Deepening Nigeria’s Payments System | THIS DAY
The Central Bank of Nigeria (CBN) recently unveiled its intention to launch its digital currencies before December 2021.
With this plan, the CBN joins over 70% of central banks around the world who are respectively studying payment technology following increasing investor interest in cryptocurrency.
In addition, technological advancements in recent years, which have been further propelled by COVID-19, have led to an increasing number of fast electronic payment methods available to consumers for daily transactions.
While China is in the final stages of testing its digital Yuan, South Korea and Brazil recently announced their digital currencies for 2022, the European Union has started researching the development of CBDC while the Federal Reserve is taking its first steps towards a digital dollar, according to a report from Zerocap, an Australian 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 decentralized but simply a digital token issued as the territory’s currency, regulated and backed by local currency reserves, the Zerocap report states.
Additionally, CBDCs may or may not use blockchain technology, depending on the frameworks used to implement the assets in circulation.
The Digital Yuan or the DCEP, for example, does not; although it uses distributed ledger technology, it is an editable centralized ledger that contains peer-to-peer properties.
The Bank for International Settlements (BIS) notes that there are various design choices for CBDCs, including: access (widely or restricted); degree of anonymity (ranging from complete to non-existent); operational availability (ranging from current hours of operation to 24/7); and the characteristics of interest (yes or no).
In addition, he points out that many forms of CBDC are possible, with different implications for payment systems, the transmission of monetary policy, and the structure and stability of the financial system.
âThe 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 tended, for various reasons, to limit access to (digital) forms of central bank money to banks and, in some cases, to certain other financial or public institutions. âIn contrast, the physical currency of the central bank, ie cash, is widely accessible. This approach has, in general, served the public and the financial system well, setting the bar high to change the current monetary and financial structure, âadded the BIS.
While CBDCs likely won’t work exactly like paper banknotes or bitcoin, they will contain digital functionality similar to physical money.
The assets will be easily transferable between entities and will carry the same value in third party portfolios 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 office, online, and offline across the globe.
Leal Brainard, Governor of the US Federal Reserve, recently spoke in Washington about how the Fed is advancing CBDC research.
The United States seeks a solid foundation for this new monetary system before developing its own version, ensuring “a safe, inclusive, efficient and innovative payment system that works for all Americans.”
Benefits of CBN lists
For Nigeria, there is no doubt that over the years the country has made notable progress in its drive to create a robust payments system through several reforms aimed at restoring confidence in the system.
Indeed, a strong payment system infrastructure, where operators and customers can transact with confidence and convenience, confidence and speed, underpins many of these reforms.
For example, in 2007, the Central Bank of Nigeria (CBN) launched the Payments Systems Vision 2020 which identified a series of recommendations to increase the resilience of the payment system infrastructure and workflows to encourage the use of electronic payment methods were inaugurated. Since then, the country has continued to introduce initiatives that would help simplify payments and deepen financial inclusion.
Director of Information Technology, CBN, Ms. Rakiya Mohammed, said every Nigerian would have access to CBDCs when they are introduced.
She said: âLet me state categorically that cryptocurrencies like Bitcoin and the like are not under the control of the central bank; these are purely private decisions that individuals make and are not part of this arrangement.
âWe have spent over two years studying this concept of central bank digital currency and we have identified the risks.
And that’s one of the reasons I said we are putting in place a central governance structure that would involve all industry stakeholders to access all risk as we continue on this journey.
“Very soon we would be making an announcement on the launch date and by the end of the year we should have the digital currency.”
According to her, around 80% of central banks around the world are currently exploring the possibility of issuing the central bank’s digital currency, saying Nigeria cannot be left behind.
Mohammed added, âYou know we have two forms of fiat money: banknotes and coins. Thus, central bank digital currency is the third form of fiat money. So this digital currency will complement the money and note that we have.
âThe central bank’s digital currency will be as good as if you had money in your pocket. So if you have change in your pocket, you have the equivalent of having cash on your phone.
âNow, why did we need to enter this field? The central bank is looking at different cases. For example, we have remittances, which is a huge market in Africa. We also know that in the last EFInA report, our goal for this year was to achieve 80% financial inclusion. We’re at about 60% and at the rate we’re going it’s unlikely we’ll hit that target. But the central bank’s digital currency would accelerate that goal. “
She said this would support cashless policy as well as innovation, adding that the central bank has a “very clear roadmap on this and we are about to take the next step of proof of consent. after which we would launch a pilot project “.
Other qualities of CBDCs according to the Zerocap report include:
Simple cross-border transactions
With CBDCs, local or international transfers can happen almost instantly and require far lower fees than the traditional system. This will significantly reduce the task of verifying funds or monitoring risk on every banking platform, as CBDCs are the true fiat currencies in digital form. Lowering fees at faster transfer rates will also promote economic growth and benefit lower classes through lower payment fees and greater accessibility to funds.
Since CBDCs are issued by central banks and available for use through digital wallets, unbanked people can access and transfer their funds without the need for private bank accounts, which are often not available to them. It will also benefit the underbanked through better access to financial services with simpler frameworks and faster KYC. M-Pesa, a P2P payment platform launched in Kenya, is a good example of such inclusion. Launched 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 increased from 14% in 2006 to 83% in 2019.
Fight against illegal activities
Digital fiat creates greater barriers to illegal activity, as physical cash makes it possible to hide and transfer funds outside of supervised financial systems. With the increasing adoption of CBDCs, payments and transfers will be easier to identify and trace to previous sources, significantly reducing the risk of fraud and money laundering. However, this seemingly more secure system offers worrying possibilities.
Chinese digital currency lessons
A report from businesstimes.com.sg found that China has been working on its digital currency roadmap since 2014 and leads the rest of the world’s central banks currently experimenting with CBDCs.
He noted that the country’s big tech companies, like Ant Group and Tencent, have played an important role in giving China the upper hand in this journey.
âDriven by the desire to increase convenience and retain customers, they ventured into mobile wallets and digital payments.
âAt first, regulators, including the People’s Bank of China (PBOC), took a hands-off approach to this. It was not an entirely deliberate decision.
âIt takes time to study and regulate new technologies and new services. This has given Chinese tech companies the freedom to experiment and push the boundaries of the financial system.
âThe result was that 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 wasn’t until companies started to aggressively use their technology for highly leveraged loans that regulators stepped in,” the report adds.
He pointed out that one of the benefits of letting large competing consumer companies lead innovation is that platforms are willing and effective at educating consumers. When people are informed, they are more likely to try innovations and adopt new concepts.
Today, many Chinese consumers are comfortable with digital forms of money and wallet, which means they might be more willing to adopt a government-issued coin.
Consumer acceptance and confidence in digital payments has also forced state-owned companies and traditional businesses to adapt, thus strengthening digital payments.
It has also allowed the PBOC to have more experience in this area, which it can apply when deploying its own digital currency, giving it more precise direction and reducing avoidable errors.
These are indeed lessons the CBN must adopt as it works to introduce its own digital currencies in the months to come.