On Thursday, July 22, 2021, the Central Bank of Nigeria (CBN) revealed that the pilot scheme of its digital currency — eNaira — will launch on October 1, 2021.
However, due to reasons ranging from a clash with Independence Day activities to the ill-preparedness of commercial banks, the much-anticipated launch was postponed
While addressing the postponement, CBN’s Director of Communications, Osita Nwasinobi, again recited some benefits of the eNaira — peer-to-peer transactions, reduction of cash use, and financial inclusion.
While the eNaira has its benefits, concerns have been pointed out regarding transparency and how it could aid illegal financial practices by those in control.
According to a Twitter user, a closed or private ledger means crucial information such as supply rate, burn rate, and every eNaira transaction will be known to and controlled solely by an entity — trusted intermediary — that has access to the blockchain.
While we’ve explored how this currency will work, what it means, and how it differs from other digital currencies, we’re yet to examine the possibilities of a closed or private blockchain aiding “laundering on steroids”
What is a private blockchain?
A private blockchain is accessible and controlled by a single entity, organisation, or enterprise. The Hyperledger Fabric, chosen to run the eNaira by the CBN, is an example of a private blockchain.
They’re also known as permissioned blockchains. A trusted intermediary can choose to grant full or partial access to another entity if it deems fit.
Bitcoin made blockchain technology famous, so like the cryptocurrency, the tech is associated with decentralisation and openness. But private blockchains are the opposite. Although it’s the same tech, there’s no form of decentralisation; a single entity controls everything.
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Blockchain is a database or a record book, if you like, that stores data. It is a distributed ledger that stores transactions that have been validated on a blockchain network.
Validated transactions are aggregated and stored in a block; this block is added to previous blocks creating a chain, hence the word blockchain.
In the case of private blockchains, the process of validating transactions that leads to the creation of blocks is decided by one entity, bearing similarity with an original banking system.
How about public blockchains?
Public blockchains, like the name implies, are open to everyone. Anyone can join the network and see transactions that have taken place. For example, by simply typing https://www.blockchain.com/explorer on your browser, you can search for a Bitcoin address, see the number of Bitcoins in it, and the transactions it has performed.
Also, anyone with the proper hardware can validate transactions on a public blockchain. While it's open to the public, it is secure and offers a lot of transparency.
How private blockchains work, compared to the public ones
Immediately, the difference between a private and public blockchain is clear — control and access. However, to get an idea of how much power a trusted intermediary — in this case, CBN — has on a private blockchain, it is important to break down the transaction process.
According to an explanation by Bird & Bird, a global law firm, a trusted intermediary controls a private blockchain.
This means the CBN will have total control. A trusted intermediary can either build the entire blockchain software from scratch or licence it from a third party like the Hyperledger Fabric, as the apex bank did.
The private blockchain network is set up using nodes that run this software. A node is simply a system that validates transactions in a blockchain network.
The CBN will run the validator nodes itself or use a subsidiary — most likely BItt Inc. It will also create an app with which users — Nigerians — can interface with these nodes. Once you carry out a transaction on the app, it is relayed to the CBN who validates them.
Also, there are two major ways to set up a private blockchain:
- distributed ledger model, and
- shared ledger model.
From the presentation by the CBN containing the role of strategic stakeholders in the eNaira launch, it can be inferred that the regulator will most likely use the shared ledger model.
In the presentation, banks, fintechs, the Nigeria Inter-Bank Settlement System (NIBBS), and other stakeholders will be playing major roles in the deployment of the eNaira, a setup that fits the shared ledger model.
Using this model, the CBN has the master node and a full copy of the ledger. We then have the first layer of participants — banks or fintechs — that run nodes but only have a partial copy of the ledger and have their information limited to the apex bank's control.
The third layer of participants is the app users.
In contrast, a public blockchain does not have a trusted intermediary. There’s a network of equal nodes that interact with each other.
Per Bird & Bird, “these nodes are responsible for verifying and relaying the transactions on the blockchain network, but they can also act as end-user software that allows a user to create transactions and/or mine/verify transactions before they are added to the blockchain.”
Using Bitcoin as an example, the transaction starts from a wallet broadcasted to the network where the digital signatures are verified.
The mining nodes then try to validate the transaction using something called a consensus algorithm — a rule written into the blockchain software that makes certain transactions are validated correctly. The whole process is known as proof of work (PoW).
A private blockchain goes through somewhat the same process, but instead of a network of nodes deciding the fate of the transaction, it is done by one entity.
How much power does a private blockchain give the CBN
Adedayo Adebajo, Managing Director of Jelurida Africa, the blockchain company behind Ardor, an open-source blockchain network, believes that while blockchain is immutable, in the case of a private blockchain, the owners can doctor information on it.
“If you’re running a private blockchain, there are a number of things you need to sacrifice, part of which is transparency.
“Some of the reasons people run a private blockchain is to remove the need for transparency, to be able to scale, increase transaction speed with reduced energy consumption, and reduce the need for numerous gadgets in terms of nodes.”
He says it bears a lot of resemblance with the kind of banking operations we have today, the difference being that the currency is digital and could in the future be deployed for decentralised applications where smart contracts will come into play.
Interestingly, he points out that manipulation of information is possible on a private blockchain.
“It becomes pretty much easy for people to manipulate data and go away with it for a while before it can be discovered or detected as the nodes continue to generate.”
Adebajo believes that a public blockchain would be more suitable for creating the eNaira, making information available to many people.
This corroborates @dondekojo’s tweet that burn rates or circulation rates will be unknown.
Burning in this sense is reducing the amount of a particular currency in circulation to control inflation. If a certain amount of eNaira were to be burned, it would be almost impossible to confirm if it was indeed burned or laundered.
Would a public blockchain be better?
While launching the eNaira on the public blockchain could provide more transparency, it also has limitations.
To maintain security, public blockchains such as Bitcoin run thousands of nodes which makes transactions very slow.
If this is applied to the eNaira, transactions will take minutes to several hours to complete.
Also, running a validator node on the Bitcoin network is expensive. It requires significantly powerful computing hardware, one of which costs between $5000 and $10,000. It's important to note that thousands of these will be needed to run a secure network.
While it can be argued that there are faster public blockchains with a less expensive consensus mechanism such as proof of stake (PoS), their security and true decentralisation isn’t as assured as Bitcoin’s model.
Flowing from this, is transparency a valid price to pay?