Posted By Godwin Onyemaechi
The undoubted groundswell of support for the introduction of digital currency by the Central Bank of Nigeria (CBN) after many years of dithering has been greeted with loud applause by stakeholders who agree that it’s an idea whose time has come, reports Ibrahim Apekhade Yusuf
To recapitulate the prophetic words of Victor Hugo, the great poet and novelist, you cannot stop an idea whose time has come.
There is a sense in which the tacit support being given by the apex regulator of the deposit money banks, the Central Bank of Nigeria (CBN) for the introduction of digital currency into the nation’s financial ecosystem has been considered the right step in the right direction.
Enter Nigeria’s digital currency
Although virtual currency has boomed in the country in the last five years, the CBN proposal to officially introduce digital currency into the country has been considered as a late-blooming interest still.
Giving what is tantamount to a tacit support of digital currency, the Director-Information Technology Department, Central Bank of Nigeria, Mrs Rakiyat Mohammed, said that the banking regulator will launch a digital currency before the end of 2021.
Muhammed disclosed this during a press briefing on the Bankers’ Committee meeting last Thursday.
According to her, the CBN will be making special announcement and possibly launching a pilot scheme in order to be able to be able to provide this kind of currency to its populace.
She said about 80 per cent of central banks in the world were exploring the possibility of issuing central bank digital currency and Nigeria could not be left behind.
For over two years now, she added, the CBN had been exploring technology and had made tremendous progress.
Explaining what the Central Bank digital currency would be, she said there were currently two forms of money in the country.
She added, “We have in two forms in Nigeria as of now, there are the notes and there are the coins.
“So the Central Bank currency is to be the third form of money which means just as we have electronic money, digital money is not new in Nigeria.
“Just as we are about the third or fifth in the whole world as far as advancement in the use of digital money is concerned. So this is going to compliment the coins and cash that we have.
“The Central Bank digital currency will just be as good as you having cash in your pocket and even as you have the cash in your pocket, you are going to have the cash on your phone.”
She said the CBN was looking at different use cases such as remittances.
The director said, “We all know how money has to travel for someone to send money from Nigeria to abroad and it is a huge money in Africa.
“We also know that recent report by EfiNA was that our target was to achieve 80 per cent financial inclusion. We are about 60 per cent and at the rate at which we are going, we are not going to meet this target. “Central Bank digital currency will accelerate our ability to meet this target.”
Days of clampdown
It may be recalled that the CBN had last year issued a circular asking commercial banks and other financial institutions to close accounts transacting in, or operating on, cryptocurrency exchanges. All deals involving cryptocurrency are now “prohibited” with “severe regulatory sanctions” awaiting erring outfi
The CBN also asked banks to identify “persons and or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately.”
The circular follows a 2017 warning issued by the bank against the use of cryptocurrencies.
While the directive didn’t explicitly void the legality of virtual currencies, it went a step further than the 2017 guidance, by making trading them in Nigeria basically impossible. While the 2017 note prohibited banks from doing crypto deals, it did allow them to have exchanges as customers, provided they met certain requirements. Language in the latest guidance appears to make dealing on any exchanges illegal.
Modest success despite opposition to digital currency
However, the bank’s position since 2017 did not stop the meteoric rise of cryptocurrency in the country. By some estimates, Nigerians have traded over $500 million in bitcoin in the last five years, making it the second largest bitcoin market after the US.
“CBN’s move likely reflects an attempt to get remittance dollars to flow back into the official channels to support the exchange rate,” one economist who requested not to be named.
Unlike traditional currencies, crypto is not subject to monetary policy, and like several central banks around the world, the CBN has taken aim at the currency’s volatility and opaqueness. These criticisms are not without merit: crypto has been used to facilitate fraudulent and questionable activities, including a 2017 Ponzi scheme in which an estimated 3 million Nigerians lost 18 billion naira ($47 million).
However, moves to have it regulated have been protracted. Some African countries like Algeria, Morocco, and Libya have laws prohibiting cryptocurrency outright. South Africa, on the other hand, is proposing new regulations that protect its citizens from frauds using the platforms.
Nigerians upbeat about digital currency
In the view of financial pundits, crypto’s instability notwithstanding, it provides a worthwhile hedge for Nigerian investors, considering the country’s uncertain monetary policy, currency fluctuations, and recent collapse in oil prices.
According to Tunde Ogundipe, “The fact that digital currencies are protected from inflation, capital controls, or exchange rate depreciation has seen many Nigerians turn to them for financial trades such as cross-border remittances and e-commerce. Startups have sprung up to facilitate these trades.”
A financial planning expert, Mr Kalu Aja, said floating a digital currency could help boost remittances into the country.
“A central bank’s digital coin is a stable coin, which means it is backed by dollar reserves. If the CBN allows Nigerians offshore to remit using a CBN stable coin, it will create a vibrant secondary market for digital naira,” he said.
When asked if Nigeria was ready for a digital currency he said, “Yes Nigeria is ready. The Nigerian bank payment system is amongst the best in the world.”
The Chief Executive Officer of KoinWa, a cryptocurrency platform, Hakeem Disu, believes this move would strengthen the naira and revolutionise the country’s financial industry.
He said, “Digital currency is basically about strength in numbers. Nigeria just needs to position itself in the cryptocurrency space ahead of other countries, considering the fact that the nation is the second-largest bitcoin hub in the world, according to data from last year.
“And another thing is CBN needs to work with the people already in the space, especially the ones in exchanges as they are well-grounded in blockchain technology. It is an extraordinary move that might help banking cut down on operational costs.”
The Head of Economics Department, Pan-Atlantic University Lagos, Dr Olalekan Aworinde, said, “When you have a digital currency in place, the implication is we would use less of the naira, particularly because of improved financial transactions. If people do not demand the naira, its value is likely to reduce.
“Also, if we adopt a digital currency, it will affect the total money in circulation. A narrow money supply occurs. When the demand for the naira is more than its supply, the value of the naira would rise. But inflation is not our friend, it is on the increase all the time. So, we cannot easily gauge if the value of the naira would improve because of this.”
He added that if the CBN were to float a digital currency, it would be a step in the right direction.
Aworinde said, “When ATMs were first introduced, it was met with great scepticism. But now, nearly every household has an ATM card. People do not carry as much cash as they used to before. It also created jobs for some people. Although for this to be seamless, the government will have to increase its investment in cybersecurity.”
Many central banks unable to issue digital currency – IMF
Meanwhile, the International Monetary Fund has said close to 80 per cent of the world’s central banks are either not allowed to issue a digital currency under their existing laws, or the legal framework is not clear.
A recent survey conducted by the organisation reviewing the central bank laws of 174 IMF members found that most central banks could issue only physical cash, with only about 40 countries being legally allowed to issue digital currencies.
The research report said, “Law does not limit issuance to bank notes and coins for 40 central banks, 23 per cent. Law is not clear for 27 central banks, 16 per cent and law only authorises issuance of bank notes and coins for 104 central banks, which is 61 per cent.”
The financial body noted that although countries were suggested to be moving fast toward creating digital currencies, majority of such countries did not have legal structures supporting the establishment of cryptocurrencies, or in some cases, permitting their development.
The fund explained that this was not just a legal technicality. It said any money issuance was a form of debt for the central bank, so it had to have a solid basis to avoid legal, financial and reputational risks for the institutions.
The global financial body said, “Without the legal tender designation, achieving full currency status could be equally challenging. Still, many means of payments widely used in advanced economies are neither legal tender nor currency, such as commercial book money.
“The overlapping of these and other design features can create very complex legal challenges and could well influence the decisions made by each monetary authority.”
The IMF concluded that the creation of central bank digital currencies would also raise legal issues in many other areas, including tax, property, contracts, and insolvency laws; payments systems; privacy and data protection; most fundamentally, preventing money laundering and terrorism financing.