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Why the CBN’s digital currency plan is a gift and a curse

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During the week, Nairametrics broke the news that Nigeria’s Central Bank was planning to launch its own digital currency (CBDC) by October 2021. The CBN’s foray into digital currencies caught many by surprise and has been a subject of debate across many social media platforms.

Over the weekend, this issue dominated discussions on the Nairametrics weekly Club House Show “OnTheMoney” hosted by Ugodre with all the analysts on our panel expressing support for Central Bank Digital Currencies, “CBDCs” but with several layers of caution.

For starters, CBDCs are very different from cryptocurrencies mainly because they are issued by Central Banks of countries and are thus sovereign. They are also a digital replacement to paper money and fall under the same monetary policy control and regulation administered by central banks when they want to control money supply. Thus, unlike cryptocurrencies that are not controlled by any government, CBDCs are legal tenders that are issued by the government.

The advantages of CBDCs are enormous and as we have seen with cryptocurrencies, it is a more efficient form of money especially when it comes to transparency, transfer, payment, storage and even protection against theft. It is also built on the same technology that underpins cryptocurrencies except that it is issued by the government.

With CBDCs the central bank can channel funds directly to several sectors of the economy where it wants to stimulate economic activity. An example is its intervention funds. When it transfers this money to beneficiaries, it can see who has collected it and what it is being used for, helping it better measure the impact of money in the economy. Banks can also use this to determine just how well their borrowers use their money.

So why are people spooked about CBDCs if it indeed has so many advantages?

Let’s start with transparency, which is one of its major advantages. Firstly, just like cryptocurrencies, CBDCs by design allows the central banks to know who is holding what money. For example, imagine that CBN issues a N1000 naira note with serial number 347589. In today’s world, once that money is printed, the CBN doesn’t ever know who it is with. However, with a CBDC, the CBN exactly knows who is with the money and what they are doing with it.

This power has clear ramifications for the economy, good and bad. For example, the government can use CBDCs to surveil its citizens knowing exactly how much they earn, what they use the money for and where they keep it. The government can thus leverage on CBDCs to tax Nigerians especially those in the informal market or anyone who is trying to evade or even avoid taxes.

Privacy also becomes a major concern with CBDC especially when you have a government that is gross on human rights violations. With CBDCs, the privacy that spending in cash gives you will not exist. Imagine the government leveraging CBDCs to surveil human rights organizations and what they are doing with the money they get as donations. In the same vein, they can also track money that has fallen into corrupt hands, or stolen money or even money paid to kidnappers or terrorists. While most of this might seem good, there are many people who would prefer to have the government out of their private business.

There are also concerns around the role of banks if CBDCs go mainstream. Banks today exist because depositors need to be able to store money with an intermediary in exchange for an interest. They will also need to be able to transfer that money to someone, pay bills with it and most importantly, withdraw the cash. With CBDCs, this becomes a challenge for banks. If for example, the CBN decides to give everyone with a CBDC a virtual wallet where they can store their money, then the role of banks today is questionable. You do not need a bank to help you administer the wallet except the CBN decides to issue them new licenses in this regard. Surely, CBDCs will require that the CBN issue new banking regulations as well as change its laws.

In terms of laws, what will be the role of the National Assembly when it comes to the issuance of CBDCs? Will the CBN need legislative approval before it proceeds or can it just go ahead without carrying the national assembly along? Is the presidency on board with this or did they just read it in the papers like everyone else? The last time a CBN Governor made a bold move about redenominating the naira, he got a reprimand from the President.

There are also concerns about how the CBDCs will be administered. Should it replace cash 100% or should it coexist with cash? If it is the latter, how many CBDCs should the CBN issue as a percentage of total cash? If it is the former, then when will it happen? What if the CBN decides to phase the entry of CBDCs based on certain transaction types. Will they start with FAAC allocations paid to states? Will they start with their intervention loans? Or will they start with controlled markets like the money markets or forex markets?

There are many concerns, questions, and hurdles to be addressed before Nigeria launches CBDCs. China, the world’s second-largest economy has opened the doors for others to follow and Nigeria aims to be the next in line. However, unlike China, Nigeria is a democratic multi-party state with leaders who have diverse interests and opinions.

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