Talking and postulating about how central bank digital currencies (CBDCs) might one day be designed has become the favourite preoccupation of central bankers everywhere.
Despite all the talk, however, there has been scant implementation of CBDC ideas other than in China, a country that has its own unique motivation for pushing fast and hard on developing state e-money.
This, however, changed on October 25 when Nigeria became the first African country, and second substantial economy, to put its money where its mouth is on the topic by launching its very own eNaira CBDC system.
As HSBC’s Global Research team, headed by economist David Faulkner, noted about the move on Monday (our emphasis):
The eNaira issued by the Central Bank of Nigeria (CBN) will be a direct liability of the bank, legal tender at par with the physical NGN, and form part of the currency in circulation.
The CBN sees the eNaira as supporting financial inclusion through providing a less costly, more efficient and safe means of payment in a country where the World Bank estimates that c60% of the adult population was unbanked in 2017 (latest data). Beyond the economic gains from increasing financial inclusion, the CBN also sees the eNaira as enhancing the government’s capacity to deliver targeted social assistance, and boosting diaspora remittances through formal channels. These remittances are a critical source of foreign exchange in Nigeria, equalling c6% of GDP (USD24bn) ahead of the pandemic.
According to HSBC, the Central Bank of Nigeria (CBN) believes the eNaira system could even help it improve the effectiveness of its monetary policy.
But there are risks under the bonnet too.
To get the project underway, the CBN will have been forced to make critical decisions about system-design, which other central banks are still mulling the pros and cons of. This includes the degree to which traditional banks should be involved in processing CBDCs and how best to incentivise them to offer wallet services at all.
As HSBC’s economists note, in the eNaira’s case, it has been determined that the centrally issued digital currency should be exchanged on a peer-to-peer basis, universally offered and structured to yield zero interest.
But what do these decisions mean in practice? And how likely are they to become a template for other CBDC developments?
A quick analysis of the CBN’s communications shows that it is a five-layered system.
The first layer is known as the the eNaira Stock Wallet. This appears to emulate the popular cryptocurrency practice of “pre-mining”, a situation where currency is struck into existence but reserved in the issuer’s coffers until it is ready to be distributed more widely. The CBN offers little detail about how the stock wallet operates other than that it belongs exclusively to the central bank.
It’s fair to presume that for eNaira to hit the wider economy, the CBN must engage in some sort of asset swap with financial institutions.
To what degree that swap is or isn’t fully collateralised is unclear – but it’s likely the system emulates China’s NetsUnion system, the fully-reserved clearing mechanism that all Chinese emoney issuers are obliged to use.
The second layer is known as the eNaira Treasury Wallet. This is for banks to warehouse eNaira received from the CBN for institutional use.
The third layer is the eNaira Branch Wallet, for sub-dividing institutional balances originating from Treasury wallets on a seemingly fully-funded basis.
The fourth layer is the eNaira Merchant Speed Wallet. This is an exclusive sub-division provided by financial institutions to merchants. These, however, can only be dispensed to merchants providing they accept all relevant terms and conditions, and provide all mandatory information.
The final fifth layer is the eNaira Speed Wallet, also to be supplied by banks, which is available to all users and can be operated on behalf of holders or trustees.
How much emoney a user can store in a Speed wallet depends on how much privacy they require. Just to open a wallet a minimum of a passport photo and key personal data are needed (name, place and date of birth, gender and address, as well as telephone number).
A speed wallet set up on an unregistered burner phone is limited to a daily transaction level of 20,000 naira (about $50), and a balance limit of 120,000 naira (about $300). A fully verified account wallet, however, can transact as much as 1m naira a day (about $2,422) and hold a maximum of 5m naira (about $12,112). Merchant accounts are subject to unlimited balances, but simply to register as a merchant an entity needs to have a pre-existing bank account, a taxpayer identification number and a bank verification number.
All of the above, thus far, emulates a conventional bank account system, aside from the fact that CBDC balances are in theory fully funded on the central bank balance sheet and non-interest bearing.
That would make universal accessibility the eNaira’s biggest selling point.
Yet it’s not at all clear that the eNaira is necessarily as universal as physical cash. As far as we can see, you still need a legacy bank account to open a speed wallet. Potential users must also accept the terms and conditions of the service, or as the eNaira.com website puts it “have the requirements for onboarding” in the first place. It’s unclear to what degree the service assures privacy from government or CBN authorities either.
The zero-interest nature of the eNaira, meanwhile, attaches an opportunity cost to holding it. In a negative interest environment, the inverse is true, but in that case the arbitrage is limited by caps for everyone other than merchants.
The really important question that needs to be addressed, and we plan to do so in a follow up post, is what does Nigeria get out of the eNaira system? Africa’s largest economy is frequently been ravaged by fuel and consumer goods shortages. It is used to double-digit inflation levels. Will eNaira help tackle these issues?
In that context what problem does the eNaira really solve? And what are the potential unappreciated blind spots in its design? Are emerging markets particularly likely to benefit from these new structures or the opposite?
One interesting point: it only took two days for the CBN to be alerted to fake eNaira social media handles that were attempting to game the system – so as to trick users into inadvertently misdirecting their personal information into fraudulent hands.
No doubt the world’s major central banking institutions will be watching how things evolve closely.