The Central Bank of Nigeria (CBN) recently announced plans to launch its own digital currency before the end of the year. The ‘digital Naira’ would be issued by the CBN and held in digital wallets. Nigeria is now set to join countries like China (digital yuan), Bahamas (sand dollar), Eastern Caribbean (DCash) that have officially launched their own national digital currencies.
Digital, not Crypto
While the recent surge – and plunge – in cryptocurrencies took the world by storm, many sceptics still dismiss them as the fool’s gold and lacking in most of the fundamental properties of a fiat currency (medium of exchange, store of value and a unit of account). At this juncture, it is important to note that digital currencies are not the same as cryptocurrencies. While all cryptocurrencies are digital currencies, not all digital currencies are cryptocurrencies.
How do they differ? Regulation! Digital currencies are forms of money or cash available in non-physical (electronic/virtual) forms, typically issued by Central Banks and are subject to all the scrutiny and government backing of fiat currencies. They are also only accessible via internet-enabled devices.
Cryptocurrencies, while being digital are not issued by Central banks or tied to any entity – governments/institutions/individuals. Crucially, the crypto space is devoid of regulation, hence the wild fluctuations witnessed daily in response to market forces.
Blockchain the Disruptor
However, all digital currencies rely on blockchain technology. Known as distributed ledger technology (DLT), it is a digital platform and database that allows digital information to be distributed but not copied.
Originally created to authenticate bitcoin (the most popular cryptocurrency), it was designed as a way to centralize record-keeping without needing third-party authorization – like a bank or a regulator. It enables users to record, track, and validate peer-to-peer transactions.
Confirmation of records is done by multiple users with access to the data. It keeps a permanent record of all transactions, keeps users information anonymous while all activity is secure and unchangeable. But beyond recording financial transactions, it can be used to record practically everything of value. The digital naira will employ the use of the Hyperledger Fabric blockchain.
More Pro than Con…hopefully
While the risks associated with the growing use of digital currencies are clear and evolving, the CBN is banking on embracing the emerging digital world and reaping its benefits. The CBN would use electronic coins or notes instead of printing physical money. This would lower the costs of currency management.
The use of digital currencies will cut off intermediaries like banks or clearinghouses and drastically lower the cost and time involved in cross-border transactions. Remittances and trade finance, especially with the launch of AfCFTA, will be major beneficiaries. The speed of transactions will increase and enhance the velocity of circulation of money, which will boost economic activity.
The adoption of a digital currency will facilitate financial inclusion by increasing the share of the population with access to financial products. It would enable banks to bridge this gap by circumventing legacy infrastructure – and the attendant costs – especially in the rural communities. This would allow Nigeria’s informal economy to go mainstream, giving them access to services like credit and insurance, allowing them to expand their business and maximize potential – by so doing, stimulating the wider economy.
The CBN will now need to create sufficient awareness of its digital currency project and its benefits given the perception of most Nigerians who have come to associate crypto-currency use to online scams.