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In February, the central bank told banks and financial institutions that “facilitating payments for cryptocurrency exchanges is prohibited”. The bank moved to introduce the e-naira, which will count as a cryptocurrency and will be pegged to the physical naira, after the country’s vice-president, Yemi Osinbajo argued that cryptocurrencies should be regulated, not banned.
Introducing a digital currency in the context of the ban is “counter-productive”, says Toritse David, an investment banking analyst at Standard Bank in Lagos. She sees expectations of further naira weakness as a motivation for cryptocurrency use.
“We expect the naira to continue to devalue,” David says. “People will definitely want cryptocurrencies as a hedge,” and the introduction of the e-naira will not do anything to dissuade them, she adds.
In 2020, China became the world’s first country to introduce a sovereign digital currency, which counts as a form of cryptocurrency. Nigeria has joined African countries – such as Ghana, Morocco, Egypt, Kenya and South Africa – in exploring the feasibility of following in China’s footsteps.
At the end of August, Nigeria’s central bank appointed Bitt Inc from Barbados as a technical partner in the project. Testing of the currency will take place in October, with full roll-out scheduled for the end of the year.
Success will partly depend on whether the e-naira can address the main reasons why many Nigerians started using cryptocurrencies in the first place, namely the need to hedge against currency risk and reduce transaction costs, says William Attwell, senior sub-Saharan Africa analyst at Fitch Solutions in London.
- Appetite for crypto will stay high given continuing concerns about the naira’s outlook, Attwell says.
- “We expect the currency to remain under a fair bit of pressure, with further weakening likely in the coming quarters,” he adds.
Analysts see advantages in the e-currency, including greater financial inclusion and banking competition. According to Standard & Poor’s, the plan could help the regulator limit black-market trading in the naira, increase inbound remittances and improve the efficiency of state-funded social programmes.
The digital currency can “eliminate logistical burdens, lower transaction costs and accelerate transfers of remittances,” says Abisola Adeniji, a banking analyst at Greenwich Merchant Bank in Lagos. It will also help create “equality in terms of financial services, specifically for the unbanked”, though this will also depend on mobile-phone penetration and high-speed internet access, she says.
- Increased financial inclusion in turn leads to more remittances, which are usually targeted at the poor, she says.
- “The downside here is the low level of trust citizens have” in the central bank.
- “Competition in the banking sector will grow because the banks are tasked with the provision of the technology to scale the use of the digital currency,” Adeniji says. “Banks with [solid] technology which can adapt faster will be the biggest winners.”
- However, Adeniji says, there will still be room for cryptocurrencies to thrive, especially in a high-inflation environment like Nigeria’s.
The e-naira in itself will do little to tackle the fundamental factors that have caused Nigerians to start using cryptocurrencies.
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