The advancement of digital technology has transformed how payments and other financial services are conducted. Cash, which used to be king, is now giving way to digital forms of currencies. Central Bank Digital Currencies (CBDCs) are one of the digital alternatives to cash with a very promising potential for disrupting existing financial systems. CBDCs are blockchain-inspired virtual forms of a nation’s fiat currency. Although CBDCs are similar in design to cryptocurrencies, they are centralized, unlike cryptocurrencies, and are issued by the central bank of a nation.
An interesting feature of a CBDC system is its capability to facilitate payments directly between multiple parties without requiring intermediaries such as payment settlement institutions, payment systems operators, or clearing houses. This could be a potential problem for intermediaries in the financial system because this kind of system will eliminate the need for intermediaries that exist in the present traditional payment system, hence, threatening their survival due to significant revenue drop that would follow.
The choice of storage and exchange design of CBDC would affect how much impact its usage will have on banks and other intermediary financial institutions. If third-party providers of financial services, like fintechs, are allowed to keep CBDCs and also provide payment services that are related to traditional fiat currency, banks will be significantly impacted from the introduction of CBDCs because customers will be able to keep the CBDC on wallets they have with non-bank third-party providers, thereby, reducing the need for banks. Also, if the exchange of CBDC to fiat currency is restricted to the central bank only, banks will be hindered from making profits associated with the fees for the exchange between CBDC and fiat currency.
When CBDCs become alternative payment systems, a decline in the volume of card transactions would be inevitable, as more transactions would be done with CBDCs. This, in turn, will cut down the revenue that financial institutions generate from interchange fees associated with card transactions.
Although the issuance of CBDCs could stiffen the growth of the traditional banking system in a country like Nigeria, it could also positively transform how financial services are offered. A CBDC in Nigeria will provide better security for customer’s funds because, by its nature, each digital naira will possess a unique identity, which allows it to be tracked continuously by the central bank. Since CBDCs may also leverage blockchain technology, there is a lower chance that a CBDC would be counterfeited or illegally modified.
For a country like Nigeria with a high number of underbanked citizens, a CBDC could strengthen financial inclusion by providing underbanked citizens access to a wide pool of financial services that they would not have had access to with today’s traditional banking system. This would also reduce the need for bank branches to be present in rural communities in order to facilitate the distribution of cash to members of those communities.
The integration of CBDCs into Nigeria’s financial system is expected to lower the cost of monetary transactions, accelerate economic growth and stabilize the country’s financial sector. The severe effects of the drastic devaluation of the naira could also be mitigated with the issuance of a CBDC. While the issuance of a CBDC comes with its pros and cons, there is no doubt that the issuance of a CBDC would have tremendous positive impact on the Nigerian economy, as well as on how financial services are offered in the country.