As the launch of the digital Naira (E-Naira) draws near, 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. 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.
CBN Director, IT Department, Rakiya Mohammed, stated that the innovation would benefit the fintech ecosystem by enhancing operational efficiency, opportunities for fintech start-ups in building services and products as well as financial inclusion that will contribute to economic growth, and the creation of a new system complementing the traditional payment system.
“We have spent over two years studying this concept of the central bank’s digital currency and we have identified the risks. And it is one of the reasons why I said we are setting up a central governance structure that would involve all industry stakeholders to assess all the risks as we continue on this journey”, Mohammed said.
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, government, institutions or individuals (they are not centralised). Crucially, the crypto space is devoid of regulation, hence the wild fluctuations witnessed daily in response to market forces.
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 centralise record-keeping without needing third-party authorisation – 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. 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.