In October, the Central Bank of Nigeria (CBN) launched Nigeria’s digital currency eNaira, in an aim to counter the burgeoning influence of cryptocurrency that’s rapidly overshadowing the financial industry.
The CBN urged Nigerians to download and sign up to the eNaira as it’s designed to facilitate easy financial transactions, including cross-border transactions. The Central Bank Digital Currency (CBDC) has racked up more than 694,000 downloads since it was launched. But in a country of over 200 million people, the number of downloads is meager. But that’s not all.
The International Monetary Transfer (IMF), in its ‘Nigeria Staff Report for the 2021 Article IV Consultation’, said the expansion of the use of the eNaira to cross-border fund transfers and agency bank networks could lead to new money-laundering and terrorism financing risks.
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“Prospective expansion of eNaira use to cross-border fund transfers and agency bank networks may cause new money-laundering/financing of terrorism risks,” the IMF said.
The Washington-based financial body also pointed at other possible risks facing the digital app, including cyberfraud.
“There are cyber security risks associated with the eNaira. Unforeseen legal issues, including for private law aspects of its operations (e.g., the exact nature of legal relationship between the wallet providers and CBDC holders), may subject eNaira to litigation and operational risks,” it added.
The CBN launched digital currency in the aftermath of its ban on cryptocurrency, providing a government-backed alternative to a large section of Nigerians, who by their adoption of cryptocurrency, showed willingness to embrace digital transactions.
It was swift, compared to how long other countries like China worked on their CBDCs. Many are still trialing even though they started much earlier than Nigeria. The CBN started work on eNaira about mid-last year, and the CBDC was launched in October, taking only a few months – and it was never trialed. Nigeria thus became the first country in the world to launch digital currency.
While there are aspects of the eNaira applauded by the IMF, such as bank funding, the risks it pointed out put the digital currency’s chances of adoption under question. The CBN said part of the reasons it banned regulated financial institutions from dealing with cryptocurrency is because it is used to finance terrorism and facilitate money laundering.
It is a concern the eNaira has failed to address since according to the IMF, the CBDC poses the same risks and some others not yet observed. The international lender said there is need for vigilance to various risks, including monetary policy implementation, bank funding, cyber security, operational resilience, and financial integrity and stability, through regular risk assessment and contingency planning.
The CBN has repeatedly assured users of the credibility of the eNaira, and has also denied that it poses any risk. However, the IMF suggested a line of actions the apex bank should follow to address the risks.
“While preventive measures and the planned AML/CFT regulations for eNaira intermediaries are welcome, a money laundering/terrorist financing risk assessment of domestic and cross-border uses of eNaira and the adoption and implementation of the regulation along with putting in place risk-sensitive mitigation measures should be a priority,” the IMF said.