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DIGITAL ECONOMY & TECHNOLOGY

Five Observations on Nigeria’s Central Bank Digital Currency

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By Jack Ree

The Central Bank of Nigeria (CBN) officially launched the “ eNaira”—a central bank digital currency (CBDC)—on October 25, 2021. This is the second CBDC fully open to the public after the Bahamas.

Other countries and regions, such as China and the Eastern Caribbean Currency Union, have been conducting CBDC pilots with a subset of their citizens. Given the size and complexity of Nigeria’seconomy, this launch is drawing substantial interest from the outside world—including from central banks.

1. What is eNaira?

Like coins or cash, the eNaira is a liability of the CBN. The eNaira uses the same blockchain technology as Bitcoin or Ethereum and, like them, the eNaira is stored in digital wallets and can be used for payment transactions; and it can be transferred digitally and at virtually no cost to anyone in the world with an eNaira wallet. There are, however, important differences. First, the eNaira features stringent access right controls by the central bank. Second, unlike these crypto-assets, the eNaira is not a financial asset in itself but a digital form of a national currency and draws its value from the physical naira, to which it is pegged at parity.

2. Why did Nigeria introduce eNaira?

According to the CBN, the eNaira is envisaged to bring multiple benefits, which are expected to materialize gradually as the eNaira becomes more widespread and is supported by a robust regulatory system. Key benefits include the following:

  • Increase in financial inclusion. For now, the eNaira wallet is provided only to people with bank accounts, but its coverage is expected to eventually expand to anyone with a mobile phone even if they do not have a bank account. A large number of people do not have bank accounts (38 million people; 36 percent of the adult population), and allowing those of them with a mobile phone to have access to the eNaira would increase financial inclusion and facilitate more direct and effective implementation of social transfers programs. It is expected that the move would enable up to 90 percent of population to use the eNaira.
  • Facilitation of remittances. Nigeria is among the key remittance destinations in sub-Saharan Africa, with remittance receipts amounting to $24 billion in 2019. Remittances typically are made through international money transfer operators (e.g., Western Union) with fees ranging from 1 percent to 5 percent of the value of the transaction. The eNaira is expected to lower remittance transfer costs, making it easier for the Nigerian diaspora to remit funds to Nigeria by obtaining eNaira from international money transfer operators and transferring them to recipients in Nigeria by wallet-to-wallet transfers free of charge. Exchange rate reforms, including a unified market-clearing rate, that reduce the gap between official and parallel market exchange rates would enhance the incentives for using eNaira wallets to send remittances.
  • Reduced informality. Nigeria has a large informal economy, with transactions and employment equivalent, respectively, to over half of GDP and 80 percent of employment. The eNaira is account-based, and transactions are in principle fully traceable, unlike token-based crypto asset transactions. Once the eNaira becomes more widespread and embedded into the economy, it may bring greater transparency to informal payments and strengthen the tax base. Informal and formal businesses may also benefit if eNaira adoption enhances consumption through greater financial inclusion.

3. What are the potential risks?

Like digital currencies elsewhere, the eNaira carries risks for monetary policy implementation, cyber security, operational resilience, and financial integrity and stability. For example, eNaira wallets may be perceived, or even effectively function, as a deposit at the central bank, which may reduce demand for deposits in commercial banks. Relying as it does on digital technology, there is a need to manage cybersecurity and operational risks associated with the eNaira.

4. What are the authorities doing to mitigate the potential risks?

The authorities have taken measures to manage the risks. The transfer of funds from bank deposits to eNaira wallets is subject to daily transactions and balance limits to mitigate risks of diminishing the roles of banks and other financial institutions. Financial integrity risks, such as those arising from the potential use of the eNaira for monetary laundering, are mitigated by using a tiered identity verification system and applying more stringent controls to relatively less verified users. For example, for now only people with a bank verification number can open a wallet, but over time coverage will be expanded to people with registered SIM cards and to those with mobile phones but no ID numbers. The latter categories of holders would be subject to tighter transactions and balance limits. Even so, wallet holders who meet the highest identity verification standards cannot hold more than 5 million naira (about $12,200) each in their eNaira wallets. To address cybersecurity risk, regular IT security assessments are expected to be conducted.

5. What can the IMF do?

The IMF remains available to help with technical assistance and policy advice. The IMF’s Monetary and Capital Markets Department has been involved in the eNaira rollout process, including by providing reviews of the product design. The 2021 IMF Article IV mission emphasized the need for monitoring risks and macro-financial impacts associated with a central bank digital currency. [1] The IMF is ready to collaborate with the authorities on data analysis, cross-country studies, sharing the eNaira experience with other countries, and discussing further evolution of the eNaira including its design, regulatory framework, and other aspects.

Jack Ree is an economist in the IMF African Department


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DIGITAL ECONOMY & TECHNOLOGY

Aeon Bank Officially Launches Malaysia’s First Islamic Digital Bank

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Aeon Bank (M) Bhd has officially launched Malaysia’s first Islamic digital bank, marking a significant milestone in the country’s banking sector. The launch aims to provide comprehensive, Shariah-compliant digital banking solutions to all Malaysians, setting a new standard for financial services in the region.

Comprehensive Shariah-Compliant Solutions

At the public launch ceremony, Chief Executive Officer Raja Teh Maimunah Raja Abdul Aziz outlined the bank’s vision. “We aim to offer safe, simplified, and inclusive Shariah-compliant digital banking solutions such as savings accounts, retirement savings plans, various borrowing options, and payment services,” she stated. “This will allow us to offer financial services to our customers comprehensively, helping us achieve our mission.”

Innovative Banking Products

The Islamic Digital Bank’s services currently include personal banking products like Savings Account-i and customizable Savings Pots with optimization features. These products were developed and refined through extensive testing phases. Raja Teh Maimunah highlighted the success of the beta testing phase, which involved over 1,800 participants over 12 weeks. “The beta test was meant to identify any necessary improvements and fixes. We received a lot of positive feedback on the overall architecture. We did not rush the test and also conducted an alpha test before the beta, ensuring platform stability,” she explained.

Seamless User Experience

Users who activate their Aeon Bank account will immediately gain access to their virtual Aeon Bank x Visa Debit Card-i and can request a physical Debit Card-i. To celebrate the public launch, Aeon Bank is offering a sign-up bonus of 3,000 Aeon Points and triple Aeon Points for transactions using the Aeon Bank x Visa Debit Card-i, along with a profit rate of 3.88% per annum.

Additionally, Aeon Points Programme members will have their memberships automatically linked with the Aeon Bank (M) app, providing extra benefits and rewards to Aeon Group’s outlets and merchants.

Revolutionizing Digital Banking in Malaysia

Jointly owned by Aeon Financial Service Ltd and Aeon Credit Service (M) Bhd, both subsidiaries of Japan’s largest retail group Aeon Group, Aeon Bank is set to revolutionize digital banking in Malaysia. Raja Teh Maimunah expressed optimism about the bank’s potential to perform detailed financial analyses and promote financial inclusion.

Competitive Landscape

In addition to Aeon Bank, a consortium led by KAF Investment Bank Sdn Bhd has also secured an Islamic digital bank license from Bank Negara Malaysia. Other recipients of digital banking licenses include a consortium of Boost Holdings Sdn Bhd and RHB Bank Bhd, a consortium led by GXS Bank Pte Ltd and Kuok Brothers Sdn Bhd, and a consortium led by Sea Ltd and YTL Digital Capital Sdn Bhd.

Promoting Financial Inclusion

With the launch of Malaysia’s first Islamic Digital Bank, Aeon Bank is poised to make significant strides in promoting financial inclusion. The bank’s innovative products and services are designed to cater to the diverse needs of Malaysian consumers, providing them with Shariah-compliant, convenient, and efficient banking solutions. This initiative aligns with the broader goals of enhancing financial accessibility and inclusion across the country.

As Aeon Bank continues to expand its offerings and reach, it is expected to play a pivotal role in shaping the future of digital banking in Malaysia. By leveraging advanced technology and adhering to Shariah principles, Aeon Bank aims to provide a robust banking platform that meets the evolving needs of its customers. The successful launch of Malaysia’s first Islamic Digital Bank marks a new era in the country’s financial landscape, promising a future of inclusive, innovative, and customer-centric banking services.


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DIGITAL ECONOMY & TECHNOLOGY

Crypto Miners See ‘Enormous Potential’ in the Gulf

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  • Crypto miners drawn to Gulf
  • Electricity is 80% of cost
  • Tech-savvy population

With cryptocurrencies edging up again after last weekend’s “halving” – in which the rewards Bitcoin miners get for solving problems is cut in two to maintain scarcity – these are heady days for holders of Bitcoin and other virtual currencies. Bitcoin miners have been attracted to the Gulf by cheap electricity and established infrastructure.

“GCC countries have enormous potential in relation to the development of the Bitcoin mining sector,” Abdumalik Mirakhmedov, executive president of Dubai-based Bitcoin miner GDA, told AGBI. “In the past year, the region has been experiencing active growth, with several significant launches.”

Bitcoin “mining” is a process in which information in a blockchain block is validated by specialist machines. When a complex solution is reached by this equipment, a reward – in the form of Bitcoin and fees for the work done – is then issued. Initially, mining was often done in back rooms and sometimes-unofficial data centres. These days, however, it is increasingly dominated by larger businesses.

This equipment, however, also requires a lot of electricity.  In 2023, the Cambridge Bitcoin Electricity Consumption Index (CBECI) estimated global electricity usage associated with Bitcoin mining to be around 120 terawatt hours – about the same as Australia’s total electricity consumption that year.

Working day and night, Bitcoin miners also generate a lot of heat.  In colder climates, this has sometimes been repurposed to provide heating.  In the Gulf, however, the heat creates even greater electricity consumption, as powered cooling systems are used to keep the machinery within its operational temperature range.

A further problem in the Gulf recently has often been the lack of a clear regulatory framework for the industry – sometimes because of a general suspicion of cryptocurrencies.  Kuwait, for example, has banned all virtual asset transactions, investments and mining. In Saudi Arabia and Qatar, crypto has only quasi-legal status.

Yet, despite the obstacles, “the GCC region is the world’s sixth-largest adopter,” said Paige Aarhus, Paris-based director of crypto news and analysis site DL News. And figures from Chainalysis, a US-based cryptocurrency software development company, estimate that total crypto transaction levels in Saudi Arabia alone amounted to $36 billion and in the first two months of 2024 it hit $6 billion.

In the UAE and Oman, too, a more positive approach has been taken. A regulatory framework has been established, enabling facilities such as the DMCC Crypto Centre in Dubai to provide a wide range of services, including mining. In Oman, $800 million is now invested in crypto mining in the Sultanate. Abu Dhabi’s Green Data City in Salalah was Oman’s first licensed mining entity, while Exahertz International has also now joined it in the southern – and slightly cooler – Omani city.

Power plays

With electricity representing around 75-80 percent of a data farm’s average cost, cheap power is a major draw for miners when it comes to the Gulf. In Oman, although subsidies for electricity are being phased out, typical costs remain at around $0.05 per kilowatt – much less than the US average of $0.23, which is itself lower than average tariffs in Europe. “Innovations such as liquid cooling and immersion cooling are expected to significantly contribute to the expansion of operations within the region,” says Mirakhmedov.

This was recognised at the recent Global Digital Mining Summit hosted by mining server manufacturer Bitmain, held in Muscat. The “Hydro-mining Wins in the Desert” gathering highlighted progress in water cooling.

Green, renewable energy from solar is also available in abundance in Oman and other Gulf countries, providing miners with more sustainable credentials. At the same time, the Gulf offers a developed infrastructure and few restrictions on land for large data farms.

Oman, and other Gulf states, have also all invested heavily in education and training in IT, producing large, tech-savvy populations. “Key benefits of the Gulf also include the region’s access to capital and the ease of doing business,” says Mirakhmedov.  These benefits may help Gulf miners weather the storm of the recent halving.

Larger mining companies, or groups of miners, stand a better chance of absorbing that loss, while “some smaller mining companies may well go out of business as a result,” Aarhus says. With miners in the Gulf generally larger operations with lower overall costs, they may now be well placed for further expansion. More data farms could therefore be springing up around the region, in the months to come.


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DIGITAL ECONOMY & TECHNOLOGY

Zakat on Stocks and Shares: A Modern Dilemma Solved

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In today’s fast-paced world, where the buzz of the stock market is as familiar as morning coffee, a timeless tradition meets the modern age: the practice of paying Zakat on stocks and shares. This intersection of faith and finance might seem like a modern dilemma, but “Zakat on Stocks and Shares: A Modern Dilemma Solved” can be achieved with a blend of ancient wisdom and contemporary understanding. Let’s dive into the world of stocks, shares, and spiritual duty, and discover how this blend enriches both our wallets and our souls.

Understanding Zakat in the Digital Age

Zakat, one of the Five Pillars of Islam, is a form of almsgiving to the less fortunate, calculated as a percentage of one’s wealth. Traditionally, it applied to tangible assets like gold, silver, and livestock. But what happens when your wealth is tied up in the intangible world of the stock market?

Imagine you’re in a vast, bustling city where skyscrapers are filled with traders, analysts, and investors, all meticulously tracking the rise and fall of stocks. In this modern jungle, your investments grow, sometimes unpredictably, reflecting not just your financial acumen but also the global economic heartbeat. Here lies our modern dilemma: how do we apply the ancient practice of Zakat to this digital-age wealth?

Calculating Zakat on Stocks and Shares

The key to solving this puzzle lies in understanding the nature of your investment. Are your stocks purely for capital gain, or do they yield dividends from companies that deal in tangible goods and services? The answer guides how Zakat is calculated on these modern assets.

  1. For Long-Term Investment: If you hold stocks as a long-term investment, Zakat is due on their market value. Think of it as if you’re a farmer with fields (stocks) that grow crops (dividends). Just as a farmer would calculate Zakat on the harvest, you calculate Zakat on the annual value of your stocks.
  2. For Active Trading: If you’re an active trader, your stocks are akin to the goods in a merchant’s caravan, constantly moving and changing. Here, Zakat is calculated based on the total value of your trading portfolio at the end of the lunar year.

Stories from the Stock Market

Let’s take a moment to walk in the shoes of Aisha, a dedicated software engineer by day and a savvy investor by night. Aisha’s portfolio is a mix of long-term tech stocks and short-term trades in renewable energy. When the time comes to calculate her Zakat, she reflects on the nature of each investment. Her tech stocks, akin to a golden wheat field, are valued at their current market price, while her active trades are tallied up like a merchant’s inventory at year-end. This careful consideration ensures Aisha fulfills her spiritual obligations without overlooking her modern investments.

Similarly, Omar, a retired teacher with a passion for philanthropy, uses his dividends from healthcare stocks to support various charities. By calculating the Zakat on his shares, Omar turns his investments into a powerful tool for social good, illustrating how ancient practices can meet modern philanthropy.

Embracing Modern Dilemmas with Ancient Wisdom

The dilemma of paying Zakat on stocks and shares illustrates a broader lesson: that our faith and traditions are not static, but rather, they evolve with us. As we navigate the complexities of the modern financial world, we’re reminded of the adaptability and enduring relevance of Islamic teachings.

Zakat on stocks and shares: a modern dilemma solved, not just through numbers and calculations, but through the stories of individuals who bridge the gap between their faith and their finances. In doing so, they enrich not only their own lives but also the lives of those around them, weaving a tapestry of spiritual and material prosperity that spans the ages.

In conclusion, the practice of paying Zakat on stocks and shares: a modern dilemma solved, offers a fascinating glimpse into how timeless traditions adapt to contemporary realities. It’s a journey that not only addresses a modern financial challenge but also deepens our connection to our faith, our community, and the wider world. As we move forward, let’s carry this wisdom in our hearts and portfolios, ensuring that our investments reflect our values and contribute to a better world for all.


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