The latest news to emanate from Nigeria is the decision of the Central Bank of Nigeria to begin the process to launch its digital currency, which will run on the Hyperledger Fabric blockchain.
A central bank digital currency (CBDC) is a virtual form of money that a country’s central bank backs. It is usually issued and regulated by the monetary authority of a country or region.
Nigeria’s apex bank has been at the centre of anti-crypto activities in the early part of 2021. However, its decision to follow in the footsteps of other central banks in the world in the research and development of digital currencies would shock many stakeholders in the crypto space.
This article does not seek to focus on the legal implications of designing a digital currency but will look at the general challenges.
CBDC: Finding a balance between users’ privacy and proper identity
One of the main objectives of digitizing currencies is to have control and create adequate identification of users in the digital currency ecosystem. It is essential to create a secure system that will eliminate all forms of illicit activities; however, central banks might be walking a tightrope when it comes to privacy. Collating users’ details might scare them away on their first try.
Already, there have been reports of central banks sacrificing users’ identities for privacy and programmability. Considering that the implication of a central bank with a weak security system can lead to a mass data breach.
Introducing the traditional banking mechanisms can be a step in the right direction, which could also be favourable for conventional banks. Customers will be able to manage their digital currencies portfolio just like they did with the traditional currencies. This method also encourages seamless deductions from government tax agencies. However, users might be exposed to the risk of devastating data leaks if mishandled.
It is fair to say central banks are aware of the risks involved in creating digital currencies. However, they have maintained that its essence is to curb illegal financial activities.
While the blockchain system is built to be decentralized, there can be room for centralization. There have been different opinions of how the CBDC will work in regions that would pilot the innovation. But the question is: how will CBDC affect stable crypto coins?