The International Monetary Fund (IMF), has identified monetary policy implementation, cyber security, operational resilience, and financial integrity and stability among the possible risks inherent in Nigeria’s newly-launched, Central Bank Digital Currency (CBDC), also called, eNaira.
In its IMF Country Focus released yesterday, the Fund also listed accruable benefits from the wide use and circulation of the eNaira, which was launched on October 25th, by the Central Bank of Nigeria (CBN).
The IMF Country Focus, titled: Five Observations on Nigeria’s Central Bank Digital Currency, however notes that these risks are not peculiar to Nigeria alone, but a general trend in countries where digital currencies are in use.
Elaborating on the associated risks, the author, Jack Ree, an economist in the IMF African Department, expressed concern that the use of the eNaira “may reduce demand for deposits in commercial banks,” once the wallets are either perceived or function as a deposit at the central bank.
“Relying as it does on digital technology, there is a need to manage cybersecurity and operational risks associated with the eNaira,” he added.
Of particular interest in the Country Focus, is what the authorities are doing to mitigate the potential risks, and admitted that measures have been put in place for this purpose.
“The authorities have taken measures to manage the risks. The transfer of funds from bank deposits to eNaira wallets is subject to daily transactions and balance limits to mitigate risks of diminishing the roles of banks and other financial institutions.”
It however noted that “Financial integrity risks, such as those arising from the potential use of the eNaira for monetary laundering, are mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users.
“For example, for now only people with a bank verification number can open a wallet, but over time coverage will be expanded to people with registered SIM cards and to those with mobile phones but no ID numbers. The latter categories of holders would be subject to tighter transactions and balance limits.
“Even so, wallet holders who meet the highest identity verification standards cannot hold more than N5 million (about $12,200) each in their eNaira wallets.”
To address cybersecurity risk, the Focus called for regular IT security assessments.
Financial integrity risks, such as those arising from the potential use of the eNaira for monetary laundering, are mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users.
Against this backdrop, the IMF therefore offered to help with technical assistance and policy advice, since its Monetary and Capital Markets Department has been involved in the eNaira rollout process, including by providing reviews of the product design.
It also drew attention to the 2021 IMF Article IV mission, which emphasized the need for monitoring risks and macro-financial impacts associated with a central bank digital currency.
“The IMF is ready to collaborate with the authorities on data analysis, cross-country studies, sharing the eNaira experience with other countries, and discussing further evolution of the eNaira including its design, regulatory framework, and other aspects,” it assured.
Citing the eNaira as the second CBDC fully open to the public after the Bahamas, the IMF argued that it is not a surprise that “Given the size and complexity of Nigeria’s economy, this launch is drawing substantial interest from the outside world—including from central banks.
This is because other countries and regions, such as China and the Eastern Caribbean Currency Union, are still conducting CBDC pilots with a subset of their citizens.
The IMF is ready to collaborate with the authorities on data analysis, cross-country studies, sharing the eNaira experience with other countries, and discussing further evolution of the eNaira including its design, regulatory framework, and other aspects.
Notwithstanding the risks the IMF Country Focus acknowledged the usefulness of the eNaira as a liability of the CBN in terms of being stored in digital wallets and can be used for payment transactions.
Other benefits include:
Increase in financial inclusion especially in Nigeria where a large number of people (38 million people; 36% of the adult population) do not have bank accounts. It is expected that the move would enable up to 90% of the population to use the eNaira.
Facilitation of remittances through international money transfer operators (e.g., Western Union) with fees ranging from one percent to five percent of the value of the transaction.
The eNaira is therefore expected to lower remittance transfer costs, making it easier for the Nigerian diaspora to remit funds to Nigeria by obtaining eNaira from international money transfer operators and transferring them to recipients in Nigeria by wallet-to-wallet transfers free of charge.
Exchange rate reforms, including a unified market-clearing rate, that reduce the gap between official and parallel market exchange rates would enhance the incentives for using eNaira wallets to send remittances.
Reduced informality – Nigeria has a large informal economy, with transactions and employment equivalent, respectively, to over half of GDP and 80% of employment.
The eNaira is account-based, and transactions are in principle fully traceable, unlike token-based crypto asset transactions. Once the eNaira becomes more widespread and embedded into the economy, it may bring greater transparency to informal payments and strengthen the tax base.