What CBN’s digital currency could mean—transparency vs surveillance

Earlier this week, the governor of Nigeria’s Central Bank—Godwin Emefiele, announced the regulator’s plan to float a digital currency called the eNaira.

In a story by Premium Times, the governor of Nigeria’s apex financial body was reported to have said that the Central Bank had set up a committee to look into the creation of a digital currency.

“We are committed in the CBN and I can assure everybody that digital currency will come to life even in Nigeria" - Godwin Emefiele, CBN Governor

As expected, different reactions have trailed the announcement.

But what does it mean considering the CBN’s recent stance towards cryptocurrencies?

What will a digital currency from the CBN look like?

While there isn’t yet information on how the CBN’s digital currency will work, it is not a new phenomenon. Central Bank Digital Currencies (CBDC) are a growing trend worldwide. They are part of different central banks’ responses to the explosive influence of cryptocurrency.

So far, China, South Korea, Singapore, Sweden, The Bahamas, and The European Union have either hinted at or piloted some form of CBDC. China has made the most progress with CBDCs with extensive pilots in major cities like Shenzen, Chengdu, and Suzhou. So far, China’s CBDC offers the best indication of how a Nigerian CBDC may look like.

Here are some of the things to expect with the eNaira:

• Blockchain-based: Any CBDC issued by the Central Bank is likely to be blockchain-based, albeit with a twist. CBDCs are typically built using Distributed Ledger Technology (DLT). A blockchain itself is a kind of DLT used to record transactions.
  
  However, where Bitcoin’s blockchain is permissionless i.e. editable by anyone without permissions, most DLTs used for Central Bank Digital Coins require permissions from a central body e.g. a central bank, before they can be edited. These kinds of DLTs are sometimes called a permissioned blockchain.
• Centralisation: Following on from CBDCs being based on a permissioned blockchain system, the central bank is likely to be the controlling body of the digital currency.
  
  Considering that one of the concerns of the CBN about cryptocurrency was the lack of control, it is almost certain that control of the digital currency will be vested within the four walls of the regulators compound. This is a source of concern for many crypto enthusiasts who cite that centralisation is a weakness of the current global financial system.
• Stability: Another certainty is that the value of the eNaira is going to be tied to the naira. The digital yuan, which was trialed in China, is a like for like replacement with the yuan i.e. one digital yuan is equal to one physical yuan.
  
  If a similar system is implemented in Nigeria, expect the eNaira to track the naira. This can be both a good or bad thing. On one hand, it allows people to own, move and possibly use the digital naira across borders. On the other hand, the digital currency will be subject to the same devaluation and inflation that the naira suffers.
• Bank involvement: In the cities where China has trialed the digital yuan, the government has used two methods to push it into circulation. Lotteries were used to gift some citizens digital yuans in hopes they would spend it. However, the second, and perhaps most important way for concerned onlookers was through traditional banks. Users could exchange their physical yuan for digital yuans at banks.
  
  Two things are certain: one, Nigeria’s central bank will need distribution outlets when the eNaira is finally ready. Two, Nigerian banks will do everything in their power to ensure they are the distribution outlets for the digital currency.
• Trackability: Perhaps the most concerning part of a CBDC for most critics is that they are usually trackable. The blockchains built for CBDCs are not usually hashed i.e. encrypted, which means that all activities on them are trackable.
  
  This feature is perhaps the biggest distinction that this currency will have from mainstream cryptocurrencies. Chinese authorities insist that their digital currencies are pseudonymous but can be tracked in cases of fraud or if they are used for nefarious purposes.

How will a Nigerian CBDC affect local crypto companies

Inside information reaching Benjamindada.com revealed that the CBN had tapped up some of the country’s crypto companies and experts to help with the initiative. While this might appear like a hostage situation of sorts, it may also offer crypto companies a way back into the mainstream financial sector.

Following the crypto ban of February 2020, crypto companies have been unable to directly transact with the local financial ecosystem. Startups have had to devise ingenious, and sometimes complicated means to allow customers to buy and trade cryptocurrencies. Some of those methods appear to increase the already-high bar of entry for newbies looking to partake in the crypto landscape.

CBDCs will likely offer a way for these crypto companies to re-integrate into the financial ecosystem. While the companies may not be able to make direct debits from financial institutions, the digital currency is likely to be easily integrable into their current systems. This will make the digital currency the ideal choice for on- and off-ramp activities on these exchanges.

A probable scenario works like this:

“Sharon buys digital naira from her bank. She uses the digital naira to purchase some bitcoin via Luno—which has now integrated the digital naira into its product. When she needs to sell her bitcoin for cash, she is paid in this digital naira.

Sharon has been able to complete on-ramp (purchase), and off-ramp (selling) activities on the exchange due to the digital naira.”

However, all is not as rosy as described. As mentioned earlier, the trackability of CBDCs mean that the CBN, banks and any other party with access can see how much Sharon has paid, and how much she has withdrawn. They may choose to impose taxes or other levies on Sharon based on her transaction history.

This brings the question of transparency vs surveillance. Yes, people should pay taxes and levies, but should all their financial transactions be monitored by the state?

Parting thoughts

The Central Bank’s announcement of its plans for a digital currency are not to be seen as a sign of immediate progress. CBDCs often take very long to create and test. China’s digital yuan has been in the pipeline since 2014 (7 years now ) and is yet to be fully rolled out. A digital naira, if it ever materialises, will likely come after the current CBN governor’s tenure ends in 2024.

If it does launch, a digital naira is poised to significantly change the nature of our financial ecosystem. One CEO at a local crypto company believes the digital naira may have some significant advantages. “A digital naira will help us improve transparency in government spending. We can easily track what money went where and who used it for what. It also provides us with more liquidity and may even increase financial inclusion.” he said to Benjamindada.com

However, it is important to note that in a machiavellian society like Nigeria, these so-called advantages may be enough reason for the ruling class to block a digital currency from ever coming to be.

This knowledge is perhaps what influenced the stance of another crypto company's CEO towards the CBN’s proposed digital currency. Choosing to be anonymous, he said to Benjamindada.com “My general opposition to it is increased centralization and obviously ‘don’t trust the government’.”

In conclusion, whether a digital currency will be positive or negative for Nigerians remains squarely in the hands of those tasked with managing it—the Central Bank, and the Government.

You can find the proposal for the eNaira themed "Project Giant" here.