THE EMERGENCE OF THE BLOCKCHAIN NETWORK — THE NIGERIAN E — NAIRA AND THE NATION’S CRYPTOCURRENCY EXPOSURE.
Nearly 250 years ago, the economist and philosopher Adam Smith wrote “The Wealth of Nations”, in which he described the birth of a new form of human activity: industrial capitalism. According to Smith, this new human activity would lead to the accumulation of wealth beyond anything that he and his contemporaries could have imagined. We thought that will be the biggest disruption in the finance ecosystem, little did we know that the course of the finance ecosystem was about to change immensely.
Just a decade ago, a major invention and financial disruption emerged, a person or group of persons with the pseudo name Nakamoto Satoshi came up with what he/they called a purely peer-to-peer version of electronic cash which would allow online payments to be sent directly from one party to another without going through a financial institution, the invention which he called “Bitcoin”, which was built on the Blockchain otherwise called the Decentralized/Distributed Ledger Technology (DLT).
Over the years, the adoption of Bitcoin and Blockchain has been rising, according to the blockchain analytics firm, Chain Analysis, the global adoption of cryptocurrency has increased by over 880 percent, especially in Vietnam, India, Pakistan, Nigeria, and other emerging economies. This was reported in the company’s 2021 Global Crypto Adoption Index, titled “Geography of Cryptocurrency.’[1] The President of El Salvador in a statement released on the 9th of June, 2021, announced that Bitcoin should be recognized as a legal tender in the country.
Equally research by Blockdata, a blockchain market intelligence outfit, shows that 55 out of the top 100 banks, through a structure called assets under management (AUM) have some form of exposure to the novel technology.[2] This involvement reportedly cuts across direct and indirect investments in crypto and DLT firms by the banks themselves or through their subsidiaries. Blockdata’s research places Barclays, Citigroup, and Goldman Sachs among the most active backers of crypto and blockchain firms, with JPMorgan and BNP Paribas, also identified as serial investors in the emerging space.[3] Global banking giants and businesses like Travala, Grayscale, Micro-Strategy, Richard Branson’s Virgin Galactic, Netflix, GetYourGuide, Microsoft, Hostingar, WordPress amidst others are reportedly increasing their involvement in emerging crypto and blockchain firms by way of early- and late-stage funding for projects and businesses in the industry. Indeed, it is a big deal. [4]
There is no doubt that the invention has fueled industrial, technological, and green revolutions. It has reshaped the natural world and transformed the role of the state concerning money. It has lifted innumerable persons out of poverty over the last decade — especially with the meteoric rise in the price of Cryptocurrencies. It has significantly increased standards of living and resulted in innovations that have radically improved human well-being.
This technology has changed the way people shop, pay for goods, and store value. In recent times, cryptocurrencies have become one of the main stakes on news, and probably everyone must have heard about Bitcoin by now. It was the first cryptocurrency to go mainstream, but others are growing in popularity too. As of now, there are over 12,000 kinds of cryptocurrencies that have been developed and there are dozens of others that are being created daily.
Research suggests that most people have heard of cryptocurrency but don’t fully understand what it is. So, in this article, I will be discussing the following:
1. What are Cryptocurrencies?
2. What is the Blockchain Network?
3. Pillars of the Blockchain Network?
4. The big deal on the E- Naira.
5. Recommendations and Conclusion.
WHAT ARE CRYPTOCURRENCIES?
Cryptocurrency is a digital payment system or a form of digital cash that does not rely on banks to verify transactions. It is completely a decentralized system (does not require any third party — be it banks or the government) of payment that enables anyone, anywhere to send and receive payment. Or, cryptocurrencies are network-centric currencies and an international means of payment that is completely decentralized i.e. you do not need a third party to verify your transaction.
I am persuaded that you may be wondering how this sort of system differs from PayPal, PayStack, Stelar, Flutterwave, or the digital banking app you have on your phone. They certainly appear to serve the same use cases on the surface — paying friends, making purchases from your favourite website — but under the hood, they are different. Cryptocurrencies are codes that primarily function on the blockchain network.
WHAT IS THE BLOCKCHAIN NETWORK?
The term “blockchain technology” typically refers to the transparent, trustless, and publicly accessible ledger that allows users to securely transfer the ownership of units of value using public-key encryption and proof of work or proof of stake methods.
Blockchain technology could further be described as a special type of database. This decentralized database managed by multiple participants is known as DLT. Which allows recording, storage, and transmission of information or data in a way that makes it difficult or virtually impossible to modify or delete, change, hack, or cheat the system.
PILLARS OF THE BLOCKCHAIN NETWORK.
1. The Blockchain network operates an open-sourced, transparent, public, and decentralized system.
2. The network is powered by cryptographic algorithms that maintain the privacy and integrity of data.
3. Data stored or transmitted through the Blockchain Network are immutable.
4. Data stored on the network are regulated by a consensus algorithm.
There are many advantages to using blockchain technology compared to other traditional technologies and they include:
1. With blockchain, your business process will be better protected with the help of a high level of security.
2. The hacking threats against your business will also be reduced to a greater extent.
3. As blockchain offers a decentralized platform, there is no need to pay for the services of centralized entities or intermediaries.
4. Enterprise blockchain technology enables organizations to use different levels of accessibility.
5. Organizations can do faster transactions with the help of blockchain.
6. Account reconciliation or balancing can be automated.
7. The transactions on Blockchain are transparent and hence, easy to track.
THE BIG DEAL ON THE E-NAIRA.
Is Nigeria launching its Cryptocurrency? This is the question everyone has been asking lately. Are we going to stop using the Rectangular — piece of paper of “dead — heroes?” Are we now going to save our Naira on crypto exchanges? Is the currency going to be as valuable as other stable currencies in the cryptocurrency market? These questions are generally an off-shoot of the recent prohibition of cryptocurrency by the CBN which at that time stirred both National and International reactions as to the reason why the apex Bank suddenly had to prohibit dealing and transacting in cryptocurrency in Nigeria.
Thus, with the recent announcement, it means that the Central Bank is creating a Central Bank Digital Currency (CBDC) — The question then is, what is CBDC?
A CBDC is a digital form of fiat currency. As such, it’s established as money by government regulation. Although, the approach to designing a CBDC is usually based on the issuing country. Some implementations will likely be based on blockchain or some other type of DLT, while others could likely be just a centralized database. The blockchain-based ones will use a token to represent the digital form of fiat currency. While we could argue that CBDCs are inspired by cryptocurrencies such as Bitcoin, they are quite different. CBDCs are issued by a state and declared legal tender by a government.
Cryptocurrencies such as Bitcoin are permissionless, borderless, and are not issued by any state or centralized entity. Necessarily, it is the case that it is impossible to make cross-border payments with a CBDC, but Bitcoin, Ether, Litecoin, Dash, Dogecoin, Solana, Kusama among others do not even know what national borders are.
Although Nigeria is not the first country to create a CBDC, countries like China have issued their Digital Yuan[5], Britain is still testing their Britcoin[6]. Nigeria, however, leads other African countries in Blockchain and Electronic Currency adoption.
Recently, the Central Bank of Nigeria (CBN) has issued preliminary guidelines for its proposed e-naira digital currency. In a sensitization document sent to commercial banks in the country, the CBN outlined several design features of the CBDC). According to the document, Nigeria’s CBDC is codenamed “Project Giant” and will be pegged to the value of the naira.
Here are major highlights or projections of the e-Naira.
❖ According to the CBN this digital currency will allow easy transaction but is it different from any other digital currency because it will be issued by a sovereign authority.
❖ E-Naira, which was created to facilitate digital transactions, does not need to be backed with physical cash and it will not grow in value like other cryptocurrencies but it will function the same way the Naira does i.e. it has parity in value.
❖ The e-Naira will be pegged to the Naira so their value remains the same like stable coins pegged to the dollar.
❖ The e-Naira will be created independently of bank accounts; the wallet will be created by financial institutions that will create customer identification through an application product interface.
❖ It is a legal tender for the entire country, it will have a non-interest bearing Central bank Digital Currency status, a transaction limit for customers — (banked and unbanked), and a value-based transaction limit.
❖ The use cases of the Naira are broadly divided into three — Cashing out, Merchants, and the Government. Primarily the e-Naira will merely serve the purpose of financial settlement and Store of Value.
❖ As a National Critical infrastructure, the e-Naira system will be subjected to comprehensive security check, all data and personally identifiable information (PII) will be kept off the ledger and will not be stored on the ledger, and it will be stored in the cloud.
LAPSES AND RECOMMENDATIONS.
1. Decentralization of the E — Naira.
Generally, the major issue which Banks, Financial Institutions, and the Government are having with regards to cryptocurrencies and the technology that powers them, Blockchain, is “control”. Since decentralized networks do not need third parties to verify or modify their transactions. Ironically, the technology cannot be un-invented and the reality is decentralization has dozens of unexplored advantages which include — global accessibility,
transaction integrity and speed, permission-less based transactions, and availability around the clock.
For instance, based on the current financial regulation, a Non-Nigerian cannot just open a Naira account unless he goes through the Banks and their procedures, equally, the Naira is unavailable outside the jurisdiction of the Country.
According to the report, the naira is to be issued and regulated by the Central Financial Authority — CBN, then distributed through Banks and other financial institutions. This, however, has not made the currency to be internationally available, or allow independent transactions to be conducted through the E-Naira.
Decentralization of the E-Naira will encourage swift capital importation and global availability of the currency.
2. Tokenization of the Naira or the “Electrolization” of the Naira.
The question which we should ask is, is the CBN issuing a token or merely creating an electronic version of the Naira? Based on the publication, after the apex bank has assessed and defined its goals for the project, the next step is to design the CBDC. The design entails the technological infrastructure needed to supply and manage the digital currency. After this, the next step is to undertake a feasibility and viability analysis using a proof of concept.
It is safe to say that with the infrastructure been set up by the CBN, is rather a means of digitalizing the naira or making it electronic. The confusion this further creates is, is the E- Naira in any way different from the naira in circulation been transferred through USSD codes or Bank Applications?
If the Naira is on the other hand tokenized, it will be deployed on other smart chains, which will, in turn, allow a seamless flow of the transaction.
3. Public and Transparent Database.
The bitcoin Blockchain operates an open-sourced and transparent ledger, where transactions are stored and published publicly. This has aided in preserving the integrity and traceability of transactions. According to the CBN, Data will be stored on the Ledger and Personal Identifiable Information will be stored off the Ledger making it a Hybrid Hyper — Ledger Blockchain. Generally, to ensure that transactions are properly censored and monitored it will be necessary to adopt a Public Blockchain.
4. Transaction Limit.
One of the many challenges, individuals and companies have been having against the traditional banking system, is the daily transaction limit. Whereas with cryptocurrencies, especially those held in decentralized exchanges, individuals and companies are allowed to conduct unlimited and multiple transactions. The transaction limit stated by CBN invariably makes the usage of the E — Naira unattractive.
5. Currency Pegging and E–Naira Circulation.
The CBN document also offered likely process flows for international money transfer operators (IMTO) and the proposed e-naira indicating plans to integrate the digital currency with the central bank’s forex control policies. The first option proposed by the CBN will see the central bank providing collateralized e-naira credit to IMTOs via their banking partners in the country. A second option might see the CBN pre-funding IMTO accounts, but this method might carry significant exchange fluctuation risks.
A third option offered by the CBN will involve the e-naira operating in the current forex architecture where overseas remittance will be cashed out in CBDC by the beneficiary in Nigeria. As much as this seems attractive, the E — Naira been pegged against the Naira
makes it less attractive and valuable. The attempt by CBN to protect the Naira is itself devaluing the Naira.
One of the things which I am persuaded CBN is aware of is ease in capital importation, for instance, Alice resides in the United States, and intends to transfer money to her family member Bob in Nigeria, if the currency is pegged against other stable currencies or Cryptocurrencies, it will be easy to import or transfer the money to her family in Nigeria or on the flip side, Alice a US citizen is on a vacation to Nigeria, and she has other Cryptocurrencies in her wallet, if the E — Naira is pegged against USD or other currencies, it will make her financial experience seamless.
CONCLUSION.
The rapid progress of Blockchain technology is showing no sign of slowing down. In the past, many things were out rightly declared impossible which has been invalidated today, such as high transaction fees, double spending, net fraud, retrieving lost data, etc. But, now all this can be avoided with the help of Blockchain Technology. Nigeria is at the crossroad of either adopting the prudence, democracy, and financial integrity which the Blockchain network is providing, or be left out. The only concern is; I hope the CBN gets it rightly.
i Barrister and Solicitor of the Supreme Court of Nigeria, Associate, The Cloud Attorneys.
[1] https://www.trtworld.com/magazine/the-world-s-fastest-crypto-adopting-countries-49410, Accessed, 10th September, 2021.
[2] Sam Wouters, Top Banks Investing in Crypto & Blockchain Companies Blockdata | Top Banks Investing in Crypto & Blockchain Companies, Accessed, 10th September 2021
[3] https://cointelegraph.com/news/55-of-world-s-top-100-banks-reportedly-have-crypto-and-blockchain-exposure, Accessed, 10th September 2021.
[4] Ibid
[5] Ekin Genc, Digital Yuan Now Has More than 20 Million Wallets: Chinese Central Bank. Digital Yuan Now Has More than 20 Million Wallets: Chinese Central Bank — Decrypt, Accessed, 28th August 2021.
[6] Marco Cavicchioli, Bank of England and CBDC: What is Britcoin? Bank of England and CBDC: What is Britcoin? — The Cryptonomist, 30th August 2021.
[7] Central Bank of Nigeria.
