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The Smile Identity eNaira Primer

A few weeks back, on October 25, the Central Bank of Nigeria (CBN) launched a digital version of the Naira. Dubbed the eNaira, this Central Bank Digital Currency (CBDC) is the first in Africa.

If you do business or provide financial services in Nigeria, you may wonder what the eNaira entails and its impact on your business. Smile Identity has broken it down for you here.

What is the eNaira?

The most important thing to keep in mind is that the eNaira is not a new type of currency, but a virtual representation of the naira that is issued and backed by the Central Bank of Nigeria.

What is a currency?

To understand Central Bank Digital Currencies (CBDCs), we need to start with the basics. A currency is a store of value, a unit of account, and a medium of exchange. Most currencies, including the naira, are fiat currencies. This means they are not backed by a physical commodity like gold but are guaranteed by the government who, in turn, controls money supply and sets policies to manage the economy.

What is a CBDC?

At its very core, a CBDC is fiat currency in digital form. CBDCs are directly backed by the central bank rather than retail banks which can nonetheless act as official distributors of the CBDC.

Indeed, CBDCs can be made available in several ways:

Through bank accounts: Traditionally, the role of the central bank is to settle payments between banks and provide liquidity when needed. But in the case of an account-based CBDC, the role of the central bank expands in scope to include providing accounts to consumers, either directly or through an intermediary like a retail bank or a wallet. In the case of a wallet, the central bank still holds the liability on the CBDC. Account-based CBDCs can be managed on a blockchain but unlike cryptocurrency, the ledger is controlled by a single entity, the central bank, and the entities to which it provides access. The consumer must authenticate her real identity to access the account and the CBDC inside it.

Through tokens: Unlike account-based CBDCs, token based CBDCs are not stored in accounts with the central bank or its intermediaries. Instead, the CBDC is an asset on a blockchain, and is accessed via a private key that corresponds to an address on this blockchain. When a payment takes place, such as when a payer sends a token to a payee, the transaction is confirmed by other members of the blockchain, commonly called “miners." For policy reasons, these miners would likely be specially permissioned by the central bank. Authentication of a token-based CBDC therefore occurs at the transaction level; while better for privacy than account-based CBDCs, this raises complex questions around AML and KYC.

In the case of the eNaira, the CBN has created an account-based CBDC whose access relies on the existing KYC framework in Nigeria.

How does the eNaira work?

The CBN issues and distributes eNaira via a wallet created by banks and accessible by consumers on Google Play or the Apple Store. There, consumers download the app and start onboarding.

There are 4 tiers of eNaira wallets available to individuals.:

  • Tier 0 and Tier 1 wallets are available to individuals with no existing bank accounts. These individuals need an NIN-verified telephone number to register for an eNaira wallet. Daily transaction limits are ₦20k and ₦50k respectively. The cumulative limits for these tiers are ₦120k and ₦300k respectively.
  • Tier 2 wallets have a daily transaction limit of ₦200k and require BVN and a valid means of identification for registration. To register for this tier of account, the individual must have an existing bank account. The cumulative limit for this tier is ₦500k.
  • Tier 3 wallets are only available to individuals with an existing bank account and have a daily transaction limit of ₦500k. Registration requirements are BVN, a valid means of identification, and a public utility receipt. The cumulative limit for this tier is ₦5M.

Businesses that want to operate an eNaira wallet are required to meet full KYC requirements and must present a BVN, Tax Identification Number (TIN), and bank confirmation. Businesses have a send limit per day of ₦1M but no receive or cumulative limits.

Licensed financial institutions are responsible for conducting KYC on customers who wish to register for a wallet: they gather information such as BVN or NIN, cross-check these details against the ID authority and if all checks out, clear the consumer for wallet use.

Once onboarded, the consumer can transfer money and make payments. There are no intermediaries in eNaira payments, resulting in faster and cheaper transactions, from domestic transfers to international remittances.

In Conclusion

The eNaira is expected to be a boon for financial inclusion as the wallet is expected to reach a greater swath of the population than traditional bank accounts. Payments are instant and cheap, benefiting both domestic and international money flows, and this in turn is expected to have positive effects on forex availability and macroeconomic stability.

If you are an entity licensed by the CBN, you may be eligible to sponsor an eNaira wallet. Your KYC liability and process won’t change, and we stand by to help!