A new document by the Central Bank of Nigeria (CBN) may indicate why Nigeria was the first African country and among the first in the world to operationalize a Central Bank Digital Currency (CBDC).
In the report, Nigeria Payments System Vision 2025, the Central Bank of Nigeria indicates that CBDCs bring many advantages that can transform and add efficiency to its work.
“Digital currencies built on blockchain/DLT are technical and economic innovations that can enable fast and cheap value transfers to be made without the need for a central intermediary, and with enhanced trust, simplicity, operational efficiency, and customer experience,” the banks says.
Despite hesitancy among several figures over CBDC, the apex bank in Nigeria says CBDCs can possibly address some of its key challenges like counterfeiting and lack of cash in the banking system.
Some of the highlighted benefits include:
1.) Reduction in Cost of Cash Management
Through the issuance of a CBDC, the CBN could save significantly on the costs associated various areas of its operations. These include:
- Minting and issuing physical notes and coins
- Secure transportation, storage, and distribution
- The collection and replacement of damaged notes and coins
2.) Dealing with Counterfeiting
According to CBN, the CBDC is cryptographically produced and cannot be counterfeited and its money supply will be exclusively issued and monitored by the CBN.
The system proves authenticity constantly through cryptographic verification, and every transaction taking place in CBDC is verified by the distributed ledger for authenticity and will not be processed unless it is issued by the CBN.
3.) Auditability
The Central Bank says that each CBDC transaction is immutably recorded and can also be viewed and tracked in real-time, facilitating better compliance with Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) frameworks.
4.) Logistical Advantages
Instant CBN issuance and distribution of digital NGN will eliminate the time, costs, and other challenges of distributing and managing physical cash.
An account-based CBDC could serve as a practically costless medium of exchange. Such accounts could be held directly at the central bank itself or made available via publicprivate partnerships with commercial banks.
5.) Payment Efficiency
When it comes to payments, the bank forsees CBDC facilitating lower cost of transactions compared to existing mechanisms such as wire transfers, cheques, inter-bank transfers, bill payment, etc. lowering the overall cost of doing business.
6.) Monetary Policy
Real-time detailed information and reports on transaction activity, including number of transactions, speed of transactions, and velocity of circulation of money, are available with such a system.
This gives the CBN the ability to accurately monitor the effect of monetary policy actions and adjust accordingly. Further to this, an interest-bearing CBDC could provide a secured store of value, with a rate of return in line with other risk-free assets such as short-term government securities.
The CBDC interest rate could serve as the main tool for conducting monetary policy.
7.) Price Stability
In constrast to most cryptocurrencies, the real value of CBDC would remain stable over time in terms of a broad consumer price index. Such a framework would facilitate the systematic and transparent conduct of monetary policy.
Further, a CBDC could significantly enhance the stability of the financial system, the bank says.
In a financial crisis, the central bank would be able to expand the supply of digital cash as needed to carry out its role as lender of last resort, while the interest rate on digital cash could be adjusted downward to discourage runs from other financial assets into digital cash.
8.) Financial Inclusion
According to the apex bank, CBDC can impact financial inclusion too helping meet key global yard sticks for progress.
For instance, universal financial inclusion underpins eight out of the seventeen 2030 Sustainable Development Goals (SDGs) (particularly those related to poverty and inequality).
The World Bank has set a goal of universal financial access by 2030.
Traditionally, commercial banks have had prohibitive costs and requirements for products and services resulting in the exclusion of many, especially the most vulnerable in society.
CBDC will enable all users to access a broad range of affordable financial services, but this could potentially be most meaningful for the unbanked, underbanked and underserved.
9.) Control
CBN will be able to not just monitor but also exercise a measure of control in order to effect, for example, freezing and/or blacklisting of accounts/wallets as necessary.
The widespread use of CBDC and the obsolescence of paper currency would be helpful in discouraging tax evasion, money laundering, and other illegal activities.
10.) Fostering Competition
The introduction of a CBDC for retail transactions on mobile wallets in particular has the potential to drive further innovation and efficiency by boosting competition with the existing financial institutions’ retail payments products (including debit cards, credit cards, ATM machines, mobile banking apps, internet banking, etc.) to the benefit of the consumer.
11.) Economic Development
Many central banks globally are considering CBDCs, and experimentation and adoption rates are increasing.
According to the Bank of England, a CBDC has numerous macroeconomic benefits. CBDCs are likely to cause:
- Lower real interest rates
- Reduced monetary transaction costs
- Growth of the economy
- Stabilized business cycles
- Improved monetary policy effectiveness
- Financial sector stability
The CBN has set a 3-5 year timeframe for the implementation of the e-Naira.
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