The Central Bank of Nigeria’s eNaira Project

This is the first time I’ll be writing an article on the subject of cryptocurrency.

 

To start, I want to make it clear that I do not own any bitcoin – whether directly or indirectly, and while I believe Blockchain technology is phenomenal technology with the ability to revolutionize a lot of industries and processes we run today (I have at some point in the past considered being a blockchain developer myself), I do not believe in bitcoin, and there’s a very good reason for that;

 

Money is usually more than just a store of value; in most cases, it represents the economic strength and viability of any nation. Bitcoin in most cases seeks to create a backdoor route for the exchange of value between two corresponding parties. Is this a bad thing? Not necessarily, the problem is that as bitcoin transactions increase, the ability of financial institutions to monitor inflow and outflow of currency in its system reduces, its ability to influence monetary policy based on available data is also weakened, and in a country like Nigeria where remittances (US$16.9billion in 2020) make up a sizable amount of foreign currency inflows (US$43 billion in 2020) – the ability to both monitor and profit off those processes is greatly reduced.

 

This is the long-term challenge for bitcoin, and why I personally believe the whole crypto craze is a fad. Regardless of how innovative you think you are, regulators play a large role in determining what floats, and what does not and when the success of a product threatens the job of a regulator, he will find ways (whether within or outside his jurisdiction) to cut your product to the ground. This is what the Central Bank did to bitcoin. Regardless of what you think, the success of Bitcoin is a threat to the viability of the Central Bank of Nigeria, and being the apex regulator of financial activities in Nigeria, the Central Bank has responded accordingly.

 

Historically, the most regulated space in the global business world is in financial services – banks are heavily regulated financial service players and fintechs are not any different. Firms like PayPal, Stripe, and the likes all face their respective levels of financial regulatory scrutiny, and with all the financial power Facebook has, when it tried to push the LIBRA project in June 2019 (a great idea, but one the regulators didn’t trust it to handle), the regulators killed it.

 

To be clear, I do not support the highhanded and abrupt way in which the CBN announced its ban on Crypto trading – but after how Bitcoin was used to circumvent CBNs strategy of blocking accounts of EndSARS protesters on the basis of ‘Funding terrorist operations’, I think this was only a matter of time.

 

According to Chainanalysis, Nigeria received around US$2.4 billion in crypto in May 2021, extrapolated on an annual basis represents more than US$25 billion per annum which is actually 6.4% of Nigeria’s GDP with the capacity to grow even more in the coming years. 

 

Bitcoin trading firms have it made – the customer acquisition strategy for Bitcoin trading was a falling Naira and rising inflation – two acquisition channels that have continued nonstop for the past couple of years and have fallen about 21% and 17% respectively 2021 YTD (Year to date) since the CBNs February Ban on Crypto trading.

Bitcoin’s growth and global adoption is the biggest threat to its viability – the more people use crypto, the more regulators become concerned and look for alternatives and various ways to ban and stifle its growth. India, China, and the likes are examples of such instances. 

 

The United States may not continue to be open-minded towards crypto (bitcoin) when it represents about 6% of their economy (US$1.285 trn). 

 

CBN’s strike against bitcoin was a clear frontal attack – nobody will watch some strange digital product built by a guy called Satoshi Nakamoto threaten his business and welcome it with open hands – the ideal thing to do is find ways to destroy this competitor, and this is what the Central Bank has done.

 

And for those saying El Salvador has adopted bitcoin as its legal tender, El Salvador’s GDP is US$27 billion, less than the net worth of Mckenzie Scott and Michael Bloomberg. Search traffic to El Salvador has probably seen a considerable spike since it announced its Bitcoin adoption plan in June 2021. What El Salvador chooses to adopt may not necessarily matter in the global turn of events. In my opinion, El Salvador’s decision to adopt bitcoin as legal tender may be more of a PR strategy than a financial one.

 

Personally, I expect bitcoin to continue to grow and probably reach even US$100,000 or even more in the coming years, but I strongly believe this isn’t sustainable, and that on the back of a unified regulatory clampdown its long term viability may be questionable – Unpopular opinion, but my thoughts nonetheless.

 

ENAIRAs VALUE PROPOSITION

The first time I heard of the eNaira, I was largely dismissal of its value proposition. The eNaira was announced exactly 18 months after the Central Bank announced its ban on crypto trading in Nigeria and was heralded as some kind of alternative to Bitcoin and the likes. 

 

The biggest issue with eNaira being a replacement for bitcoin is the fact that eNaira is a stable coin – what that means is that unlike bitcoin that is relatively volatile and is a profit making cryptocurrency, the eNaira is fixed to the Naira. 

 

One of the major reasons people buy bitcoin is to hedge against inflation, and there’s a very good reason for that. While the Naira is less volatile than Bitcoin, regardless of the ups and downs bitcoin has undergone in 2021 (no thanks to Elon and his Twitter escapades), bitcoin has been up 43.5% YTD (Year to Date), however, the Naira had been down 21% YTD. If you were earning 500k a month last year, without your knowledge your earning capacity has been depleted by at least 17% if your income has stayed constant.

 

So while the eNaira is a cryptocurrency, it isn’t a viable replacement for Bitcoin or any other meaningful non-stable coin cryptocurrency. The main value proposition for Bitcoin has been its ability to bypass inflation and currency devaluation mismanagement – eNaira doesn’t solve this problem, and this makes the eNaira a weak and largely meaningless alternative to those who hold Bitcoin.

However, the eNaira is not all gloom and doom. The eNaira is the Central Banks way of becoming an unofficial MPESA and bolstering financial inclusion in Nigeria. 

 

To be honest with you, the eNaira is an innovative solution that at its core (and if it succeeds) will help the Central Bank gather valuable data to properly influence its monetary policy decision-making ability, and also help bring a vast majority of financially excluded people into the fold. 

 

One way the Central Bank intends to do this is to allow feature phones to hold eNaira wallets and allow them make transactions on those devices without the need for an internet connection, the same way the USSD framework works. I am also aware the Central Bank is in talks with telcos to allow them make eNaira wallets run on smartphones without the need for data. What this means is that regardless of whether you have data or not, you can still make transactions via your digital wallet. I believe this is a step in the right direction. For these reasons I personally believe the eNaira is a step in the right direction.

 

Financial Inclusion

I was in a session recently where one of the speakers brought out a slide that listed unbanked people and financially excluded people in different categories. The slide made me ask myself – does being banked automatically mean a person is financially included? I think the answer is no.

 

To be honest, when I think of financial inclusion, I’m thinking of a scenario where a person has access to a wide array of financial services as against just having a store of value (bank account, digital wallet). If this definition is anything to go by, then banks are not necessarily solving the financial inclusion problem (which they really have no incentive to do off course), and being banked does not automatically mean you are financially included.

 

Being financially included SHOULD mean you have access to loan services, wealth management (of some sort), and even investment opportunities. The vast majority of the Nigerian populace do not have access to these services from their banks, Fintech companies like PiggyVest, Chaka, Bamboo, and the likes are willing to help millennials earning even N30k a month save and manage their wealth. No Nigerian bank is remotely interested in managing your wealth if you earn anything less than N30 million a month. If not for firms like Fairmoney, Branch, Carbon, and the likes, getting a loan from a traditional bank was almost synonymous with applying for a US visa with a criminal record. 

 

Banks have very little interest in financially including anyone who doesn’t add anything meaningful to their bottom-line. Most TRUE financial inclusion progress has largely come from fintech players innovating to solve customer needs as against primarily banks.

 

Payment and Transaction Nodes

The thing about financially including people is understanding the node system. MPESA works in Kenya because most if not all merchants in Kenya accept it as a means of payment. Cash is still king because while there may still be certain places that refuse to accept cash for payment, you can get a vast majority of things done in Nigeria with cash as against most digital payment channels.

The higher you are on the economic chart, the more likely you can live off non-cash transactions. 

 

As a Millennial (with fewer responsibilities) earning N300k a month, you can avoid the bus (if you don’t own a car), go to work with a bolt ride, pay with a bank transfer, eat lunch at Chicken Republic, pay for that with your debit card, buy groceries at a mall, pay with a card, and come back home with the same bolt ride after paying with a bank transfer and literally go a whole day without needing to run any cash transaction. A person earning less than 50k a month may not be too disposed to run such a process – transportation is largely by bus, and unless you follow the BRT transit system in Lagos, no conductor (to the best of my knowledge) carries a POS around with him he uses to receive card payments or has a bank account pasted somewhere on the bus for bank transfers, plus with access bank charging me N26.88 for P2P bank transfers, it doesn’t really make any sense for anyone to pay little amount of monies through those means.

 

The secret to bolstering financial inclusion is by increasing transaction Nodes; if the woman selling tomato has eNaira in her wallet, but the woman selling Yam doesn’t have an eNaira wallet, transactions cannot happen between them in eNaira and the next point of call would therefore be to liquidate that money back into cash to allow for transactions to occur. 

 

If most if not all transaction nodes are not onboarded into the eNaira payment system, cash will still remain the most preferred payment channel and will eventually defeat the whole purpose of creating an eNaira in the first place. 

 

Also, the CBN should be wary about its decision to separate wallets into Merchant and consumer types – while this may make sense for more established businesses, a lot of informal market businesses are one-man/woman enterprises, meaning the person running the business account could also be spending from that same account for personal needs – should the lady selling tomato in the market be onboarded to a merchant or consumer wallet? She likely doesn’t even have a TIN (Tax Identification Number), so that doesn’t really make any sense, and if she’s given a consumer wallet, does she lose out on the benefits of being a merchant wallet holder? What stops her from reverting to cash if she doesn’t see the value proposition behind all of this?

 

INCENTIVES

In my opinion, the biggest threat to the success of the eNaira is the CBNs lack of an incentive system. The eNaira project directly benefits two key players – the Central Bank of Nigeria (due to its ability to access more transaction data and better influence monetary policy) and end consumers (cheaper/free P2P transaction rates, and the possibility of financially including more people), every other player excluding the CBN issuing CBDCs to customers receiving CBDCs will likely be financially affected by the success of this project.

 

Banks who are one way or the other responsible for seeing this project succeed have no incentive to do so. The 12 largest banks in Nigeria made a combined N216 billion (US$527 million) in 2020 revenue from their eBusiness divisions, this money came from Bank charges of all kinds and manner for Bank transfers and ATM withdrawals – considering the fact that to bolster adoption, the CBNs design of the eNaira stipulates that Wallet to wallet transactions are largely free, the success of the eNaira project will therefore result into lesser revenues for their eBusiness divisions. 

 

There’s probably a Bank CEO planning to be the first person in Nigeria to order the new Rolls Royce Boat-tail that retails at US$28 million – this new arrangement by the CBN is targeted at stifling his/her plans, I’m not sure they’ll be very happy with this arrangement.

 

Telling banks to push and promote a product whose success will inevitably reduce their eBusiness revenues is tantamount to forcing Apple to sell Samsung products. Banks have no incentive to push this project, in fact, its failure is to their benefit, if the Central Bank decides to go ahead with this project in its present form, I half expect the banks to play eye service to their big brother (CBN) and subtly frustrate this project.

 

The eNaira design is simply staging a price war on another person’s infrastructure. The eNaira is expected to run on already existing payment infrastructure, and to be cheaper than other alternatives as a way to draw in more people. 

 

The big challenge behind the eNaira design is the CBN may not be making adequate considerations for Fintech players providing payment infrastructure, and other PSSPs. If the eNaira project prospers, those switching card payments for both ATMs and POS devices will see less revenues; MMOs and mobile payment apps will likely also see a drop in profits if the design allows eNaira wallet holders to make bill payments and other vending transactions (power, water etc), CBN will literally be directly competing with MMOs and mobile payment applications – competing with a regulator is not a very good position to be in, if the referee is a CR7 and Manchester United fan, don’t be surprised when Ronaldo ends up scoring three penalties in the match, even if two of the assigned penalties were clear VAR confirmed dives. 

 

While Banks and probably MMOs will be allowed to build their own digital wallets to store eNaira, what happens when the CBN mandates all merchants to accept eNaira payments? Payment processors will be forced to list Pay with eNaira as a payment option on their gateways, Pay with eNaira will likely have the least payment commission for payment processors – if more people adopt that payment channel, the revenues of PSSPs will be largely affected.

 

Personally, I would have suggested the Central Bank talk to businesses like Patricia who have gone beyond just enabling crypto trading to facilitating crypto payments over the past couple of years. I have never really seen payments as a value proposition for volatile cryptocurrencies like Bitcoin – due to their volatile nature, US$100 worth of bitcoin payments made to you today could be worth less or more in a weeks’ time dependent on what China does or Elon tweets, acceptable Legal tender ideally should not be that volatile.

 

While I do not have any hard data backing this up, Patricia has either been able to facilitate crypto payments and seen a steady increase in adoption, or seen that product fail or underperform and have a clear understanding of why such things do not work. All that is valuable knowledge I think the Central Bank should be interested in.

While I believe Patricia probably has plans in place to build an eNaira wallet to facilitate payments already, the fact that wallet-to-wallet transactions are largely free just makes it all the more undesirable to want to play it big in this space.

 

UNINTENDED USE CASES

There are times when innovation will see you build out a solution, put it in the hands of potential users, and watch for unintended use cases for you to build a more focused solution around and capitalize on.

 

The CBN should build this solution with a clear eye for unintended use cases it can take advantage of. The CBNs eNaira design frowns on the idea of liquidating eNaira to cash the same way POS systems are run in Nigeria. While there are many reasons this should be frowned upon, the Central Bank should endeavor not to stifle out innovation by being too rigid and outrightly ignoring unintended use cases users may begin to adopt.

 

CONTINENTAL PLAY

From the onset, one key value proposition of a CBDC would have been to foster African trade. Presently, a lot of deliberations are ongoing on the continental level in regards to the launch of a single currency for African trade, what stops all AU member Nations from adopting a single CBDC as an acceptable means of cross-border payment between all African Nations? The currency could be pegged to the collective economic value of all AU member states. 

 

The advantage here could be products having two prices – one would be in its local currency, and the other would be in the collective CBDC for cross-border payments. 

 

Since the CBDC runs primarily on digital channels, all transactions would be made on the blockchain ledger which would make it easy to monitor transactions, reduce and prevent fraud, money laundering, and make payment transaction data easily accessible to regulators for better financial benchmarking.

 

The CBDC could be offered by a single player/entity in the African banking space (likely Afrieximbank) and if Bitt inc were to get the privilege to get on that project, expect the CEO of Bitt Inc to get himself a US$6.75 million Eurocopter Hermes EC 135 next year, but I digress.

 

CONCLUSION

To be clear, I believe the eNaira is a step in the right direction and if graduated to accommodate a continental play would be a great way to foster intra-African trade on the continent, however, for this project to work, the Central Bank needs to avoid employing a high handed approach to execution, and create a clear incentive system (especially for the banks and fintechs) to give them the willingness to both adopt and create meaningful and innovative use cases around the solution.

 

Inspired By The Holy Spirit 

 

P.S: would be great if the CBN eventually decided to hedge the eNaira to the US dollar. That would make for a great use case for retail users and probably bolster adoption.