Analysing CBN’s Digital Currency, Economic Implications

Analysing CBN’s Digital Currency, Economic Implications

Mariam Sanni

In the last decade, the emergence of digital currencies has brought transformation in the global financial ecosystem. Cryptocurrencies like Bitcoin and Ethereum have seen a massive rise in popularity as an alternative to fiat currencies leading to unprecedented growth in adoption all over the world.

The rapid rise of cryptocurrencies triggered hostile reactions and responses from regulatory bodies across the globe. Many governments see this rise as a threat to their national currency and have been actively against its use. They warn that the use of cryptocurrencies may lead to monetary and financial instability.

However, recent development shows that central banks around the world have begun exploring ways in which they can leverage digital currency for maximum returns. According to a survey by the Bank for International Settlements, BIS, about 80% of the central banks surveyed are exploring the idea of creating their own Central Bank Digital Currency, CBDC.

Interestingly, Nigeria is set to follow suit as we learned that the Nigerian government is working on its own digital currency. This was disclosed by a top government official at the recently concluded virtual bankers’ committee meeting.

The Central Bank of Nigeria, CBN, could be trialing a digital currency as early as October.

Rakiya Mohammed, the bank’s director of information technology, said the pilot will begin Oct. 1 during a webinar on Thursday, according to someone who took part and asked to remain anonymous because the meeting was private. The meeting was reported earlier by Nigerian financial news publication Nairametrics. Olumide Adesina, the author of the Nairametrics article, told CoinDesk that according to his sources, Mohammed herself had called the virtual meeting to discuss the initiative.

According to the report, the Central Bank of Nigeria, CBN, has been experimenting with CBDCs for the past two years and has made significant progress on the front. The apex bank is hoping to launch its digital currency before the end of the year and will engage the knowledge of industry experts to pilot the scheme

According to the BIS, CBDCs are a new form of digital money that has the same functionality as traditional fiat. How are they different from cryptocurrencies? Are CBDCs any different from existing cryptocurrencies? Should you still buy Bitcoin or not? These are the common questions looming on the minds of Nigerians.

Although CBDCs and cryptocurrencies are both digital currencies, there are specific differences between them.

Unlike cryptocurrencies such as Bitcoin, CBDCs are centralized, regulated, and backed by the government regulatory body (the central bank). This is against the decentralized nature of Bitcoin and other cryptos. Also, CBDCs may or may not utilize blockchain technology, depending on the frameworks used to implement the assets.

Cryptocurrencies such as Bitcoin and Ethereum rely on the underlying Blockchain technology to verify transactions. Furthermore, CBDCs are controlled by the central banks and as such, all transactions facilitated can be monitored and traced.

In contrast, anyone can buy Bitcoin without being tracked. Usually, the central banks will also peg CBDC to their existing fiat currency. CBDCs are backed by the country’s monetary reserves thus, offering a stable value in comparison to the wild volatility of cryptocurrencies.

CBDC promises faster, cheaper, and more efficient domestic and cross-border payments. Potential benefits of CBDCs include lower transaction costs, transparency, and easier monitoring of transactions. CBDCs also offer greater security, lower risk of fraud, and increased oversight on fund movement. CBDCs also have the potential to broaden financial inclusion and lower the under banked population.

One of the major reasons the CBN is creating its digital currency is to make remittances easier in the country. Strict foreign exchange policy and exorbitant transaction fees when transferring money in and out of the country have led many Nigerians to find out how to buy bitcoin and use it to facilitate cheap and fast domestic and cross-border transactions.

Also, there has been a decline in cash usage over the past few years due to a gradual loss of confidence in Naira. The COVID-19 pandemic, which caused a global economic downturn significantly weakened the Naira and its purchasing power. This made Nigerians buy bitcoin and altcoins as an alternative to grow and protect their businesses and funds against the local currency. These are some of the factors that made the central bank of Nigeria see the need to extend the use of the national currency by creating its digital form.

The CBN’s digital currency will act complementary to the Naira. It will help the apex bank achieve its public objectives such as safeguarding people’s money, ensuring safe and resilient payment systems and infrastructure while also reinforcing the public trust in Naira. It could help combat economic crimes and frauds as it offers transparency and is difficult to counterfeit.

The CBDC could also aid the unbanked population and help accelerate the central bank’s mission to broaden financial inclusion. It will also help make banking and monetary policy more efficient. For consumers, access to electronic CBDC allows for reliable and low-risk payment solutions. CBDC could help achieve efficient and low-cost transactions eliminating the need for third parties.

Financial officials in Nigeria have been grappling with how best to deal with the rise of crypto currencies in the African nation, which prohibited transactions on crypto currencies in the banking sector in February. A deputy governor of the CBN, Adamu Lamtek, subsequently clarified that crypto trading is not banned in the country, and usage is continuing to grow despite the banking restrictions.

Hyperledger Executive Director Brian Behlendorf told CoinDesk that there has been an increase in use of Hyperledger’s open source blockchain technologies, including Hyperledger Fabric, in central bank digital currency (CBDC) and other currency projects.

“However, since our technologies are all open source, we often don’t know all the ways and places Hyperledger software is being used, especially prior to launch,” Behlendorf said in an email. “If Nigeria’s digital currency project is built on Hyperledger Fabric, that would be welcome news that further validates Fabric as a CBDC platform.”

At the press briefing in June, Mohammed said a digital naira could make remittance transfers easier for Nigerians working abroad. In 2020, Nigeria was one of the top remittance receivers globally. During Thursday’s private meeting, the bank reportedly said a digital currency could improve economic growth, cross-border trade facilitation and financial inclusion among other things, according to Nairametrics.

CBDCs, or state-issued digital fiat currency, are often touted as a way to counter privately issued cryptocurrencies that some argue possess the potential to destabilize a nation’s sovereignty.

The announcement that CBN is creating its digital currency is a welcome development for crypto enthusiasts in the country. This shows the government is looking to tap into the opportunities that are provided by digital currencies. This can potentially enhance crypto adoption and usage rate and subsequently lead to a more favourable regulation policy for cryptocurrencies in the country.

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