UK’s Digital Currency Plan: How Nigeria Stands in Innovative Equations
Nigeria position on innovation remains as the nation continues to staying behind digital development around the world with low investment in education, research, science and development.
For some decades, the Nigerian economy has been on the consumption side of technological innovations while the political class and their appointees remain transfix on earnings from oil as a major driver of economic growth.
Without increase in oil prices, the growth-starved petrol-dollar powered largest economy in the Africa continent almost always enter into trouble in terms of gross domestic product performance.
Without adequate assessment of cost and benefit of digital currency, the Nigerian Central Bank in a reactive manner placed ban on cryptocurrency and asked Nigerian banks to lockdown accounts that have digital coins trade history.
First impression given in digital plan remains a stain, though some sorts of damage control appears to be ongoing as Securities Exchange Commission said it is now working with the CBN on cryptocurrency.
Other bellwether economies exhibit innovative maturity, rather than outright ban, they are understudy the development as digital coins receive corporate acceptance.
Recently, the Bank of England (BOE) and UK Treasury announced the joint creation of a central bank digital currency (CBDC) task force to coordinate the exploration of a potential UK CBDC.
Moody’s said in a new report the BOE’s CBDC would inevitably increase banks’ disintermediation risk and funding costs, which would lower fee income, net interest margins and thus profitability.
However, the digital currency roll-out would also support the UK financial sector’s status as a global, innovative and competitive financial hub, and complement its open banking advancements and collaboration with financial technology firms (fintechs).
Moody’s explained that a UK CBDC would be a form of digital money issued by the BOE for use by households and businesses, existing alongside cash and bank deposits, rather than replacing them.
Additionally, a UK CBDC would act as a proactive strategy as other digital currencies develop, and depending on its final form, would enhance the BOE’s current tools to implement monetary policy and ensure financial, monetary and macro stability.
Payment mechanisms are increasingly digitalised, and cash-free transactions are becoming more common in the UK, which ranks second to Nordic countries in terms of digital developments and ahead of EU peers, making the BOE’s exploration of a CBDC timely.
UK Finance data show that cash payments made in the UK are likely to decline to 9% by 2028 from 28% in 2018 (2012: 54 %). The UK’s use of a CBDC would increase the resilience of payment landscapes, on which many different entities rely to operate efficiently and securely.
It would also provide safer and more trustworthy payment services versus new forms of privately issued money-like instruments, such as stablecoins,1 or other forms of cryptocurrency, such as Bitcoin, which at times can be more volatile than a stable national currency.
A CBDC would increase the efficiency of payments, meeting the future payment needs of an increasingly digital economy. It also has the potential to bring smart contracts and programmable features to money, ensuring access to central bank money as cash usage declines. The exhibit shows the benefits that a CBDC would offer.
The BOE is exploring a hybrid CBDC model, in which there is a direct claim on the central bank but intermediaries handle payments, which would be less disruptive but would still be disintermediating to banks.
The regulated private-sector payment service providers, which include commercial banks, will be user-facing providers, allowing them to maintain customer relationships.
The BOE would provide the core technology standards, regulatory requirements and access. A CBDC as a deposit-like instrument would negatively affect the banking sector in a number of ways.
Customers would likely prefer the security of a CBDC’s risk-free nature and favour it over cash held in commercial banks’ current accounts.
A substitution of bank deposits for a CBDC risks tightening bank funding and subsequently increasing lending costs and disintermediation risk for banks.
Consequently, the BOE’s challenge would be to ensure that it maintains funding for the economy given that banks have an important role in leveraging their deposit bases.
The BOE is looking at ways to effectively manage the attractiveness of a CBDC compared with other forms of money and bank deposits via economic design choices, such as defining who can hold it, and exploring limits on the amount that can be held or transferred, its convertibility between cash and deposits and whether it would be interest bearing or not.
Since 70% of the UK banking system’s deposits are held in current accounts at a 0% interest rate, we expect the BOE to rely on a range of economic design choices to effectively manage a CBDC.
Banks’ fee income from payment services, which we estimate is equal to 8% of revenues, would come under negative pressure as banks lose transaction business and related fee and commission income as customers transact more using CBDCs.
On the other hand, the BOE’s roll-out of a CBDC and its more flexible authorizing payment institution oriented approach would help the UK’s financial sector remain a global, innovative and competitive financial hub. The UK was an early adopter of open banking and fintechs have a strong presence there.
As a result, a CBDC could provide additional insight into customer behaviour, enabling banks, other financial intermediaries and fintechs to develop new products that expand customer choice and cut transaction costs.
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UK’s Digital Currency Plan: How Nigeria Stands in Innovative Equations
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