By Emeka Anaeto
As the Central Bank of Nigeria, CBN, gears up for a new down in monetary economy under its digital currency initiative, several issues have been raised by the stakeholders.
Meanwhile, the apex bank’s committee and the central governance structure established for the initiative are working to launch the pilot scheme before end of this year, according to the Director, Information Technology, CBN, Rakiya Mohammed.
According to her, the apex bank has for over two years been exploring the technology and has made tremendous progress.
Mrs Muhammed also said the CBN would be exploring various technological options and engaging various industry players as well as moving to the next stage of proof of concept to pilot the scheme.
She said the CBN considered the architecture, accessibility issue and privacy of the currency before going into it.
Understanding digital currency
Digital currency is a form of money or cash that is available only in digital or electronic form, and not in physical form.
It could be called digital money, electronic money, electronic currency, or cybercash. They are only accessible with computers or internet-enabled mobile phones.
Digital currencies are not exactly cryptocurrency. The difference is that all cryptocurrencies are digital currencies, but not all digital currencies are crypto.
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.
Looking at the benefits
The apex bank has started banking on the economic and monetary benefits of its new currency initiative.
Mrs Mohammed said when eventually operational, the currency would complement cash notes.
According to her, another reason the apex bank plans to come up with digital currency is to make remittances travel easier from abroad to Nigeria.
She said digital currency would accelerate the ability to meet transaction target, regardless of one’s country of residence.
Since digital currencies require no intermediary, they are often the cheapest method to trade currencies.
Digital currencies have all intrinsic properties like physical currency, and they allow for instantaneous transactions that can be seamlessly executed for making payments across borders when connected to supported devices and networks.
Watching the risks
Most regulatory authorities around the world have been foot-dragging in embracing digital currency, hence the restriction to unregulated transactions in crypto. But the inherent risks in digital currency, whether crypto or any other form have been very loud across all jurisdictions.
This technology platform has the following characteristics.
All transactions, once executed, are irreversible, no room for corrections After confirmation, a transaction cannot be reversed, there is no safety net.
Neither transactions nor accounts are connected to real-world identities, everything is digitalized with access by means of the internet.
Since they happen in a global network of computers they are completely indifferent of your physical location. There are no third parties involved in verification or validation, meaning that authentications are eliminated.
No Gatekeeper: The software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other digital currencies including cryptocurrencies.
Loss of confidence in digital currencies: the nascent nature of the currencies is subject to a high degree of uncertainty. Online platforms have generated a large trading activity by speculators seeking to profit from the short-term or long-term holding of digital currencies.
Though Nigeria would be implementing a governed digicurrency regime (like a few developed countries), most digital currencies are not backed by a central bank, a national or international organisation, or assets or other credit, and their value is strictly determined by the value that market participants place on them through their transactions, which means that loss of confidence may bring about a collapse of trading activities and an abrupt drop in value.
Presently, the dominant digital currency, cryptocurrency, is essentially a cash currency it has attracted a large set of the criminal community; these criminals can break into digital wallets and even exchanges, drain crypto wallets and infect individual computers with malware that steals cryptocurrency.
As transactions are conducted on the internet, the hackers target the people, the service handling, and storage areas, through means such as spoofing/phishing and malware.
Investors must rely upon the strength of their own computer security systems, as well as security systems provided by third parties, to protect purchased digital currency from theft.
But CBN is aware of these challenges and that was what kept the committee busy for two years now, engineering the solutions. This is more so inevitable as the digital economy races up to becoming the mainstream across industries all over the world.
Digital currency is just a natural consequence of the emerging digital world. The CBN is now poised to play a central role in piloting Nigeria’s financial system towards a safe and pragmatic digicurrency regime.
As the US accelerates its deployment of digital currencies regulations, China is already testing the digital Yuan. Britain, France, South Korea and other countries are working on similar steps, too.
Given this new reality, it becomes clear that the finance world will never be the same. Nigeria cannot afford to be left behind.
But why do we need digital money? How is it better than traditional fiat money? What are the pitfalls?
The coronavirus epidemic has accelerated need for a digital currency regime, just as cryptocurrency’s exit process from the marginal state, and has firmly pushed itself front and center into many more people’s consciousness than ever before.
Today, the global economy needs a payment instrument with which you can make payments quickly, inexpensively and without unnecessary intermediaries, such as Visa or Mastercard, and it needs such an instrument now more than ever before.
With all of this action behind the scenes, it seems inevitable, in the coming years, that state digital currency will become widely available to ordinary citizens.
Like China example
The Central Bank of China had since last year, launched its digital DC/EP (digital currency/electronic payment) in the cities of Shenzhen, Suzhou, Chengdu, and Xunan. Four state-owned banks were used in the pilot scheme last year in the issuing of this digital asset: Agricultural Bank of China, Industrial and Commercial Bank of China, Bank of China, and China Construction Bank.
The Chinese authorities have chosen the easiest way to integrate digital currency – implementation through the social and budgetary sphere. Already in May, officials working in Suzhou will receive half of the transport subsidies in DC/EP rather than in traditional renminbi.
To do this, they must install a special application on their smartphones – an electronic wallet that can be linked to an existing bank account.
This new digital currency can also be used for payments at McDonald’s, Starbucks, Subway and other popular chains. All this reminds us of how the Euro was introduced into circulation, which combined 18 European currencies. This, too, was not instantaneous and began in 1999 in a non-cash digital format.
The revolutionary nature of the state digital currency isn’t just that issuing digital money becomes cheaper since no special paper with watermarks and other security measures will be needed.
The revolution is with Chinese authorities believing that “a sovereign digital currency” is an effective alternative to the U.S. dollar settlement system. It dulls the impact of any sanctions and mitigates the threat of a boycott both at the national level and at the level of private companies.
In addition, national digital currencies can actually accelerate payments, increase transaction volumes and thereby increase the level of GDP, which has fallen sharply due to the coronavirus pandemic.