Last Friday, the Central Bank of Africa (CBN) shocked Nigerians with a sudden ban that prevents them from buying cryptocurrency using their bank accounts.
The directive instructed Deposit Money Banks (DMBs) and other financial institutions to stop transacting in/and with entities dealing in cryptocurrencies, with immediate effect.
Following the negative blowback of the new order, the regulator has released a statement to provide further justifications for its decision.
Here are an analysis of its reasons for the ban.
CBN never approved of cryptocurrency
The recent crypto ban by the CBN is not the first time the regulator has expressed its disaffection and disapproval for virtual currencies. As far back as 2017, the countries apex bank has vehemently warned both people and banks from indulging in its sale and circulation, insisting it can’t guarantee its safety and as such can’t protect Nigerians nor recover any losses incured from dealing in them.
An extract from a 2017 circular shows that CBN had already instructed banks not to transact or hold virtual currencies.
“Ensure that you do not use, hold, trade and /or transact in anyway in virtual currencies”Extracct CBN 2017 circular
However, the the instruction then was optional. The CBN still allowed banks to transact with crypto companies but at their own risk.
“The CBN reiterates that VCs such as Bitcoin, Ripples, Monero, Litecoin, Dogecion, Onecoin, etc, and similar products are not legal tenders in Nigeria, thus any bank or institution that transacts in such businesses does so at its own risk.” – CBN
CBN tightens the noose on Cryptocurrency
However, that has changed but not in a way many would have expected. The regulator decided to completely ban crypto transactions as opposed to the friendly regulations many were expecting.
The recent regulation has a far-reaching implication to the cryptocurrency industry in the country, with experts literarily calling it a long noose around the booming industry.
In retrospect, the new policy could have been sparked by the boom in the industry. In the last six months, Nigeria has grown to become one of the top 3 countries in the world with the highest number in volume and value of cryptocurrency transactions.
According to Statista, Nigeria has the 3rd largest Bitcoin trading country in the world with $400.1 million worth of the crypto having been traded in the country.
Not all in government agree with CBN
Before now, the positive buzz around cryptocurrency Bitcoin, in particular, created a huge prospect of virtual currencies being widely accepted in the country.
The new framework for the regulation of digital assets and local crypto exchanges in Nigeria created by the Nigerian Securities and Exchange Commission last year especially affirmed this forecast.
However, going against the SEC’s recommendation to develop a regulatory framework for the blockchain space, the CBN has decided to opt for an outright ban.
According to the regulator, its decision to ban the virtual currency is based on following
1. Crypto prevents oversight, accountability, and regulation
Cryptocurrencies like Bitcoin are digital or virtual currencies issued by largely anonymous entities and secured by cryptography. CBN explained that the fact that the currency is issued by unregulated and unlicensed entities goes against the key mandates of the CBN. It also directly contravenes existing law as enshrined in the CBN Act (2007).
The law states that the CBN has the sole right to of issuing currency and notes throughout Nigeria and neither the FG, other persons or authority shall issue currencies payable to bearer on demand.
This means that since crypto wasn’t issued by the CBN, it isn’t legal. However, it’s reasonable to note that when the law was made even the world’s first cryptocurrency, Bitcoin hasn’t be created.
So while CBN is right by the law, it’s obvious that the law needs more of an update to encapsulate the current financial reality.
Asides its origin, the nature of cryptocurrency means that the regulation is limited. As a regulator, this isn’t exactly good news. And from history, the CBN likes to micro-manage the finance industry.
Cryptography is a method of encrypting and hiding codes that prevent oversight, accountability, and regulation.
2. Other countries have also banned cryptocurrency
According to the CBN explanation, its position on cryptocurrencies is not an outlier as “many countries, central banks, international financial institutions, and distinguished investors and economists have also warned against its use.”
Justifying its decision, the CBN has pointed out that countries like China, Canada and Egypt have placed restrictions on crypto trading in their individual countries.
While this is true, the regulator conveniently fails to point out that there are many other countries like South Africa, Russia and the US that have embraced cryptocurrency and are making efforts to regulate the virtual currency.
Last year, South Africa’s Minister of Finance, Tito Mboweni proposed amendments to its Financial Intelligence Centre Act (FICA) which contains rules around crypto-asset service providers (CASPs)
Even China, who were initially against cryptocurrency is already working on creating its own digital currency. This indicates that the biggest name in the CBN’s litany of countries that have banned cryptos also acknowledges that digital currencies are probably the future of money.
3. Cryptocurrency is increasingly being used for criminal activities
It’s not a secret that cryptocurrency allows for anonymous transactions that have been misused for criminal activities. Over the last couple of years, crypto exchanges have been making conscious efforts to reduce it with strong KYC policies among other things.
However, the CBN isn’t convinced. The regulator questions why any entity would disguise its transactions if they were legal. It added that cryptocurrencies have become well-suited for conducting many illegal activities including money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion.
As an example, the regulator highlighted the role of cryptocurrencies in the purchase of hard and illegal drugs on the darknet website called “Silk Road”. The recent reports that cryptocurrencies have been used to finance terror plots further damages its image as a legitimate means of exchange.
Prior to the ban, The United States’ Federal Bureau of Investigation, (FBI), reportedly warned the CBN on the activities of fraudsters using cryptocurrencies to bring in hundreds of millions of US Dollars illegally.
However, the reality is that with or without crypto, money laundering and terrorist financing will still persist as they have done before the emergence of cryptos. So banning may not have been the best option especially in a groaning economy like Nigeria where youths have resorted to it to earn honest livings.
For example, the US didn’t ban Bitcoin and other cryptos even after over $1 billion was channelled through the currency using Silk Road.
Cryptos extreme price volatility
During an online forum hosted by the World Economic Forum, the Governor of the Bank of England, Andrew Bailey, highlighted the extreme price volatility of cryptocurrencies as one of its biggest flaws.
“Have we landed on what I would call the design, governance and arrangements for what might call a lasting digital currency? No, I don’t think we’re there yet, honestly. I don’t think cryptocurrencies as originally formulated are it.”Andrew Bailey
He explained that this flaw makes it impossible for them to be used as a lasting means of payment. The CBN agrees with him, explaining that unprecedented price volatility of the digital currency threatens many sophisticated financial systems.
Although the CBN didn’t clarify if Bitcoin threatens the Nigerian financial system, it’s obvious that the currency has an effect on the economy, – good or bad, who knows?
According to highly placed sources within the presidency, “fraudsters remitted between $200 and $300 million through crypto to Nigeria every week.”
This comes at a time when foreign capital inflow into the country is at a four year low, having plummeted from $23.9 billion in 2019, to just $9.68 billion in 2020, according the NBS.
In addition, while Mr Andrew’s allusion to Bitcoin price volatility is understandable, it also means that confidence in cryptocurrency especially Bitcoin is at an all time high and, more evident than ever, here to stay.
Bitcoin price hit a record high of $42,000 per unit on January 8, 2021, and sank as low as $28,800 about two weeks later.
Cryptocurrencies do not generate returns (investment)
There is no investment without risk. The CBN claims that cryptocurrencies do not have market fundamentals that price of stocks reflects.
It argued that when one buys a stock, say of a conglomerate, its price reflects the activity and production of that conglomerate and the value people place on their goods and/or services.
However, with cryptos, investors only buy in the hope that its use and acceptability will rise. Therefore, it does not have any intrinsic value and does not generate returns by itself.
Bitcoin was the first to be introduced in 2009 and now accounts for about 68 per cent of all cryptocurrencies.
While CBN’s argument is true, it omits the fact that the prices are not just driven by demand, they are also fueled by news relating to the crypto space, from regulatory news in the US to those in Nigeria.
Also, the CBN’s deduction that Fiat Money is safe because it’s accompanied by full faith and comfort of a country or Central Bank can be disputed.
From the tales of the Zimbabwean dollar to the current decline of the Nigerian naira, even countries can fail. Now more than ever, big techs and corporations run the world, and with Bitcoin backed by many of these big techs, its safety is strong.
Since cryptocurrency came into limelight with Bitcoin in the 2010s, the CBN has always spoken against it despite the huge possibility it holds. If the latest regulation is anything to go by stifler regulations may be on the way.
For now, CBN has revealed that it will continue to use its regulatory powers to educate Nigerians to desist from its use. However, with the level of Bitcoin adoption in the country, that may just be a naive pipe dream.
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