Deepening Nigeria’s Payment System
The Central Bank of Nigeria (CBN) recently has unveiled plans to launch its digital currencies before December 2021. With this plan, the CBN joins over 70 per cent of central banks around the world that are respectively researching on the payment technology following the growing investor interest in cryptocurrency.
Beside, technological advances in recent years which was further propelled by the COVID-19, have led to a growing number of fast, electronic means of payment available to consumers for everyday transactions.
While China is in the final testing stages of its Digital Yuan, South Korea and Brazil recently announced their digital currencies for 2022, the European Union began research on CBDC development while the Fed Reserve is taking its first steps towards a digital dollar, according to a report by Zerocap, an Australian-based full-service digital asset investment platform.
Essentially, Central Bank Digital Currencies (CBDCs) are digital representations of fiat currencies developed and issued by central banks. Given their source, CBDCs are not decentralised but simply a digital token issued as the territory’s currency, regulated and backed by local monetary reserves, the report by Zerocap stated.
In addition, CBDCs may or may not utilise blockchain technology, depending on the frameworks used to implement the assets into circulation.
The Digital Yuan or DCEP, for instance, does not; although it utilises distributed ledger technology, it is a centralised mutable ledger that contains peer-to-peer properties.
The Bank for International Settlement (BIS) notes that there are various design choices for CBDCs, including: access (widely versus restricted); degree of anonymity (ranging from complete to none); operational availability (ranging from current opening hours to 24 hours a day and seven days a week); and interest bearing characteristics (yes or no).
Furthermore, it points out that many forms of CBDCs are possible, with different implications for payment systems, monetary policy transmission as well as the structure and stability of the financial system.
“CBDC raises old questions about the role of central bank money, the scope of direct access to central bank liabilities and the structure of financial intermediation. Traditionally, central banks have, for various reasons, tended to limit access to (digital) account-based forms of central bank money to banks and, in some instances, to certain other financial or public institutions. “By contrast, physical central bank money, that is cash, is widely accessible. This approach has, in general, served the public and the financial system well, setting a high bar for changing the current monetary and financial structure,” the BIS added.
Although CBDCs will probably not function precisely like paper notes or bitcoin, they will hold some digital features similar to physical cash.
Assets will be easily transferable between entities and carry the same value in third-party wallets or platforms.
These properties also apply to their storage; CBDC users will store the tokens in their digital wallets and use the assets wherever they go. Citizens will most likely need to open an account with their central bank affiliations, but storage options will vary from mobile to desktop, online and offline anywhere on the planet.
Leal Brainard, Governor of the Federal Reserve System, recently spoke at Washington on how the Fed was advancing research on CBDCs.
The US seeks to obtain a solid foundation of this novel monetary system before developing its own version, ensuring “a safe, inclusive, efficient, and innovative payments system that works for all Americans.”
CBN Lists Benefits
For Nigeria, there is no doubt that over the years the country has made noticeable progress in its desire to create a robust payment system through several reforms targeted at restoring confidence in the system.
Indeed, a sound payment system infrastructure, where operators and customers can transact business with confidence and convenience, trust and timeliness, underpins many of these reforms.
For instance, in 2007, the Central Bank of Nigeria (CBN) launched the Payment Systems Vision 2020 which identified series of recommendations to increase the resilience of the payment system infrastructure and work-streams to encourage the usage of electronic payment methods were inaugurated. Since then, the country has continued to introduce initiatives that would help simply payments and deepen financial inclusion.
The Director, Information Technology, CBN, Ms. Rakiya Mohammed, said every Nigerian would have access to the CBDCs when it is introduced.
She said: “Let me state categorically that cryptocurrency such as Bitcoin and the rest of them are not under the control of the central bank; they are purely private decisions that individuals make and are not part of this arrangement.
“We have spent over two years studying this concept of central bank’s digital currency and we have identified the risks. And it is one of the reasons why I said we are setting up a central governance structure that would involve all industry stakeholders to access all the risks as we continue on this journey.
“Very soon we would make an announcement on the date for the launch and by the end of the year, we should have the digital currency.”
According to her, about 80 per cent of central banks across the world are presently exploring the possibility of issuing the central bank’s digital currency, saying that Nigeria cannot be left behind.
Mohammed added: “You are aware that we have two forms of fiat money: The notes and the coins. So, the central bank’s digital currency is the third form of fiat money. So, this digital money is going to complement the cash and note that we have.
“The central bank digital currency will just be as good as you having cash in your pocket. So, if you are having the currency in your pocket, you are as good as having cash on your phone.
“Now, why did we need to go into this? There are different cases that the central bank is looking at. For instance, we have remittances, which is a huge market in Africa. We also know that in the last EFInA report, our target for this year was to achieve 80 per cent financial inclusion. We are about 60 per cent and at the rate we are going, it is unlikely we would meet this target. But the central bank digital currency would accelerate this target.”
She said it would support the cashless policy as well as innovation, adding that the central bank has a “very clear roadmap on this and we are about to move to the next stage of a proof of consent after which we would start a pilot.”
Other qualities of CBDCs according to the report by Zerocap include:
Simple cross-border transactions
With CBDCs, local or international transfers can occur almost instantly and require much lower fees than the traditional system. It will drastically minimise the task of verifying funds or risk-monitoring in each banking platform, since CBDCs are the actual fiat currencies in digital form. Reducing fees at faster transfer rates will also promote economic growth and benefit lower classes through low payment fees and higher accessibility to funds. Social Inclusion Since CBDCs are issued through central banks and available to use through digital wallets, the unbanked may access and transfer their funds without the need for private bank accounts, which are often not at their disposal. It will also benefit the underbanked through higher access to financial services with more straightforward frameworks and faster KYC. M-Pesa, a P2P payment platform released in Kenya, is a good example of such inclusion. Released in 2007, M-Pesa promoted easy payments and transactions without the need for private bank accounts. As a result, Kenya`s access to formal finance grew from 14 per cent in 2006, to 83 per cent in 2019.
Combating illegal activities
Digital fiat creates more significant obstacles to illegal activities as physical cash allows funds to be hidden and transferred outside of surveilled financial systems. With CBDCs rising in adoption, payments and transfers will be easier to identify and trace back to previous sources, drastically reducing fraud and money laundering risks. However, this seemingly safer system does come with concerning possibilities.
Lessons from China’s Digital Currency
A report from businesstimes.com.sg, revealed that China has been working on its digital currency roadmap from as early as 2014, and leads the rest of the world’s central banks presently experimenting with CBDCs.
It noted that the country’s big technology companies, like Ant Group and Tencent, played a big role in giving China the upper hand on this journey.
“Driven by a desire to increase convenience and retain customers, they ventured into mobile wallets and digital payments.
“At first, regulators, including the People’s Bank of China (PBOC), took a hands-off approach to this. That wasn’t a wholly deliberate decision.
“It takes time to study and regulate new technologies and services. This gave China’s tech companies the freedom to experiment and push the boundaries of the financial system.
“The result was a wave of new fintech services emerged in China between 2012 and 2020. These included digital know-your-customer processes, credit control and fraud control.
“It was only when companies started using their technology aggressively for highlyleveraged lending that regulators stepped in,” the report added.
It pointed out that one advantage of letting large, competing consumer businesses lead innovation is that the platforms are willing and effective in educating consumers. When people are informed, they are more likely to try innovations and embrace novel concepts.
Now, many Chinese consumers are comfortable with digital forms of money and wallets, meaning they may be more willing to embrace a government-issued coin.
Consumers’ acceptance of and confidence in digital payments also forced state-owned enterprises and traditional businesses to adapt, further entrenching digital payments.
It has also led to the PBOC having more experience dealing with this field, which it can apply when rolling out its own digital currency, giving it a sharper focus and cutting down on avoidable mistakes.
These indeed are lessons the CBN must embrace as it works towards introducing its own digital currencies in the coming months.
With CBDCs, local or international transfers can occur almost instantly and require much lower fees than the traditional system. It will drastically minimise the task of verifying funds or riskmonitoring in each banking platform, since CBDCs are the actual fiat currencies in digital form