Nigerian apex banking regulatory agency, the Central Bank of Nigeria (CBN) has explained why it barred financial institutions in the country from transacting business in cryptocurrency.
Osita Nwasiobi, the CBN’s Acting Director of Corporate Affairs, said the explanation became necessary in the light of public reaction to the apex bank’s earlier warning on cryptocurrency transactions in Nigerian financial institutions.
He said: “ Cryptocurrencies are digital or virtual currencies issued by largely anonymous entities and secured by cryptography. Cryptography is a method of encrypting and hiding codes that prevent oversight, accountability, and regulation.
“While there are a number of cryptocurrencies now in circulation, Bitcoin was the first to be introduced in 2009, and now accounts for about 68 percent of all cryptocurrencies. As regards our recent policy pronouncement, it is important to clarify that the CBN circular of February 5, 2021 did not place any new restrictions on cryptocurrencies, given that all banks in the country had earlier been forbidden, through CBN’s circular dated January 12, 2017, not to use, hold, trade and/or transact in cryptocurrencies . Indeed, this position was reiterated in another CBN press release dated February 27, 2018. It is also important to note that the CBN’s 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. They have all made similar pronouncements based on the significant risks that transacting in cryptocurrencies portends-risk of loss of investments, money laundering, terrorism financing, illicit fund flows and criminal activities. China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabia, Jordan, Iran, Bangladesh, Nepal and Cambodia have all placed certain level of restrictions on financial institutions facilitating cryptocurrency transactions.
“Let us now turn to some of the justifications for CBN’s recent policy reminder. A perfunctory reflection on the definition of cryptocurrencies can already reveal several problems. First, in light of the fact that they are issued by unregulated and unlicensed entities, their use in Nigeria goes against the key mandates of the CBN, as enshrined in the CBN Act (2007),as the issuer of legal tender in Nigeria. In effect, the uses of cryptocurrencies in Nigeria are a direct contravention of existing law. It is also important to highlight that there is a critical difference between a Central Bank issued Digital Currency and cryptocurrencies. As the names imply, while Central Banks can issue Digital Currencies, cryptocurrencies are issued by unknown and unregulated entities.”
Nwasiobi said also that the nature of cryptocurrencies is built on anonymity, obscurity, and concealment makes transacting business in it risky. He asked why an entity would disguise its transactions if it was legal.
“It is on the basis of this opacity 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. Indeed, many banks and investors who place a high value on reputation have been turned off from cryptocurrencies because of the damaging effects of the widespread use of cryptocurrencies for illegal activities. In fact, the role of cryptocurrencies in the purchase of hard and illegal drugs on the darknet website called “Silk Road” is well known. They have also been recent reports that cryptocurrencies have been used to finance terror plots, further damaging its image as a legitimate means of exchange, he said.
He explained further: “More also, repeated and recent evidence now suggests that some cryptocurrencies have become more widely used as speculative assets rather than as means of payment, thus explaining the significant volatility and variability in their prices. Because the total number of Bitcoins that would ever be issued is fixed (only 21 million will ever be created), new issuances are predetermined at a gradually decelerating pace. This limited supply has created a perverse incentive that encourages users to stockpile them in the hope that their prices rise. Unfortunately, with a conglomeration of desperate, disparate, and unregulated actors comes unprecedented price volatility that have threatened many sophisticated financial systems. In fact, the price of ether, one of the largest cryptocurrencies in the world, fell from US$320 to US$0.10 in June 2017. The price of Bitcoins has also suffered similar volatilities. Given that unlike Fiat Money which accompanied by full faith and comfort of a country or Central Bank, cryptocurrencies do not have any intrinsic value and do not generate returns by themselves. When one buys a stock, say of a conglomerate in the Nigeria Stock Exchange, its price reflects the activity and production of that conglomerate and the value people place on their goods and/or services. This price may rise as the conglomerate produces better goods/services and probably gains greater market share. The reverse would be true if the conglomerate does not innovate to improve the quality of its goods/services. In other words, the price of that stock reflects market fundamentals. In contrast, , cryptocurrencies do not have fundamentals and would never have fundamentals. Investors only buy in the hope that its use and acceptability will rise, thereby pushing up its demand and price.
“ But since new versions of cryptocurrencies come on stream with new mathematical models, an infinite supply may someday crash the price to zero. At this juncture, the CBN would like to assert that our actions are not in any way, shape or form inimical to the development of FinTech or a technology-driven payment system. To the contrary, the Nigerian payment system has evolved significantly over the last decade, leapfrogging many of its counterparts in emerging, frontier and advanced economies propelled by reforms driven by the CBN. This is evident from the variety of participants, products, channels, cutting-edge technology in the payments system. It is also validated by the astronomical growth of volume/value of transactions and the fact that Nigeria is an investment destination of choice for international financial technology companies because of CBN’s policies that have created an enabling investment environment in the payments system. These developments in the payments and settlements space has helped to grow the financial system, improving financial inclusion, the quality and convenience of financial services and has also created millions of direct and indirect jobs for teeming youth population. The innovations in Nigeria’s payment system were catalyzed by regulatory reforms driven by the CBN which entailed the issuance of a raft of guidelines and regulations on operations of electronic payments channels in Nigeria; transaction switching; card issuance and usage, licensing of payment service providers; mobile money services, electronic payments of salaries, pensions, suppliers and taxes, licensing super agents in Nigeria; and use of USSD for financial services in Nigeria, super agents and agent banking operations and payment service banks to mention a few. The robust regulatory framework put in place by the Bank opened up the payment system to innovation with several new players across in the following licensing categories-Payment Terminal Service Providers (PTSPs), Payment Solution Service Providers (PSSPs), Mobile Money Operators (MMOs), Payment Terminal Application Developers (PTSAs), Switches, Super Agents, Agents and Payment Service Banks (PSBs) This has created both direct and indirect jobs for Nigeria’s youth population.”