Smart Contract Summit 2021: Central Bank Digital Currency (CBDCs) and Blockchain Panel

The Central Bank of Nigeria (CBN) has adopted various policies and released guidelines in efforts directed to control the devaluing state of the Naira. Earlier in February 2021, the CBN instructed all financial institutions to withdraw all support services for transactions involving cryptocurrencies.

The apex bank cited the need to protect the financial system and the youths from the risks inherent in crypto volatility.
Further concluding in a press release that “… *cryptocurrencies are largely speculative, anonymous *
*and untraceable, they are increasingly being used for money laundering, terrorism financing and other *
criminal activities”.

Nigeria is battling dollar shortage largely due to the disruption of international trade by the COVID-19
pandemic and dwindling oil prices. The apex bank has had to devalue the Naira thrice since 2020, a
measure that has failed to strengthen the value of the Naira.

A contributory to the fall in the value of the Naira is the preference by many to hoard foreign currencies
due to the various economic risk concerns across Nigeria. However, the continued adoption of
cryptocurrencies as store of value over this period and means of remittance may have also mildly sidelined the Naira as even the Bureau De Change Operators (BDCs) have been linked to exchange transactions to render cryptocurrencies into foreign currencies in response to restrictions trading against the Naira.

BDCs are licensed to provide retail FX services such as buying from the public and selling to users for
allowed transactions such as Personal Travel Allowance (PTA), Business Travel Allowance (BTA), medical fees etc.

Based on available data, Nigeria ranks no. 1 currently as the leading country per capita for cryptocurrency
transactions at 32% adoption rate

Nonetheless, there is a need to review the various steps and guidelines
released by the CBN which have been ineffective in strengthening the Naira.

Notable FX guidelines released in 2021
• July 2021; Ban on the sale of Foreign Exchange to Bureau De Change Operators citing grounds
that BDCs facilitate graft and corrupt activities of people who seek illicit fund flow and money
laundering in Nigeria.
• 30th August; Directive on publication of names of defaulters of the CBN policy on the sale of Forex
for Personal Travel Allowance (PTA) /Business Travel Allowance (BTA)- Directed that all banks
publish on their websites, the names and BVN of defaulting customers that present false travel
documents or cancel flight tickets without returning the purchased FX within 2 weeks.
Notable is the fact that the limit to PTA and BTA is $4,000 and $5,000 per quarter respectively.
• 28th July 2021; Restriction on licensing of new Bureau De Change Operators and refund of
minimum capital deposits/licensing fees for pending license applications.

The President of the Association of Bureau De Change Operators of Nigeria (ABCON) has made a
statement that the decision to ban sale of FX to its members is the driver for the continued inflation of
prices of goods and services in Nigeria. The ban has further restricted the supply of FX in the parallel
market as banks.
The CBN stated that the sale of $110 million weekly with allocation of $20,000 to each of the over 5,500
BDC operators in the country was taking a huge toll on the national foreign reserves. However, BDC
operators fix rates in the foreign exchange market and this influenced the restriction of the sale of forex to BDC operators.

However, the Naira has kept on losing value despite the increase in foreign reserves of the nation from a
record low of $33.09 billion in July 2021 to $34.26 billion by September 3rd 2021. This is deducible from the continuous fall in the value of the naira within a week from N520/USD to as low as N545/USD (48-year low), N745/GBP and N636/ EUR in the parallel market.

Other factors include panic buying by Forex users and BDC operators hoarding FX in anticipation of rates fluctuations due the policies.

The CBN needs to be cautious to ensure that the restrictive FX policies will not be counterproductive due to the rising demand for foreign exchange and its exploration of the national digital currency. Legitimate end users that are unable to access FX supply can rely on cryptocurrencies to remit payment for transactions that support crypto payments or cross-border remittance.

Nigeria’s CBDC (e-Naira)

The CBN engaged Bitt Inc, a Barbados Fintech based company as its Technical partner to pilot the national digital currency (eNaira). The apex bank stated that its selection of the project partner was based on the
company’s prior experience with the successful launch of the CBDC of the Eastern Caribbean Central Bank (ECCB) earlier in 2021. The selection process considered technological competence, efficiency, platform security, interoperability and implementation experience.

However, the eNaira transaction has a spending limit in three tiers (Tier 1, Tier 2 and Tier 3) with the Tier
3 having the highest spending limit. Tier 3 wallets have a transactional (sending and receiving) limit of N1 million Naira, an equivalent of about $1,850 at the parallel market rate.

With the advent of the eNaira, the CBN is targeting increased cross-border trade, accelerate financial
inclusion, tax collection, monetary policy effectiveness, cheaper and faster remittance inflow. eNaira will not operate as a store of value for users as it is a form of payment with non-interest bearing CBDC status.

Though, it is arguable that the sovereignty threat and infrastructural risks in appointing a foreign partner
should be a consideration and preference to be given rather to a local company.

Based on Executive order No.5, Government Ministries, Departments and Agencies (MDAs) are to engage local professionals in the planning, design and execution of national security projects. A provisional exception is the situation
where foreign companies with demonstrated capacity to handle such indigenous projects can be awarded the contract in preference to local professionals where they lack expertise.

Reports in the media claim that the CBN has conditioned Bitt Inc to register as a Limited Liability Company in Nigeria and the CBN will own shares in the Nigerian entity.

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