The Center for Fiscal Transparency and Integrity Watch provides a comprehensive analysis of the eNaira and its value proposition.
The 2008 global financial crisis was largely blamed on the radical optimism of new classical economists, whose prescriptions allowed for the stupendous-albeit-spontaneous investment in the stock exchange and financial markets, which consequently granted unaccounted freedom to the hubris of bankers.
Except for Nouriel Roubini and Robert Shiller, it has been argued that most economists did not foresee the oncoming burst. Nevertheless, when it occurred, the world came together in search of a viable solution, with the government intervention centred around the bailing out of bankrupt banks.
According to the Greek economist, Yanis Varoufakis, the bailout policy only further fuelled the irresponsibility of bankers. Instead of using the bailouts to issue loans that would get the economy going, they rather decided on deploying them to recover the assets they lost to the unfortunate crisis.
Moreover, the move triggered intellectuals into profiling the new order as the era of an economic game, which was between being played by greedy bankers and a government that’s ever ready to play into their hands.
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The first-ever digital currency was introduced by the anonymous Satoshi Nakamoto, who aims to create a financial system that can’t come under the influence of government or the corruption and lack of transparency of deposit money banks.
This will be possible upon the acceptance of the currency as a medium of exchange, whose supply and demand is purely determined by the equilibrium of the market forces.
However, the idea has been viewed by economists like Roubini and Varoufakis as futuristic technological fantasy, rather than any revolutionary economic idea – mainly because the cryptocurrency doesn’t have any of the features of money.
Also, economists have projected that the limited supply of a cryptocurrency, due to the technical demands of mining, will risk inescapable deflation. In the same way, hyperinflation will inevitably break out if the supply becomes unlimited when the mining becomes easier. For one reason, there is no central regulator around the use of cryptocurrency.
The decentralised feature of the digital currency also warrants untraceable remittances that bypass the watch of market regulation, which despite making countless transactions easier, paves the way for entrenching money laundering.
Such presents a challenge to the central banks of major global economies, especially those bedevilled with illicit financial flows, political instability, corruption and terrorism, as in Nigeria.
The eNaira has been disclosed by the CBN governor, Mr Godwin Emiefele as, “a digital currency that provides a unique form of money denominated in Naira. E-Naira serves as both a medium of exchange and a store of value, offering better payment prospects in retail transactions when compared to cash payments.
E-Naira has an operational structure that is both remarkable and nothing like other forms of central bank money.”
Another relevant concern is the epidemic of scamming. The Nigerian economy is riddled with unpatriotic fake news entrepreneurs, to the point that even the educated and enlightened can be victimised by fake news.
A significant number of people holding digital currencies would mean an opportunity for scammers to exploit their inexperience and ignorance to bankrupt them.
As such, unlike other digital currencies, the CBN further explained that the eNaira is traceable because there are components of due diligence in hindering any prospects of fraudulent and illicit activities like money laundering and illicit financial flows involved in the circulation of the currency.
Worth considering is the high technical demand of cyber-security to overcome cyber-criminals, who have proven capable of bypassing even the most equipped security systems in high-tech countries. Otherwise, the new system would make it easier for criminals to exploit it.
Digital currency is nothing like traditional money. It is fiat. Therefore everything is swift, flexible and capable of outwitting saboteurs. There is no room for inconsistency or any avoidable incidence in its handling. Otherwise, all hell would break loose.
Reuters reports that in 2018, $1 billion were laundered through a digital currency. And in 2019, the amount increased to $2.8 billion, even though it will be a fair argument that such happens because no centralised regulator can trace the wallets holding the funds.
Another relevant concern is the epidemic of scamming. The Nigerian economy is riddled with unpatriotic fake news entrepreneurs, to the point that even the educated and enlightened can be victimised by fake news.
A significant number of people holding digital currencies would mean an opportunity for scammers to exploit their inexperience and ignorance to bankrupt them. A similar disaster took place barely two years after the bitcoin was introduced.
A pervasive fear of scamming was created in the mind of a huge section of the American populace, which was the opportunity that scammers used to appear as trustworthy keepers of their assets, only to run away with all of it.
Concerning the technicalities of the eNaira, Nigeria appears as an even more vulnerable target. The CBN must ensure proper education among users of the digital currency. Otherwise, it will have to spend massive resources in bailing out the victims of scams involving this. Also, the insurance of ‘depositors’ in relation to this currency is presently not clear.
In a possible scenario in which the eNaira is expected to appreciate from ₦200 to ₦360 within three months. No rational agent holding a range of hundred to a thousand units of the currency will forgo it, knowing that it will add ₦16,000 to ₦160,000 on his initial investment in just three months.
From the information that surfaced, it has not been made very clear how the currency would be supplied, which would be a phenomenon of critical relevance, having learnt from the CBN that the objective of the currency is to be accepted by everyone.
The aim of digital currency since its inception in 2008 has been to replace paper money. Therefore, if the supply is limited, the acceptance of the currency may give rise to a problem along the axis of deflation. And if it is unlimited, the regulation of CBN will help in correcting the inconsistencies. But that will mean defeating the purpose of decentralisation.
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Moreover, the distinguishing feature of the eNaira as a simultaneous medium of exchange and store of value brings more challenges than the non-conversant eye can see. The paradox here is that any commodity that stores value is subjected to appreciation and depreciation.
In the event in which the economic agents expect depreciation, they will be rational as to become unwilling to hold it in order to rescue their investment. Likewise, their rational willingness to hold it when they expect it to appreciate. And that will threaten its stable flow as a medium of exchange.
In a possible scenario in which the eNaira is expected to appreciate from ₦200 to ₦360 within three months. No rational agent holding a range of hundred to a thousand units of the currency will forgo it, knowing that it will add ₦16,000 to ₦160,000 on his initial investment in just three months.
Moreover, suppose it is required that he uses the eNaira as a legal tender to purchase daily goods and services. In that case, a rare culture of thrift may break out that will see people preferring to hold their money, rather than consume in anticipation of profit.
This will cause a fall in consumption, a menace of cunning debt, and collective abstinence that may trigger the paradox of thrift and fallacy of composition. Likewise, in the event in which the people anticipate a fall in its value, they will scramble to let it go, threatening the stability of its value at an unreasonable proportion.
That being said, despite the open-ended prospects for modification and corrections, a digital currency that combines storing value and serving as a medium of exchange presents solutions for the future.
Center for Fiscal Transparency & Integrity Watch is an accountability platform based in Abuja, Nigeria.
