What is CBDC?
CBDCs stand for Central Bank Digital Currencies. CBDCs are a type of cryptocurrency that is issued on blockchain networks. A mainstream cryptocurrency traded in the spot market is issued by a public and open-sourced blockchain network.
On the other hand, CBDCs are issued by privatized blockchain networks that are published and supervised by central banking authorities. As per the Atlantic Council data projections, a total of 130 sovereign nations conducted CBDC research as of December, 2022.
What is Nigerian CBDC (eNaira)?
The government of Nigeria also started CBDC research project and became the first ever nation among African nations to issue a CBDC in 2021. The central bank of Nigeria named the digital Naira project as eNaira.
eNaria project is the fifth CBDC launch on a global scale. The project focuses on promoting financial inclusion, cross-border payments, economic remittances, and alternative payment channels.
How does eNaira Work?
It is important to note that CBDCs often operate as the digital alternative for the national legal tender within that region. Therefore, the legislators in the nation introduce new regulatory reforms to add the local CBDC project as the acceptable and lawful legal tender.
In this manner, the citizens of the nation and local businesses can use the newly issued CBDC as a legitimate unit of account in addition to the traditional fiat.
The Central Bank of Nigeria (CBN) had made efforts to leverage the blockchain technology to ensure that the eNaira project completed the international requirements of efficiency, economic development, accountability, and financial stability.
Data projections from Enhancing Financial Innovations and Access has relayed that about 36% Nigerian citizens do not have access to banking services in 2023 comprising of 40 million unbanked people. This amount is equivalent of one-quarter of the total population.
The Origin of eNaira Project
CBN adopted a cashless policy as far back as 2012. The governor of CBN at the time Sanusi Lamido promoted the idea of digital transactions and infrastructure for national legal tender in place of paper currencies. The turning point for eNaira projects took place in February, 2021 when CBN launched the native CBDC pilot. A few weeks before this announcement, CBN imposed blanket ban on all cryptocurrency transactions via regulated banks.
In this way, CBN formally launched the eNaira project on 25th October, 2021. To install supply limits, CBN officials imposed daily and weekly cash withdrawal limits on eNaira.
At the same time, the central bank also started to promote the new legal tender on various forums such as online banking, mobile banking, and eNaira transactions. The extensive promotion campaign was part of the plan to market the eNaira project at a global scale and add to its overall usage.
eNaira’s Platform Model
eNaira is based on a digital platform model that is compatible with the existing payment infrastructure but also amplifies its intrinsic value. Financial institutions and private firms can build new payment applications on top of the foundational layer of eNaira blockchain.
It contributes to the development of diverse and layered payment options that further multiplies the practical use case of eNaira.
The project brings various use cases such as interoperability that allow financial firms and payment services providers to interact with each other in a seamless manner. The CBN project has also established a regulatory framework for native CBDC to provide a guarantee for seamless services for the platform model.
At the same time, the regulatory framework for eNaira addresses various aspects such as operating mechanism, Anti-Money Laundering compliance, and combating terror financing.
On this front, legislators have also accounted for problems concerned with financial privacy, data protection, contract breaches, user protection, and contract settlements etc.
eNaira Wallets
CBN has published a host of different wallet services and custodial options. The range of storage options is to address the utility and requirements of users at different scale such as businesses and retail users. eNaira serves as unit of account, medium of exchange, and store of value at once.
However, retail users need to complete all the requirements that are applicable for opening a bank account. The users can meet this requirement by having a phone number, national identification number, bank verification number.
Conclusion
eNaira is a project that has broadened the circumference of financial inclusion. Since this digital legal tender is accessible to a vast expanse of users through mobile phones, it has contributed to bettering the economic position of the masses. However, eNaira project also suffers from various risks and constraints such as slow adoption, lack of education and general cynicism among citizens.
