By Emmanuel Okoegwale
Digital financial specialist why not go out on a limb, isn’t that where the fruit is?Mark Twain
With the Central Bank of Nigeria’s announcement of readiness to launch its own Central Bank Digital Currency (CBDC), the country’s financial services playbook enters the uncharted territory of digital currencies which is gaining thoughts across National regulators across the globe though with few interests yet, in Africa. Ghana takes the lead with the February 2021 announcement of planned deployment of a Modern central sandbox while Nigeria’s CBN planned Oct 01, 2021 as go-live date for the e-Naira.
Why issue CBDC
Many reasons had been put forward as to why Central Banks are exploring issuance of own digital currency which could be for reducing cost of managing paper currency, leverage new emerging digital technologies, improved digital readiness landscape, maturing identification registries, drive financial inclusion, easier tax and revenue administration etc.
Central Banks appropriate risk and ensure certainty in the financial services space and knowledgeable that digital wallets present higher systemic risks due to many factors such as velocity of transaction, higher volume and value however from the presentation of the Nigeria’s CBDC plan, some steps had been taken to mitigate these from the consumer tiering structure and application of AML/CFT standards with the Banks providing onboarding services that will prevent a “run” on the system.
In some climes, the National digital currency is a closed loop payment system which is person-specific and purpose-specific payment system. India recently launched its e-Rupi which is a digital voucher and pre-cursor towards full-fledged digital currency and its mainly used for government subsidy and welfare schemes.
From the review of Nigeria’s plan, its open loop system, connects to the switches, licensed market operators can join the scheme. It’s a digital representation of the country’s currency. It can be accessed by everyone for all permissible activities that Naira can be used for.
The benefits of financial services digitization is immense for the nation but what are the risks or perceived disruption that may occur if a CBDC replaces or come into play alongside licensed market operator’s digital offerings? The Banks will play a significant role in the success of the deployment, the system will allow existing infrastructure to keep serving the market but how will market operators with investments in financial services infrastructure compete with a regulator’s issued digital currency which is based on No-fee model?
The use cases of the CBDC highlighted by the Central Bank of Nigeria is a replica of current digital wallet offerings in the marketplace aside some slight restriction of not allowing a cash-out at Merchant location which in my opinion can’t be enforced since Merchants can treat the transaction as a purchase and hand over cash to customer.
Not sure of any global standard setting body mandate to meet as per CBDC’s deployment per country but National financial inclusion targets, competitiveness of the economy for ACFTA readiness, improvement of payment systems are compelling enough to pursue a National digital currency however, Government as the biggest spender in the economy should have been used to ‘guinea-pig’ this effort before leapfrogging to entire population in my opinion.
Alignment with market operators
The business case for the deployment of CBDC is compelling for the regulator but market operators will need clarity with the alignment and avoid pit holes in the implementation of the deployment if not, collaboratively approached.
Market operators will have to deal with the CBN’s digital wallet No-fees model against their paid-for service with their customers.
It is still early days to fully evaluate the risks involved in this enterprise despite the foolproof safeguards that the CBN will implement in good faith as the host and custodian of the nation’s financial services ecosystem. Digital Wallets by their own very nature, enhance systemic risk due to velocity of money and transactions which can have a significant impact on the entire financial services ecosystem if there is, spillover effects from significant failure arising from a mass-market financial services system which the CBDC is positioning to become.
Technology capture arising from Vendor lock-in and concentration risk should be seriously evaluated as new technologies evolve and most likely the service will be provided by a single technology firm. Enhanced service level agreements which protect customer data, integrity of this very critical national infrastructure and through any means possible, the regulator may have very strong oversight over the deployment and management of the entire system, end to end.
If there is loss of market opportunity for digital offerings of licensed market operators arising from increased adoption and use of the CBDC, it can lead to drastic reduction in digital offering rates and standard of service compromise, increased Bank deposit churn rate if the trust perception of the CBN’s e-Naira is high, individuals may decide to hold balances in their wallets which may then lead to increased bank deposit churn rate and may lead to reduced earnings etc.
If the above is the case in the next few months, Fintech investors and funders may go into ‘watch & wait status’ to better understand the impact of the full deployment on the sector and investments may decline.
Emmanuel Okoegwale is a Digital Financial Specialist