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  Nigeria aspires to go the digital route with its currency. That’s the impression it gave the world back in June when its apex bank announced that it would be launching a digital currency. If it goes ahead with this, it would be joining a growing club of nations, which are seeking local, government-sanctioned alternatives to decentralized cryptocurrencies. That group includes South Africa, Morocco, Kenya, Ghana, and Egypt, as well as China, Indonesia, South Korea, Japan, Norway, and the Bahamas. The motive behind this global rush to introduce digital money is clear: cryptocurrencies—which aren’t controlled by governments—have become more popular across the world in recent times. Central banks across the world fear that cryptos could decouple large segments of their countries’ economies from their formal financial systems. This would mean that they have little control over what happens in those quarters. But it’s not immediately clear what Nigeria stands to gain from rolling out a digital currency (besides temporary bragging rights). We could find clues from examining the very nature of the proposed currency format itself.

Digital Currencies Defined

Digital currencies are a form of currency that is only accessible in digital format, on computers or mobile phones. They exist in electronic form and may be held in electronic wallets. A key characteristic that digital currencies have is that transactions with them don’t require intermediaries. This is unlike regular electronic financial transactions, which are mediated by banks and clearinghouses. Here’s something worth noting: cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies. Besides crypto, the class of digital currencies also includes Central Bank Digital Currency (CBDC), the sort of money that Nigeria and other countries are mulling. One difference between CBDCs and cryptos is that the value of the former is relatively stable—at least when compared to the latter. Digital money that’s introduced by central banks also has most of the features of regular currencies.

The Emergence Of Digital Currency, As Seen Across The Globe 

As has already been pointed out, the surge of interest in digital currency from governments, the world over, is linked to the rise of crypto. This is clear in the case of Nigeria, which has banned banks from hosting accounts linked to crypto trading. China, a country that’s clamped down on cryptocurrencies, has been at the forefront of the global move towards adopting a government-regulated alternative. In 2020, it began testing its digital Yuan as a means of payment in selected cities. But, as experts have pointed out, China has more to gain from this project than just smothering Bitcoin. If the digital Yuan is directly exchangeable with other countries’ (digital) currency, it could threaten the place of the dollar as the international medium of exchange. And that’s something the Chinese seem eager to bet on. China isn’t the first country to latch onto the digital currency train. Back in 2018, the Marshall Islands—a small archipelago whose previous legal tender was the US dollar –became the first country to launch their own digital currency (which they called “Sovereign”). In the years that followed, more nations have examined the possibility of following this path. Even the United States Federal Reserve is considering digitizing the US dollar. They appear to be looking at the benefits this move could confer. Because digital currencies remove the need for an intermediary, they could enable businesses to run faster and incur less (or no) transaction costs.

Nigeria Could Be Eyeing Benefits Too

The CBN may have first conceived of digital currency as an alternative to cryptos. But perhaps it’s since been drawn to the idea by the rewards that it could bring. We have already mentioned that digital currencies accelerate payments by cutting out intermediaries. This could work as an incentive, increasing transaction volumes, and, ultimately, boosting Gross Domestic Product (GDP). It’s a potential win that’s hard to pass up. There are also benefits to tax collection. Like cryptos, transactions involving CBDCs would be easier to track, meaning that the ‘tax net’ could be spread out more broadly. The government will also be able to collect data on Nigerians and their finances, and design policies accordingly—something that it’s always struggled to do. The CBN has been fighting a losing battle against Naira devaluation for a while now. A digitized Naira could be an effective weapon for it in this regard. If the naira becomes freely exchangeable with the dollar and other major global currencies, the downward pressure on the naira could lessen somewhat over the medium to long term. (Of course, a permanent solution has to involve a substantial increase in Nigeria’s productivity, which is at the heart of the trouble with the weakening naira.) Given these possible outcomes, it’s not hard to see why the CBN would want a digital currency (which they plan to launch by 2022). However, it’s probably not going to replace fiat for a while yet; at least that doesn’t seem to be the apex bank’s aim. Featured Image Source: Central Banking
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This article was first published on 23rd August 2021

ikenna-nwachukwu

Ikenna Nwachukwu holds a bachelor's degree in Economics from the University of Nigeria, Nsukka. He loves to look at the world through multiple lenses- economic, political, religious and philosophical- and to write about what he observes in a witty, yet reflective style.

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