September 22, 2021/United Capital Research

In 2017, the Central Bank of Nigeria (CBN) made public its vision to digitise the naira, in the light of rising digital payments and the emergence of a digital economy in Nigeria. After four years of consideration, which came with new developments including a rise in the use of decentralised cryptocurrencies amid macroeconomic challenges and further Naira depreciation, the apex bank is poised to launch its own Central Bank Digital Currency (CBDC) on the 1^st of October 2021. The CBN in Aug-2021 selected Barbados-based Bitt Inc as partner, to develop and pilot the digital Naira. The launch of the e-Naira aligns with a broader global trend of CBDC adoption, led by China. Notably, Bitt Inc was key to the development and launch of a CBDC pilot for the Eastern Caribbean Central Bank (ECCB) in Apr-2021.

As opposed to common preconceptions, the e-Naira is not a variant of cryptocurrencies. While CBDCs and cryptocurrencies share the characteristics of digital currencies and are blockchain-based, the latter is a decentralised asset of value secured by encryption, while the former is an electronic form of fiat money issued and controlled by centralised monetary authority. Thus, the e-Naira will essentially serve as a digital supplement for the physical Naira.

According to recent media reports, the CBN has recently directed Nigerian businesses to compulsorily accept the e-Naira as legal tender for transactions. While we have a pessimistic bias on adoption, we first look to highlight the potential positives. The zero-cost nature of the CBDC and the potential improvement in transaction efficiency could encourage adoption and spur usage. Furthermore, if adoption is significant, it could increase transaction velocity as well as reduce cash-handling costs. The e-Naira can also augment the fast-growing digital payments industry and enable the CBN to better regulate the industry, as the apex bank will be looking to position itself at the forefront of digital payments amid rising adoption of decentralised cryptocurrencies. 

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