Reasons why Nigerian Government is creating its own digital currency
Reasons why Nigerian Government is creating its own digital currency — what are the benefits?
The emergence of digital currencies has transformed the global financial ecosystem over the last decade. Cryptocurrencies such as Bitcoin and Ethereum have exploded in popularity as a substitute for fiat currencies, resulting in unprecedented global adoption.
The meteoric rise of cryptocurrencies elicited hostile responses and responses from regulatory authorities worldwide. Numerous governments regard this increase as a threat to their national currency and have been vocal in their opposition to its use. They caution against the use of cryptocurrencies, stating that they may result in monetary and financial instability.
However, recent developments indicate that central banks worldwide have begun exploring ways to maximize their returns on digital currency. According to a Bank for International Settlements (BIS) survey, approximately 80% of central banks surveyed are considering developing their own Central Bank Digital Currency (CBDC).
Nigeria, surprisingly, is poised to follow suit, as we recently learned that the Nigerian government is developing its own digital currency. This was revealed by a senior government official during the recently concluded meeting of the virtual bankers' committee.
According to the report, the Nigerian Central Bank (CBN) has been experimenting with CBDCs for two years and has made significant progress. The apex bank hopes to launch its digital currency before the end of the year and will pilot the scheme with the assistance of industry experts.
The general public was taken aback by this revelation. As previously reported, the Central Bank of Nigeria (CBN) put a hard cap on cryptocurrencies earlier this year by prohibiting all commercial banks in the country from facilitating cryptocurrency-related transactions. Additionally, it directed banks to identify and close accounts associated with cryptocurrency platforms and exchanges.
What exactly are central bank digital currencies (CBDCs), and why is the CBN developing one? Continue reading to find out more about this.
A Brief Overview of Central Bank Digital Currencies (CBDCs)
CBDCs, as defined by the Bank of International Settlements (BIS), are a new type of digital money that performs similarly to traditional fiat currencies. They are digital representations of fiat currencies that central banks create and issue.
They are backed by the central bank and may be used as a medium of exchange, a store of value, or a unit of account. Holders of CBDCs can use them to settle trades and facilitate fast domestic and international payments without the use of intermediaries.
What distinguishes them from cryptocurrencies? Are CBDCs distinct from other cryptocurrencies? Should you continue to purchase Bitcoin or not? These are the frequently asked questions by Nigerians.
While both CBDCs and cryptocurrencies are digital currencies, they have significant distinctions.
In comparison to cryptocurrencies like Bitcoin, CBDCs are centralized, regulated, and backed by a government regulatory body (the central bank). This is in direct opposition to the decentralized nature of Bitcoin and other cryptocurrencies. Additionally, depending on the frameworks used to implement the assets, CBDCs may or may not utilize blockchain technology.
Bitcoin and Ethereum, for example, rely on the underlying Blockchain technology to verify transactions. Additionally, because CBDCs are regulated by central banks, all transactions facilitated can be monitored and traced.
By contrast, anyone can purchase Bitcoin anonymously. Central banks typically peg CBDC to their existing fiat currency as well. CBDCs are backed by a country's monetary reserves, providing a stable value in comparison to cryptocurrencies' wild volatility.
The benefits of CBDCs
CBDC promises to make domestic and cross-border payments faster, cheaper, and more efficient. CBDCs may have a number of potential benefits, including lower transaction costs, increased transparency, and simplified transaction monitoring. Additionally, CBDCs provide increased security, a reduced risk of fraud, and increased oversight of fund movement. CBDCs also have the potential to increase financial inclusion and reduce the population of unbanked people.
What are the benefits of the CBN developing its own CBDC?
One of the primary reasons the CBN is developing its digital currency is to facilitate domestic remittances. Strict foreign exchange controls and exorbitant transaction fees for money transfers in and out of the country have prompted many Nigerians to learn how to buy bitcoin and use it to facilitate inexpensive and rapid domestic and cross-border transactions.
Additionally, cash usage has decreased over the last few years as a result of a gradual loss of confidence in the Naira. The COVID-19 pandemic, which precipitated a global economic downturn, weakened the Naira and its purchasing power significantly. This prompted Nigerians to purchase bitcoin and altcoins as a means of expanding and safeguarding their businesses and funds against the local currency. These are just some of the factors that convinced Nigeria's central bank that it needed to expand the use of the national currency by creating a digital version.
The CBN's digital currency will function in tandem with the naira. It will assist the central bank in achieving its public objectives, which include safeguarding people's money, ensuring secure and resilient payment systems and infrastructure, and reestablishing public trust in the naira. It may aid in the fight against economic crime and fraud by providing transparency and being difficult to counterfeit.
Additionally, the CBDC could benefit the unbanked population and assist the central bank in advancing its mission of financial inclusion. Additionally, it will contribute to the efficiency of banking and monetary policy. For consumers, electronic CBDC enables the use of secure and low-risk payment methods. CBDC may contribute to the development of efficient and low-cost transactions by obviating the need for third parties.
Conclusion
The CBN's announcement that it will create its own digital currency is a welcome development for the country's crypto enthusiasts. This demonstrates that the government is interested in capitalizing on the opportunities presented by digital currencies. This could potentially increase crypto adoption and usage, resulting in a more favorable regulatory environment for cryptocurrencies in the country.
