Many expect that Central Bank Digital Currencies, or CBDC’s, will eventually overthrow traditional cryptocurrencies, which are far more volatile than their “less-risky”, centralized counterparts. Recently, the International Monetary Fund chimed in on the debate by using Nigeria’s eNaira as an example as to why CBDC’s could create a paradigm shift in the financial sector.
IMF Managing Directional Kristalina Georgieva suggested that CBDCs like eNaira are a better bet than cryptocurrencies including Bitcoin and other altcoins. The statement, published on IMF’s website, read “In contrast to private digital currencies, CBDCs can potentially offer greater resilience, more safety, greater availability, and lower costs when designed prudently”
“Crypto-assets, which are inherently volatile, are not backed by any government. It is possible that even the best-managed and regulated stablecoins cannot compete with a well-designed and stable central bank digital currency,”
From improving cross-border payments to faster transactions, countries around the world are working on their own CBDC’s. As per Atlantic Council, 9 CBCD’s have been launched officially, 14 are in their pilot stage while 17 are still being developed.
Nigeria’s Economic Woes
While the advantages of CBDC’s have been discussed by financial institutions across the world, some fundamental questions still exist. Let’s take a look at Nigeria’s eNaira as an example. The West African nation created history by launching its own CBDC in October 2021 after discouraging cryptocurrency investments for most of the year. It was estimated that by adopting eNaira, Nigeria could increase its Gross Domestic Product by $29 billion over the next 10 years, among other advantages.
Yet, eNaira does not provide a solution to inflation- an issue that has plagued Nigeria since the late 1900s. Since skyrocketing to more than 70% in 1995, Nigeria’s inflation rate has averaged around 12% over the past few years.
A study by American-based investment advisor Vanguard showed that 2021 was particularly rough for the Nigerian economy. A piling national debt and rising consumer prices attributed to a 4-year high inflation rate of 18.5% before declining to 15% in November. As a result, the naira dropped to a record low in December, its 9th straight yearly decline. Higher inflation decelerates the value of a currency and the eNaira, which is based on its paper twin, would inherently become a less attractive investment over time.
The Foreign Policy Magazine went as far ahead to argue that the eNaira wouldn’t end the country’s foreign exchange volatility or shore up its reserves” due to a host of other complications as well.
Conclusion
This brings us back to an earlier point made by the IMF. Are CBDC’s more resilient than cryptocurrencies? While CBCD’s may not be as volatile as cryptocurrencies on a day-to-day basis, their long-term performance is directly linked to the economy whereas crypto prices are mainly driven by forces of supply and demand.
During her statement, Kristalina Georgieva was clear that CBDC’s needed to be worked on specific use cases, depending on each countries’ requirement. In either case, CBDC’s are only as good as a single nation’s economy and while their fundamental issues persist, demand for traditional cryptocurrencies continues to soar. A top research firm suggested that Bitcoin could touch over $200,000 as early as 2022-end.