Several firms have expressed an interest to develop a stablecoin in Nigeria called the compliant-Nigerian-Naira (cNGN). The purpose of this paper is to explore the features, benefits, and challenges of issuing a stablecoin in Nigeria known as the cNGN stablecoin. The study also compares the proposed cNGN with the eNaira central bank digital currency and offer several differences that are worth noting. The study shows that the proposed cNGN stablecoin offers many benefits. They include enabling faster payments, ensuring seamless cross-border payments, and increasing participation in the financial system for those who are already banked. The study also identifies some challenges of the proposed cNGN stablecoin. The study concludes by stating that the long-term success of the cNGN will be guaranteed if majority of Nigerians embrace it and if cNGN issuers collaborate with regulators to ensure that the cNGN is designed in a way that achieves financial stability objectives, transparency, and consumer protection.
Top1. Introduction
Non-fiat forms of money emerge when money is viewed as a social convention where one party accepts it as a means of payment in the expectation that the other party will accept it as a means of payment (Frost et al, 2020).1 Once this social convention of is widely believed, the specific substance, object or commodity being used as a means of payment will become ‘money’. This is how money was created until government-backed money emerged and replaced the social convention system of money (Dequech, 2013; Frost et al, 2020).
Understanding the social convention system of money is essential in understanding what ‘stablecoin’ really is. Using the same analogy, a stablecoin is simply digital value which a person accepts as a means of payment in the expectation that the other party will accept it as a means of payment, and where the digital value is pegged to the value of a reference asset such as gold, stock or some economic indices (Frost et al, 2020).
The painful consequences of past economic and financial crises, e.g., the dotcom crash and the global financial crisis, led some private actors to believe that governments deliberately create economic and financial crises to make fiat money lose its value which in turn leads to loss of personal wealth so that the rich will become richer through the increase in the value of their physical assets, while the poor will become poorer through loss in the value of their fiat money held as cash or in the vaults of commercial banks (Othman et al, 2020). This ideology or belief system led private actors to seek ways to decouple from the government’s fiat monetary system (Dapp, 2021). This led to the rise of private digital currencies also known as cryptocurrencies.
A private digital currency refers to a currency in digital form in which transactions are verified and records are maintained by a decentralized system using cryptography and controlled by private entities (Zohuri et al, 2022). Private digital currencies have many benefits such as increased speed of transactions, lower transaction cost, ease of access, high levels of privacy, and it is protected against inflation. However, private digital currencies, or cryptocurrencies, have a major problem which is their high volatility. Analysts, central banks and policymakers have criticized cryptocurrencies for being too volatile and they argue that the high volatility makes cryptocurrency unsafe for use as money, and it cannot be relied on by businesses to plan or for investment purposes. Soon, some central banks began to develop their own state-controlled digital currency to counteract the rise of private digital currencies and its unwanted volatility. This led to the creation of a state-controlled digital currency also known as a ‘central bank digital currency’. As central banks were accelerating the development of CBDCs, some private actors rather than abandoning cryptocurrencies due to their high volatility, began to develop another type of cryptocurrency that will be less volatile if its value is pegged to a reference asset whose value is also non-volatile such as gold. This led to the idea of a stablecoin.
Technically, a stablecoin is a digital currency whose value is pegged to a fiat currency or a commodity like the US dollar or gold (Ante et al, 2021). Many private sector innovators are optimistic and enthusiastic about the development of stablecoins due to its ability to eliminate the volatility inherent in many cryptocurrencies. However, many policymakers and academic economists have called for caution and argue that stablecoin are not really stable rather they are less volatile than cryptocurrencies such as Bitcoin, and their perceived stability is not guaranteed in the long-term due to moral hazard of the operating entity, when the entity has poor financial performance or when there is limited supply of the stablecoin (Kwon et al, 2021; Frost et al, 2020). Despite these concerns, interest in stablecoins is growing rapidly in the private sector just as interest in CBDC continues to grow among central banks.