Opinion Nigeria recently became the first African country to launch its central bank digital currency (CBDC), the eNaira. However, there are significant privacy challenges that could make eNaira a lot less attractive.
The central concern? Authorities may see every transaction. This could potentially provide a great deal of data on individuals, making them vulnerable to malicious use for political or commercial purposes.
At the same time, there are fears that due consideration has not been given to the broader societal and rights implications. A recent IMF analysis [PDF] suggests adopting CBDCs more generally “could lead to major disruptions affecting monetary policy transmission, financial stability, financial sector intermediation, the exchange rate channel, and the operation of the payment system.”
The Nigerian CBDC was launched on 25 October, with the tagline “Same Naira. More Possibilities” and is just the second to be fully open to the public after the Bahamas.
The eNaira is promoted by the Central Bank of Nigeria (CBN) as having the capability to deepen financial inclusion, reduce the cost of cash and financial transactions and support a resilient and more efficient payment system.
CBDC [PDF] is a digital payment instrument denominated in the national unit of account, which is a direct liability of the central bank. A key question is which format the CBDC should take: should it be cash-like or more like money in deposit accounts?
Token-based systems are like cash and allow anonymous payments. They rely on cryptographic techniques, which enables central banks “to digitally sign a coin” as a digital asset on a blockchain. The token thus derives its value and authenticity from the Central Bank’s signature, which prevents the need to identify or authenticate the parties to a transaction.
Account-based CBDC depends on records and identification. Although it follows the conventional account model of tying ownership to identity, unlike these systems, account-based CBDC involves the transfer of direct claims to the central banks from one user to another without the intermediation of the settlement process by financial institutions.
A feature of account-based CBDC is its compatibility with “know-your-customer” (KYC) and anti-money laundering and countering terrorist financing (AML/CFT) requirements – an attribute that incidentally also compromises the privacy and confidentiality of transactions.
CBN opted for account-based CBDC for compliance with KYC standards and AML/CFT requirements. The bank argues that the complete anonymity of eNaira is not desirable. Like cryptocurrencies, token-based CBDC can be untraceable and hence could be used for criminal activities, it says.
However, it is critical to balance the individual’s privacy rights (ensure the anonymity of transactions) against the public interest functions of the CBN. For example, users’ identity, transaction data, value and history could be accessible to the CBN and intermediaries other than those chosen by the user. Identification and authentication can pose additional privacy risks because of their central role in onboarding users to the eNaira wallet and ensuring equal access for all users to meet the financial inclusion aspiration of the CBN.
Under the CBN’s Circular and Guideline [PDF] on the eNaira issued on 25 October, the national identity number (NIN) and/or biometric verification number (BVN) are the unique identifiers for users to “self-onboard” to the eNaira speed wallet. Even users subject to tier 0 (wallets with a daily transaction limit of N20,000 and balance limit of N120,000) must meet KYC requirements, including the provision of passport photograph, personal information, name, place, and date of birth, gender, and address and telephone number.
A mine of information
Trust is paramount to any payment system; hence robust legal rules and data governance framework is essential to address the risks associated with entities’ behaviour and privacy practices within the CBDC ecosystem, including disparate and inconsistent privacy policies. Cyber-attacks on the CBN eNaira’s technical infrastructure could compromise the users’ personal (financial) data. CBDC systems are particularly susceptible to cyber-attacks because the number of endpoints in a general-purpose CBDC system will be significantly larger than current wholesale central bank systems [PDF].
Concerning privacy, the CBN eNaira Guideline provides that two-factor authentication and other measures should ensure the security of the eNaira wallet. It further provides that “the eNaira shall be administered by the CBN through the Digital Currency Management System (DCMS) to mint and issue eNaira.”
The underlying technology of the DCMS and its security risks and challenges or how these will be managed has not been precisely explained. While a linked digital identity system is considered necessary for CBDC to realise broader social and economic objectives, such as financial inclusion, it is also unclear how users’ privacy will be guaranteed under a linked or federated identity system using the NIN and/or the BVN.
Nigerian government institutions are notorious for flouting the Nigeria Data Protection Regulation [PDF], the principal regulatory framework for data protection in Nigeria, and the regulation is weak because of its status as subsidiary legislation.
There are possible explanations for the policy and regulatory gaps. The eNaira appears to be a hurried response to the threats posed by “cryptocurrencies” and “stable coins” rather than a decision guided by practical considerations and empirical evidence.
While the CBN claims that it has been working on a CBDC since 2017, it did not publish the research or proof of concept (PoC) to support the technical and functional feasibility of the eNaira or the legal and regulatory framework for its issue and use. Also, reports tracking the development of CBDC did not list Nigeria among the top countries with project maturity in either the retail or wholesale CBDC before the launch of the eNaira.
The central banks in many leading economies are still conducting research, PoC and pilot schemes on CBDC. For instance, the PoC developed by the European Central Bank’s EUROchain research boasts novel features, including a digitalisation solution for AML/CFT compliance preventing a user’s identity and transaction history from being seen by the central bank or intermediaries not chosen by the user.
It may be correct that developing countries like Nigeria can better leverage payment innovation because they have less need for massive infrastructure layouts. However, a seeming patchwork of research and policy consultations could invariably overlook the potential market structure effects, technical risks, and rights implications of a CBDC.
If the eNaira fails, the CBN will also have to consider possible risks of currency substitution, loss of monetary sovereignty, and a shift in the structure of financial regulation due to disintermediation already indicated by the eNaira. ®
Dr Kemi Omotubora is a Nobert Elias Research fellow, ZiF Centre for Interdisciplinary Research, University of Bielefeld, Germany. Dr Subhajit Basu FRSA is an associate professor in Information Technology Law at Leeds.