Five Observations on Nigeria’s Central Bank Digital Currency
IMF News, November 16, 2021
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- Authors: Jack Ree IMF African Department November
- Published: November 16, 2021
Overview and context
- The Central Bank of Nigeria (CBN) officially launched the “eNaira”—a central bank digital currency (CBDC)—on October 25, 2021.
- This is the second CBDC fully open to the public after the Bahamas.
- Author and date: By Jack Ree, IMF African Department, November 16, 2021.
- The IMF’s Monetary and Capital Markets Department has been involved in the eNaira rollout process, including by providing reviews of the product design.
What is eNaira?
- The eNaira is a liability of the CBN, like coins or cash.
- It uses the same blockchain technology as Bitcoin or Ethereum and is stored in digital wallets.
- It can be used for payment transactions and transferred digitally at virtually no cost to anyone in the world with an eNaira wallet.
- Key differences from crypto-assets:
- The eNaira features stringent access right controls by the central bank.
- The eNaira is not a financial asset in itself but a digital form of a national currency and draws its value from the physical naira, to which it is pegged at parity.
Why did Nigeria introduce eNaira? (expected benefits)
- Increase in financial inclusion:
- For now, the eNaira wallet is provided only to people with bank accounts, but coverage is expected to eventually expand to anyone with a mobile phone even if they do not have a bank account.
- A large number of people do not have bank accounts: 38 million people; 36 percent of the adult population.
- Allowing those with a mobile phone to access the eNaira would increase financial inclusion and facilitate more direct and effective implementation of social transfers programs.
- It is expected that the move would enable up to 90 percent of population to use the eNaira.
- Facilitation of remittances:
- Nigeria’s remittance receipts amounted to $24 billion in 2019.
- Remittance fees via international money transfer operators typically range from 1 percent to 5 percent of the value of the transaction.
- The eNaira is expected to lower remittance transfer costs by enabling wallet-to-wallet transfers free of charge when recipients hold eNaira wallets.
- Exchange rate reforms, including a unified market-clearing rate that reduce the gap between official and parallel market exchange rates, would enhance incentives for using eNaira wallets for remittances.
- Reduced informality:
- Nigeria has a large informal economy, with transactions and employment equivalent, respectively, to over half of GDP and 80 percent of employment.
- The eNaira is account-based and transactions are in principle fully traceable, unlike token-based crypto asset transactions.
- Wider eNaira adoption may bring greater transparency to informal payments and strengthen the tax base.
- Informal and formal businesses may benefit if eNaira adoption enhances consumption through greater financial inclusion.
Potential risks
- Monetary policy implementation risks, including the possibility that eNaira wallets may be perceived, or effectively function, as a deposit at the central bank, which may reduce demand for deposits in commercial banks.
- Cybersecurity and operational resilience risks due to reliance on digital technology.
- Financial integrity and stability risks, including potential use of the eNaira for monetary laundering.
- Need to monitor macro-financial impacts associated with a central bank digital currency.
Measures taken by authorities to mitigate risks
- Limits on transfers from bank deposits to eNaira wallets:
- 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.
- Tiered identity verification and transaction limits:
- Financial integrity risks are mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users.
- For now 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.
- Less-verified categories of holders would be subject to tighter transactions and balance limits.
- Wallet holders who meet the highest identity verification standards cannot hold more than 5 million naira (about $12,200) each in their eNaira wallets.
- Cybersecurity measures:
- Regular IT security assessments are expected to be conducted.
IMF engagement and offers of support
- The IMF remains available to help with technical assistance and policy advice.
- The IMF is ready to collaborate with the authorities on:
- Data analysis
- Cross-country studies
- Sharing the eNaira experience with other countries
- Discussing further evolution of the eNaira including its design, regulatory framework, and other aspects
- The 2021 IMF Article IV mission emphasized the need for monitoring risks and macro-financial impacts associated with a central bank digital currency.
- The IMF’s Monetary and Capital Markets Department has been involved in the eNaira rollout process, including by providing reviews of the product design.
Source: Five Observations on Nigeria’s Central Bank Digital Currency (IMF, November 16, 2021)