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CBN explains motive behind cryptocurrencies’ ban from financial institutions

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.”

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