In this article, JULIANA AJAYI writes about the inclusivity proposed through digital currencies and future concerns
On October 25, 2021, Nigeria became the first African country to launch a central bank digital currency. Despite the circumstances and the concerns surrounding the project, the eNaira was launched by the Federal Government to increase financial inclusion, create a transparent taxing institution system and increase foreign exchange, among other things.
With a record of almost a million downloads, the eNaira app has been ranked first on global retail Central Bank Digital Currency. Plans are also in place to launch the Unstructured Supplementary Service Data soon. Deputy Governor of the Central Bank of Nigeria, Dr Kingsley Obiora, recently noted that the next step in improving the CBDC would be to introduce the USSD code, so that those without smartphones could still transact.
CBDC
Like the eNaira, a CBDC is represented in digital forms of a country’s fiat money/currency acting as a claim on the central bank.
The eNaira currently used in Nigeria is a digital currency backed by law, the full sovereignty of Nigeria, issued by the CBN as a legal tender. It is also regarded as a unit of account, store of value and medium of exchange.
Currently, 105 countries, representing over 95 per cent of global Gross Domestic Product, are exploring a CBDC. While CBDC may require a lot of research and prudence, some 50 countries are currently in an advanced phase of piloting digital currencies.
According to the Atlantic Council, 10 countries have fully launched a digital currency, with China’s launch set to expand in 2023. Interestingly, Jamaica is the newest country to launch a CBDC.
As countries begin to explore alternative international payment systems, the trend has been predicted to increase following the financial sanctions on Russia.
Among the G7 economies – Canada, United States of America, France, Germany, Italy, Japan, United Kingdom – and the European Union, the US and UK are considered the furthest behind on CBDC development. Notably, the EU Central Bank has signalled it will aim to deliver a digital euro by the middle of the decade.
Also, 19 of the G20 countries are exploring a CBDC, with 16 already in the development stage. The countries in the piloting stage include South Korea, Japan, India and Russia.
The AC stated that the financial system is likely to encounter a significant interoperability problem in the near future, as the proliferation of different CBDC models is creating a new urgency for international standard setting.
While cryptocurrency and other digital currencies are not influenced or controlled by governments, the CBDC is managed, controlled and regulated by the central bank of countries using it. With the availability of secured encryption, crypto holders have direct access to their coins.
Despite the CBN’s ban on crypto, over 30 million Nigerians traded crypto in 2021. Also, in the first three months of the year, Nigerians reportedly traded at least N77.5bn worth of Bitcoin in 2022.
Addressing its stand on the crypto trade in Nigeria, the CBN issued a statement last year. It reads, “For those who are not conversant with the universe of cryptocurrencies, it is important to state that cryptocurrencies are digital or virtual currencies issued by largely anonymous entities and secured by cryptography. Cryptography is a method of encrypting and hiding codes that prevent oversight, accountability and regulation. While there are some cryptocurrencies now in circulation, Bitcoin was the first to be introduced in 2009, and now accounts for about 68 per cent of all cryptocurrencies.
“As regards our recent policy pronouncement, it is important to clarify that the CBN circular of February 5, 2021, did not place any new restriction on cryptocurrencies, given that all banks in the country had earlier been forbidden, through CBN’s circular dated January 12, 2017, not to use, hold, trade and/or transact in cryptocurrencies. Indeed, this position was reiterated in another CBN press release dated February 27, 2018.”
The address stated that countries like China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabia, Jordan, Iran, Bangladesh, Nepal and Cambodia have all placed certain levels of restrictions on financial institutions facilitating cryptocurrency transactions.
Cryptocurrencies are quite different from CBDC, in that they are high in volatility. Bitcoin and other types of cryptocurrency are kept on a decentralised blockchain network, where transactions can be carried out, verified and added to the public ledger without the interference of a third party.
Cryptocurrency depends on a decentralised system to track transactions and create units rather than a central body to regulate transactions.
The AC reports that around 100 countries are exploring CBDCs at one level or another; some are researching, some are testing and a few already distributing CBDCs to the public.
Digital currencies, cross-border payments and economy
According to the World Economic Forum, the growth in digital currencies can make cross-border payments more efficient and help address the $1.7tn global trade financing gap.
The implication for this is that the supply and demand of foreign exchange may become even more complicated as a result of these booming currencies, particularly for nations with little existing international trade. These currencies may not, however, be the answer to all trade problems. Additionally, the digitisation of trade must go with the development of payment technology to reach its full potential.
Countries embrace CBDCs for various reasons, including economic reasons. In a country like Nigeria, one of the reasons for introducing a digital currency, the eNaira, was to promote financial inclusion, by giving access to the unbanked population and promote the ease of payments and transactions.
According to a study, digital currencies can help boost international trades through cross-border payments, as well as provide alternative credit information for trade finance.
According to the World Economic Forum, there is a $1.7tn global trade financing gap, which heavily impacts Small and Medium-sized Enterprises, who typically don’t have established financial records with banks. Public ledgers of digital currencies could be used to share payment and financial history to underwrite loans for import and export. At the same time, strong privacy protocols would need to be enforced to achieve this.”
In addition to promoting financial inclusion and increasing cross-border payments, digital currency can help reduce de-risking. By reducing de-risking, money laundering can be prevented, risks can also be properly managed.
To help consumers and businesses in those nations reconnect with foreign buyers and sellers, digital currencies may offer substitute payment methods.
Digital currency is a global economy in which all users can exchange money regardless of citizenship due to its decentralised structure. This is particularly true for business-owners, who must deal with a global clientele that can exchange funds without having to worry about exchange rates or international law. Some businesses specialise in digital currencies that help African business-owners transact with European, American and Asian firms to spread financial freedom and coverage through international trade.
The social need for cross-border communication is manifesting in financial needs, and traditional financial institutions are not able to meet these needs as well as digital currencies can in an increasingly digitalised world. Over time, entrepreneurs can help create opportunities for people to save, invest and transfer funds internationally, which will re-frame international business procedures.
Impact on small businesses
The impact of digital currencies on small businesses can position them to a wider audience, including having to transact with companies having a global presence.
Because digital currency is a universal currency that anyone can use, small businesses can provide services to customers around the world. A small business can also appeal to younger customers by accepting digital currency, as this is a growing trend among the younger generation. By accepting digital currency, a company can reach a wider audience of clients and show that it is capable of innovation and growth. Since digital currency is still a relatively new product, this may be the ideal time for businesses to adopt it.
Reacting to the impact of digital currencies on the economy, Idowu Babatola explained the benefits attached for small businesses.
His words, “Big businesses are taking over many different markets, and supporting small businesses is now more critical than ever. Small businesses are not only important, but they allow customers to support a good, genuine company and a great cause. Digital currency can provide several benefits to small businesses.
“The low transaction fees that come with digital currency are one of the biggest reasons many establishments have opted to accept it. While traditional forms of currency, especially credit and debit cards, can cost businesses high processing fees, digital currency takes away nearly everything.
“In addition to low transaction costs, digital transactions can happen almost instantly. While debit and credit transactions may take a few days to process fully, a digital transaction is fast and efficient. Further, there is no need for a third party in digital transactions – meaning the transactions can happen quickly.”
Investing in digital currency
Traditional investors have been very active in the digital currency market. For people looking for an alternative investment to traditional stocks, the digital currency has many advantages. Globally, the digital currency has had a significant impact. Some people assert that it has the potential to rule the world in the same way the Internet did in the 1990s.
Since there is no central authority over digital currency, many investors choose to purchase their tokens. Fiat money, or money that the government issues, has the potential to lose value over time. But digital money does not. No governmental body can push a digital currency’s value down because majority of them have a finite supply. Further, digital currency tokens cannot be taxed or taken by the government without authorisation.
Babatola described the idea of investing in digital currencies to be one with high prospects.
His words, “Digital currency has the potential to continue to become a mainstream form of currency in the future. As it grows in value and popularity, the benefit of investing in digital currency becomes more apparent. Whether you have been investing for years, or have just begun looking into buying digital currency, investing can be made easy without stress.”
He also noted that the impact of digital currencies over the years has been positive, which would allow more people to embrace it.
“The overall positive economic impact of digital currency proves that investing in digital currency can be a beneficial investment. Worldwide, the total number of digital currencies reached 8,000 for the first time in June 2020. They are located in around 90 countries and the U.S. has more than half of them,” he added.
