The development of CBDCs across the globe continues with feedback on Nigeria’s e-Naira (one of 11 countries to have fully deployed a central bank digital currency, the other ten are in the Caribbean) and more insights from central banks on the risks, opportunities and challenges.
It is becoming increasingly difficult to keep up with all the announcements from a raft of central banks and think tanks but here are some that caught my attention:
The Bank for International Settlements (BIS) and the central banks of Israel, Norway and Sweden launched Project Icebreaker - a joint exploration of how central bank digital currencies (CBDCs) can be used for international retail and remittance payments to develop a “hub” to which participating central banks will connect their domestic proof-of-concept CBDC systems. The objective is to test some specific key functions and the technological feasibility of interlinking different domestic CBDC systems.
The Eurosystem, Singapore and Switzerland BIS Innovation Hub Centres together with the Bank of France, Monetary Authority of Singapore and Swiss National Bank launched Project Mariana. It uses DeFi protocols to automate foreign exchange markets and settlement, potentially improving cross-border payments (and supporting a priority of the G20). Today, DeFi built on public blockchains uses smart contract protocols to automate markets for crypto and digital assets. In the future, similar AMM protocols could form the basis for a new generation of financial infrastructures facilitating the cross-border exchange of CBDCs.
The IMF has released a short report indicating that 97 countries are interested in the concept of Central Bank Digital Currencies (CBDCs). However, only two countries have fully launched theirs - Nigeria with its eNaira and The Bahamas’ Sand Dollar.
According to the publication - ‘Ascent of CBDCs’ as of July 2022, these 97 projects are either in the research or development stage. The report noted that countries have different motives for exploring and issuing CBDCs, but in the case of The Bahamas, the need to serve unbanked and under-banked populations across more than 30 of its inhabited islands was a primary driving force.
Beyond promoting financial inclusion, leading experts argue that CBDCs can create greater resilience for domestic payment systems and foster more competition, which may lead to better access to money, increase efficiency in payments, and in turn lower transaction costs. CBDCs can also improve transparency in money flows and could help reduce currency substitution (when a country uses a foreign currency in addition to, or instead of, its own).
With less than 0.5% adoption, the central bank of Nigeria is struggling to push its eNaira CBDC to its citizens. According to a Bloomberg report, less than 0.5% of Nigeria’s 217 million population are using the government-issued digital currency — the eNaira — a year after its launch. This comes despite Nigeria being identified by Chainalysis as the top country in Africa for crypto adoption and ranking 11th globally, while a KuCoin report found that 35% of the Nigerian population aged 18 to 60 had owned or traded cryptocurrencies this year.
Bloomberg noted that Nigerians have been confused due to a lack of clarity from the state which cracked down on crypto last year. In February 2021, the Central Bank of Nigeria banned banks from servicing crypto exchanges to sever fiat on and off ramps. Educating people who are generally wary of the state and ruling elite has also become a challenge for the central bank, according to the report.
The Nigerian eNaira is a central bank digital currency (CBDC) that launched 1 year ago, however only 0.5% of Nigerians are using it. The limited support of the nation’s commercial banks to support the project is considered one of the factors slowing down adoption. Users of the eNaira can conduct transactions without paying a fee, which has a negative effect on commercial banks whose income comes from fees.
According to Adesoji Solanke - a director of local investment bank, Renaissance Capital, “the eNaira does not address any of the basic use cases, so no surprise at its low adoption rates so far.”
The low figures are now prompting the Nigerian central bank to ramp up efforts to increase its adoption, including offering a 5% discount to drivers and passengers of motorised rickshaws, according to a recent report.
In August, Nigerian Central Bank governor Godwin Emefiele announced the eNaira project entered its second phase in August with an adoption target of eight million users. At the time, he added that the CBDC has had about 840,000 downloads, with about 270,000 active wallets. By August, there had been around 200,000 transactions worth 4 billion naira’s — approximately $9.5 million at the time.
Naresh Aggarwal
Associate Director, Policy & Technical