personal privacy on CBDCs, especially with account/identity of connected ones like the e-Naira, in the same way they have been raised on BigTech corporations. Stakeholders have noted that the e-Naira will expose more people, especially illiterates in the rural areas, to the risk of stolen passwords, hacked accounts, Internet banking frauds, etc.
The cyber security concerns are against the backdrop of a recently-released report, which showed that cybercrime will cost the world $10.5 trillion annual damage by 2025. In 2020 alone, the global loss from hacking and cybercrimes increased by nearly $1 trillion and tech experts say strategic efforts must be made to ensure the eNaira does not add to the crisis. As such, there are calls for investments in cyber security or partnership with the right stakeholders to protect the eNaira and ensure users enjoy its offerings
However, experts insist that creating the eNaira on the blockchain technology means you cannot have a duplicate or fake eNaira, as each eNaira note will be unique. To ensure security of funds, the eNaira is expected to have two-factor authentication and other measures.
Nigerians can link the e-wallet to their bank account or adopt the pay-as-you-go option with a prepaid option and a promise of an embedded security token system that makes information unreadable to fraudsters. In a nutshell, the eNaira is a critical national infrastructure fortified with comprehensive security and intelligence systems.
However, the IMF has offered to help with technical assistance and policy advice, stressing that “the IMF’s Monetary and Capital Markets Department has been involved in the eNaira rollout process, including by providing reviews of the product design. The 2021 IMF Article IV mission emphasized the need for monitoring risks and macro-financial impacts associated with a Central Bank Digital Currency (CBDC).”
The IMF said it is “ready to collaborate with the authorities on data analysis, cross-country studies, sharing the eNaira experience with other countries, and discussing further evolution of the eNaira including its design, regulatory framework, and other aspects.”
eNaira and the ordinary Nigerian
The eNaira functions effectively with the “e-wallet” because it is the fulcrum on which all transactions of the digital currency stands. Without the e-wallet, the eNaira functionalities are useless to intending users.
Those who want to use the eNaira must first visit their banks to register and have the e-wallet. Those in the rural areas can visit their nearest banks to register. Users can pay money from a created e-wallet (pair-to-pair), with eNaira as long as they have Near Field Communication (NFC), wifi, and bluetooth. It attracted zero transaction cost for the first 90 days after the launch. Payment is done through phone to phone transfer that is safe and secure. The initial zero charges also applied when users send money from their wallets to bank accounts and made withdrawals at agent or merchant locations.
Cash can be transferred to the eNaira and vice versa and since it is powered by blockchain technology, transactions on this platform enjoy some level of security such that even if one’s phone is stolen, the transaction is safe. Users can also transfer funds from their regular accounts to their eNaira. For instance, if you have N100,000 in your bank account, you can transfer N30,000 to your eNaira and be left with N70,000. If you owned no bank account hitherto, you can walk into a bank and use your cash to open an eNaira account and transact your business, rather than moving about with cash with all the concomitant risks.
The eNaira’s low transaction cost is considered a great attraction for traders since they will pay no fees for withdrawals and deposits to and from their bank account, and of course no transaction fees reduces the cost of commerce.
With zero usage of coins in Nigeria, most traders round up their prices to save everybody the stress of looking for’ change’ and the discomfort of carrying heavy metals in one’s pocket as money. By rounding up prices, business owners induce an artificial rise in prices. For example, a can of milk that ought to go for N76.43k will be sold for N100 instead. With the e-Naira, it becomes possible to transfer the exact cash price in the marketplace, especially in rural areas where every kobo means a lot. According to the CBN, “this reduces the possibility of round-up inflation.”
Expectations as Phase 11 is launched
On the 18th of August 2022, the CBN activated the second phase of the eNaira initiative during the eNaira Hackathon competition. Emefiele disclosed that Nigerians will be able to open an eNaira wallet and conduct transactions by simply using a designated Unstructured Supplementary Service Data (USSD) code on any phone. To carry out these activities, Nigerians will only have to dial *997# from their phones.
He revealed that within a short space of time, “both merchants and consumers with bank accounts can use the NIBSS Instant Payment (NIP) to transfer and receive eNaira to any bank account. This will further deepen the integration of the eNaira with the existing national payment infrastructure.”
The CBN Governor reiterated his “promise to increase the level of financial inclusion in the country because just like the Naira, the eNaira is expected to be accessible to all Nigerians and would provide more possibilities to bring in the unbanked into the digital economy.” He added that the “innovative products and services built on the eNaira would enhance Nigerians’ participation in the digital economy and promote further development of a burgeoning Fintech ecosystem.”
The second phase of the eNaira project, Emefiele said, “has begun and is intended to drive financial inclusion by on-boarding unbanked and underserved users leveraging offline channels. Hence, greater success is envisioned for the project with phase two expected to deliver more gains with a target of about 8,000,000 active users based on estimations using the diffusion of innovation model.”
Since the introduction of eNaira in 2021, there have been 840,000 downloads, with about 270,000 active wallets comprising over 252,000 consumer wallets and 17,000 merchant wallets. In addition, volume and value of transactions on the platform have exceeded 200,000 and N4.0 billion, respectively. Emefiele has not disguised his passion for the eNaira and he has pushed the team working on the project to deliver a world-class digital currency that will cement his legacy as CBN governor. The Hackathon, he said, “is an initiative that creates a collaborative environment for experts with a diverse set of skills to drive sustained innovation geared towards making the eNaira the pinnacle for digital financial services and the gateway to the digital economy.”
It is intended to find solutions that would drive financial inclusion, SME growth and the creation of start-ups; facilitate cross border trades and transfers as well as international remittances and FX exchanges; effective implementation of welfare-inclined government programmes; and enhance efficiency in the interbank market. The Hackathon is targeted at providing an engagement with critical stakeholders in the financial technology space to deepen the link between eNaira and Fintechs.
“The eNaira hackathon recorded a sizeable interest from young and innovative Nigerians with a total of 4,667 registrations, comprising 4,082 male and 582 female applicants. This further corroborates the fact that Nigerians, both within and outside the country, possess innovative ideas and are willing and ready to leverage on exciting opportunities that the eNaira presents for enhancing digital financial services and contributing to national development,” Emefiele said.
The CBN governor expressed confidence that the Hackathon will unravel “a pool of talents that would fuel the transformation of Nigeria into a world-class digital economy and beyond. From an initial cohort of over 105 groups that made the quarter finals and 75 teams that progressed to the semi-finals, the Hackathon reached its climax with 20 teams in the finals.
What experts are saying
The Managing Director of First Bank Nigeria, Dr Adesola Adedutan, said “there are significant differences between CBDCs and cryptocurrencies. CBDC provides a platform for the governments to leverage blockchain technology to maintain a centralised and institutional role over the currency.”
Daniel Awe, Group Head, Africa Fintech Foundry, said the CBN has transformed from a traditional regulator to a smart regulator. The eNaira Hackathon, he said, “is a platform that brings entrepreneurs, coders, product managers to solve problems and build new business models.” He stated that “all over the world, there has been disagreement between innovators and regulators because regulators usually look at the impact on financial stability as well as impact of those innovators on consumers as well as the risk while the innovators look at the opportunity in their ideas.”