From Uche Usim, Abuja
When the director of information technology, Central Bank of Nigeria (CBN), Mrs. Rakiya Mohammed, on June 10, disclosed that the apex bank would introduce digital currency before the end of this year, it was greeted with loud applause in some quarters.
Economic experts see it as a sign of playing in a global league where sitting on the fence is no longer a safe option but an announcement of alienation.
According to Mohammed, “Officials of the CBN have been exploring digital currency technology for over two years.”
Currently, there are two currencies, notes and coins. The CBN’s digital currency will be a third type of currency to supplement cash. Rather than carry cash about, digital currency lodges the money in a mobile phone.
A recent report indicated that Nigeria was at about 60 per cent in financial inclusion and, with a target of 80 per cent at the end of the year, steps needed to be taken to raise the percentage of the nation’s financial inclusion.
Mohammed argued that the proposed CBN digital currency would enhance the inclusion drive and reduce the cost of cash management, while enabling innovations in the nation’s financial market.
She added that a central governance structure would be set up to address all associated risks with a view to ensuring that the Nigerian public got the best technology for the digital currency. Nonetheless, the news generated varied reactions among Nigerians.
While many jubilated over the announcement, some were confused because they quickly concluded it was an official endorsement of the controversial cryptocurrency, where subscribers carry out hooded transactions. For emphasis, all cryptocurrencies are digital currencies, but not all digital currencies are crypto.
In full analysis, CBN’s move amplifies the thoughts of leading economic policymakers around the world, who are now considering whether central banks should issue their own digital currencies, called Central Bank Digital Currencies (CBDCs), to be made available to everyone, rather than just to licensed commercial banks. The idea has been applauded in various quarters, as it seeks to replace an inherently crisis-prone banking system and close the door on crypto scammers.
Analysts say that a national digital currency managed on a single network could allow money to change hands almost instantly. Most bitcoin transactions, for instance, settle within 10 minutes. With a digital currency, transactions could happen in real time, and fees would be lower or nonexistent.
However, a major critique against virtual money is that national digital currencies could make it harder for private cryptocurrencies to catch on. This is because, since government’s e-cash would be operated, backed and controlled directly by central banks, it would be viewed as more reliable than privately created cryptocurrencies, which operate on decentralized networks of users and fluctuate wildly in value.
According to Nouriel Roubini, an American economist, cash usage is rapidly diminishing and has nearly disappeared in countries such as Sweden and China. At the same time, digital payment systems, PayPal, Venmo, and others in the West, Alipay and WeChat in China, M-Pesa in Kenya, Paytm in India, offer attractive alternatives to services once provided by traditional commercial banks.
Most of these fintech innovations are still connected to traditional banks and none of them relies on cryptocurrencies or blockchain. Likewise, if CBDCs are ever issued, they will have nothing to do with the over-hyped blockchain technologies.
Roubini further explained that, so far as CBDCs would crowd out cryptocurrencies, they should be welcomed. Moreover, by transferring payments from private to central banks, a CBDC-based system would be a boon for financial inclusion. Millions of unbanked people would have access to a near-free, efficient payment system through their cell phones.
He argued that CBDCs would likely replace all private digital payment systems, regardless of whether they are connected to traditional bank accounts or cryptocurrencies. He added that, if a CBDC were to be issued, it would immediately displace cryptocurrencies, which are not scalable, cheap, secure or actually decentralized.
Enthusiasts argue that cryptocurrencies would remain attractive to those who wish to remain anonymous. But, like private bank deposits today, CBDC transactions could also be made anonymous, with access to account-holder information available, when necessary, only to law enforcement authorities or regulators, as already happens with private banks. Besides, cryptocurrencies like Bitcoin are not actually anonymous, given that individuals and organizations using crypto-wallets still leave a digital footprint. And authorities that legitimately want to track criminals and terrorists will soon crack down on attempts to create crypto-currencies with complete privacy.
According to Investopedia, digital currency is a form of currency that is available only in digital or electronic form, and not in physical form. It is also called digital money, electronic money, electronic currency or cyber cash. Since digital currencies require no intermediary, they are often the cheapest method to trade currencies.
Digital currencies are stable and are traded with the markets, whereas cryptocurrencies are traded via consumer sentiment and psychological triggers in price movement.
Investopedia further describes digital currencies as intangible and can only be owned and transacted by using computers or electronic wallets connected to the Internet or the designated networks. In contrast, physical currencies, like banknotes and minted coins, are tangible and transactions are possible only by their holders who have their physical ownership.
Like any standard fiat currency, digital currencies can be used to purchase goods as well as to pay for services, though they can also find restricted use among certain online communities, like gaming sites, gambling portals or social networks.
For instance, it is possible for an American to make payments in digital currency to a distant counterparty residing in Singapore, provided that they both are connected to the same network required for transacting in the digital currency.
Digital currencies offer numerous advantages. As payments in digital currencies are made directly between the transacting parties without the need of any intermediaries, the transactions are usually instantaneous and low-cost. This fares better compared to traditional payment methods that involve banks or clearing houses. Digital currency-based electronic transactions also bring in the necessary record-keeping and transparency in dealings.
Since they exist in a lot of variants, digital currencies can be considered a superset of virtual currencies and cryptocurrencies.
If issued by a central bank of a country in a regulated form, it is called the “Central Bank Digital Currency.” While the CBDC only exists in conceptual form, England, Sweden and Uruguay are a few of the nations that have considered plans to launch a digital version of their native fiat currencies.
Along with the regulated CBDC, a digital currency can also exist in an unregulated form. In the latter case, it qualifies for being called a virtual currency and may be under the control of the currency developer(s), the founding organization or the defined network protocol, instead of being controlled by a centralized regulator. Examples of such virtual currencies include cryptocurrencies and coupon- or rewards-linked monetary systems.
From industry records, more than 10,000 different cryptocurrencies are traded publicly.
Perhaps most significantly, a world of competing national digital currencies could set up a new kind of currency war. The U.S. dollar has been the world’s dominant currency since the 1920s. But if national digital currencies allow for faster, cheaper money transfers across borders, viable alternatives to the U.S. dollar could emerge, embraced by nations and monetary officials concerned about the dollar’s outsized influence on global economy.
Experts have hailed the CBN for looking in the direction of digital currency, especially now that it has gained global popularity and acceptance. They noted that, in a February circular to banks and financial institutions, the CBN stated that transactions in and facilitating payments for cryptocurrency exchanges were prohibited.
The CBN further directed all banks and financial institutions to identify and close accounts associated with individuals or entities that carry out transactions in cryptocurrencies and operate cryptocurrency exchanges.
According to the bank, this was a reminder to the directive it issued in 2017.
Justifying the directive, the governor of the CBN, Godwin Emefiele, stated that cryptocurrencies were being used to facilitate scams and money laundering, which were highly inimical to the economy and could further weaken the naira.
The directive got the nod of various anti-corruption agencies, like the Economic and Financial Crimes Commission (EFCC), the Independent Corrupt Practices and Other Related Offences Commission (ICPC) and the Nigerian Financial Intelligence Unit (NFIU).
EFCC chairman, Abdulrasheed Bawa, noted that cryptocurrencies were avenues through which criminals laundered the proceeds of crime and illicit financial transactions.
He stated that the commission had recovered proceeds of cryptocurrencies worth about $20 million from cybercriminals.
Similarly, the chairman of the ICPC, Bolaji Owasanoye, maintained that cryptocurrencies could be used to fund insurgencies, adding that the #EndSARS protest was largely financed through cryptocurrency.
The anti-graft agencies disclosed that they currently have a number of cases linked to cryptocurrencies but have been unable to track the suspects, noting that it would be difficult to solve cases involving cryptocurrencies because the role players were unknown.
Consequently, the Securities and Exchange Commission suspended the approval of cryptocurrencies and related products in Nigeria. This came after its earlier indication to accept bitcoins. The capital market regulator would only permit such digital currencies if they operate bank accounts within the Nigerian banking system.
But a flurry of reactions from within and outside the cryptocurrency community has continued to trail the directive of the apex bank, causing fears that the ban could adversely impact fintechs and hinder the rising potential of the Nigerian economy.
Considering the growing global popularity of the cryptocurrency phenomenon, which is being used in over 100 countries, and Nigeria’s rating as the world’s second-largest user of virtual currencies, the CBN directive succeeded in stirring anxiety in the cryptocurrency community.
In a reaction described by many as political, the Vice-President, Professor Yemi Osinbajo, advised that, rather than a blanket ban of cryptocurrencies, the situation actually called for a more robust regulatory framework that addresses the concerns raised about the cryptos without killing the potential of digital currencies in Nigeria.