eNaira Shows That CBDCs Are Maturing

eNaira is old news in the world of Central Bank
CPF
Digital Currencies and crypto-currencies. The eNaira announcement is just a few months old. In the fast moving world of crypto-news it has already been buried under the success of blase, boat loving primates and the news that one successful, but highly controversial, company has rebranded as the world beyond this world. When uber-hypesters gaslight web3 as hype and the holders of some of the most centralized crypto-currencies talk incessantly of decentralization, this eclipse should come as no surprise. When eNaira was announced there was a bunch of articles in many of the leading crypto publications. The CEO of Bitt, Brian Popelka, who was thrust into the limelight, complained to me that he had been on the interview circuit for what seemed like days on end, and he did not see an end to his travails. However, it seems like he can rest easy, at least on the public relations end. eNaira has faded into the background in the cryptosphere. However, due to the reasons discussed below, it is one of the most significant developments of 2021, with ramifications well into 2022 and beyond.

The Platform Model

The CBN (Central Bank of Nigeria) design document lays out the platform model as a central tenet. This involves creating public infrastructure, the key element of which is the Central Bank Core Ledger. The provision of API access to existing PSPs and Financial Institutions
FISI
. Allowing them to innovate in their interactions with ordinary users, who are agnostic to the Core Ledger. This design helps preserve the rich ecosystem of existing payment solutions while changing the lower rails on which the system runs.

Of course decentralization acolytes will complain that this is a centralized system. A truly decentralized system does not exist today, in spite of the protestations of this devoted band. Fiat currency systems are by nature under the control of the sovereign money creators; which are the people of any country, through the medium of a disinterested infrastructure. The evolution of automation of such systems towards programmability and the characteristics of a decentralized autonomy, only time will tell, with the codification of legal controls and constructs in automation. Today’s latency ridden post-facto cure is an inefficient means of control compared to ex-ante prevention. However, this must not degenerate into a pre-crime unit a la Minority Report. These are the fine-lines to be walked and explored, since one or the other extremes can degenerate into crimes of their own. The current version of the eNaira wallet allows only for micro-payments, limiting their effect on deposit accounts, as well as, protecting the incumbents from destructive change.

Such a layered platform approach fits nicely with the basic CBDC design architecture arrived at by Bitt for DXCD.

CBDC 2.0

eNaira is CBDC 2.0 for Bitt. Bitt was behind DXCD or DCash in Eastern Caribbean, the second CBDC to hit production. Bitt is also an overstock portfolio company. Bitt’s design for DXCD has remained largely intact in eNaira. The design below offers the decoupling of the front end features from the back end, where the blockchain is wrapped inside NUMA, as a part of the lower level infrastructure, accessible only through bespoke APIs. All interaction with the higher level, whether on the commercial or controller end as well as with the public, is through multi-factor authenticated interfaces to improve the security posture. The blockchain implementing the CBDC ledger is Hyperledger Fabric, eNaira uses the same blockchain. However, Bitt is agnostic about the blockchain used to implement the CBDC ledger. Witness the fact that in their proposal for MAS, the ledger is on Solana.

Bitt’s experience demonstrates a valid pathway for scaling innovation. The ECCB (Eastern Caribbean Central Bank) manages a small economy with a currency pegged at 2.70 XCD to 1 USD. In fact, DXCD can be said to be the first USD based CBDC, by proxy. The eastern Caribbean is the ideal laboratory for a CBDC, with a small population and economy. However with the challenge of a geographically scattered archipelago threatened by episodic digital isolation due to hurricanes and the wide open Eastern Atlantic. Much better than a, “Sandbox”, which is a pale simulacrum of the real world. The Sandbox strategy is employed by some of biggest economies of the world, including the Bank of England and others. Sandboxes are for children. Bitt deployed DXCD in the real world.

Bitt’s experience in creating the second CBDC to go live, albeit in a smaller setting, no doubt helped secure the contract for eNaira from CBN. Let us compare the two economies. The Eastern Caribbean has an estimated population of 613,000 with a GDP of 5.46 billion US dollars. Nigeria has a population of 211 million and a PPP (Purchasing Power Parity) GDP of $1.116 trillion. Almost a 300 fold increase in scale. Not unknown in the digital world. Along with scale comes diversity, Nigeria has a much larger land mass and diversity in tribes, languages, and economic sophistication with almost a 25% penetration for crypto-wallets, much higher than any other nation. Thus, eNaira poses a totally different threat level, compared to DXCD.

CBDC Challenges

The concerns for a retail CBDC have common challenges, whatever the scale. It is best expressed in the MAS (Monetary Authority of Singapore) outline for retail CBDC.

1. Instrument – improve and expand the accessibility and utility of digital payments. New Functionalities vs Inclusivity, Security vs Accessibility, Availability vs Risk of Disputes, Recoverability vs Anonymity
2. Distribution – mitigate risks associated with payment transfers and market infrastructure. Widespread Frictionless Use vs Control, Personal Data Protection vs System Integrity, Expanding Access to Financial Services
   CBFV
   CBFV
   vs Guarding against Data Monopolies, Coexistence vs Integration Complexity
3. Infrastructure – provision of a viable CBDC infrastructure that is low-cost, efficient and robust and provides for trusted settlement of payment transactions among participants. Decentralization vs Accountability, Extensibility vs Operational Resilience, Privacy vs Performance, Interoperability vs Standardization

The overriding sensibility is “Same Naira, More Possibilities”, as the CBN states. A seamless continuity from existing versions of fiat currency to the newer versions. CBN has chosen a two-tier model, ostensibily to reduce disruption to banks and other financial interdediaries. However, it is too early to tell what the wild (as in the real world with multiple independent agents) has in store for emergent features of eNaira.

Phased Approach

The challenges are wide spectrum. In order to manage a rollout of a CBDC in a challenging environment such as Nigeria, CBN (Central Bank of Nigeria) relied on a phased approach. This avatar of eNaira is just Phase I. The latter phases are meant to be released later in 2022 and beyond.

It is true that the challenges of adoption, of a glitch-ridden User Interface or wallet can be managed in the smaller ambit of a Phase I. Bitt’s CEO Popelka stressed the experience that the Bitt team has with this boots on the ground approach. A truly decentralized out-reach to the diverse user base. Of course this requires true sensitivity among the high priests of finance to the concerns of the public as relayed by field operators. The same technique is being employed in Nigeria.

Direct Payments

In the latter phases of eNaira, two or three changes can move the whole economy in a different direction. These are the provision of direct payments, of benefits or targeted intervention. The action at a distance of pushing on a string for pandemic payments as well as controlling the monetary policy through indirect interest rates has seen intermediaries and fraudsters leveraging the post-facto nature of controls. This lack of direct intervention has bedeviled the United States as well as many other smaller economies during the pandemic. Direct accounts for users as well as direct payments to the most disadvantaged spurred by demurrage as well as targeting spending on essentials are under consideration in the latter phases of eNaira. This will need much more sophistication in the programmability of money. In addition, a way to remit funds directly is also boon for an economy such as that of Nigeria, relying heavily on a diaspora. These are some of the capabilities planned for the phased rollout of eNaira.

Vissitudes of fate

At first, the e-tailer Overstock, under the brilliant and maverick direction of its then CEO, Patrick Byrne, started tZero, whose main aim was to disrupt the post-trade landscape, but under the regulator’s eye. tZero quickly found that unless the whole chain from issuance to settlement was reworked, this would be impossible, an ICO had limited success. Overstock by then had started Medici Ventures. Bitt benefited from this struggle, through investment from Medici Ventures. Brian Popelka is an alumnus of Overstock. How a discount furniture reseller played such an important role in the creation of digital currencies, both in the caribbean and in one of the largest economies in Africa, can only be explained through its own success as a platform company. IT systems for reselling furniture helped unite the worlds of crypto-currency and fiat currency, this is an ironic twist of chance, but also makes sense. That many of the operational concerns of strong and resilient IT systems intersect; whether it is for reselling furniture or for post-trade settlement or issuing a Central Bank Digital Currency.

In the interest of full transparency, I was a member of a team that evaluated tZero for investment by a conservative European Bank back in 2016. We were swift outriders of a slow moving behemoth that thought that they could innovate by just having an innovation department. More on that in a later article. They decided to pass on the investment, as I knew they would.