Ban on Cryptocurrencies: Another monetary headache for Nigerians

cryptocurrency

Despite the huge risks involved in transactions in Cryptocurrencies, some Nigerians, who are still contending with the vexed issues of hikes in fuel prices, electricity tariffs, upward review of Value Added Tax, and the rising inflation in an economy ravaged by Covid-19 pandemic and recession, believe that this ban on Cryptocurrencies is yet another retrogressive policy aimed at blocking investment opportunities for Nigerians.

 

By Goddy Ikeh 

ALTHOUGH not much is known about cryptocurrency in Nigeria, but many Nigerians, especially people in the financial sector and some financial institutions have been engaged in transactions in cryptocurrency.

Generally, cryptocurrency is digital money with no physical bill or coins, representing any currency of exchange.

With transactions done online, it is often called currency of the future. Unfortunately, this currency is not backed by any government, it has high volatility without any form of guarantee and it can easily be hacked.

Despite the huge risks involved in cryptocurrency transactions, the value of cryptocurrencies as of January 27, 2021, was over $897 billion.

Worried by the growing popularity of cryptocurrency in Nigeria and the risks involved, the Central Bank of Nigeria, CBN, issued what it described as its response “on regulatory directive on cryptocurrencies”.

Osita Nwanisobi

In a statement on February 7, 2021, and signed by Osita Nwanisobi acting Director, Corporate Communications of the CBN, the apex bank says that its attention has been drawn to various comments and reactions following the recent reminder to Deposit Money Banks, DMBs, to desist from transacting in/and with entities dealing in cryptocurrencies.

It noted that most of these reactions reveal that there appears to be a need to provide further justifications about its position, especially to the general public.

It explained that 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 portend- 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,” the statement said.

According to the CBN, in China, for example, cryptocurrencies are completely banned and all exchanges closed as well. Banks and other financial institutions are not allowed by law to transact or deal with cryptocurrencies. China’s Central Bank called the Peoples Bank of China (PBoC) has provided several directives ruling out the use of these currencies. The PBOC views cryptocurrencies as illegal because they are not issued by any recognized monetary institution and do not hold any legal status that can make them equivalent to money. Hence banks and all stakeholders are strongly advised against their use as a currency.

It recalled that famed investor Warren Buffett called cryptocurrencies “rat poison squared,” a “mirage,” and a “gambling device.” Buffett, according to the CBN,  believes it is a “gambling device” given that they are most valuable because the person buying it does so, not as a means of payment; but in the hope, they can sell it for even more than what they paid at some point.

The CBN posited that during a recent online forum hosted by the Davos-based World Economic Forum few weeks ago, Andrew Bailey, the Governor of the Bank of England, highlighted the extreme price volatility of cryptocurrencies as one of the biggest flaws and explained that this flaw makes it impossible for them to be used as a lasting means of payment.

“Have we landed on what I would call the design, governance and arrangements for what I 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,” he said.

It is not surprising he would take that position because, Bitcoin, the best-known cryptocurrency, hit a record high of $42,000 per unit on January 8, 2021, and sank as low as $28,800 about two weeks later. This is far greater volatility than is found with normal currencies.

“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 use of cryptocurrencies in Nigeria is 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.

“Second, the very name and nature of “cryptocurrencies” suggests that its patrons and users value anonymity, obscurity, and concealment. The question that one may need to ask therefore is, why any entity would disguise its transactions if they were 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,” it said.

According to the CBN, due to the fact that cryptocurrencies are largely speculative, anonymous, and untraceable, they are increasingly being used for money laundering, terrorism financing, and other criminal activities. Small retail and unsophisticated investors also face high probability of loss due to the high volatility of the investments in recent times.

“In light of these realities and analyses, the CBN has no comfort in cryptocurrencies at this time and will continue to do all within its regulatory powers to educate Nigerians to desist from its use and protect our financial system from activities of fraudsters and speculators,” the CBN added.

Securities and Exchange Commission

In the same vein, the Securities and Exchange Commission, SEC,  says that it decided to provide regulatory certainty within the digital asset space last year due to the growing volume of reported flows.

It will be recalled that SEC, had in September 2020 described digital assets, including crypto assets, as securities, saying it would regulate them.

SEC said in a statement on Thursday, February 11, 2021, that it had received several comments and inquiries from the public on a perceived policy conflict between its September 11, 2020 statement on digital assets and classification and treatment and the CBN circular of February 5, 2021.

“We see no such contradictions or inconsistencies. In recognition of the fact that digital assets may have the full characteristics of investments as defined in the Investments and Securities Act 2007, the SEC statement asserts that trading in such assets falls under SEC’s regulatory purview, except proven otherwise “The primary objective of the statement was not to hinder or stifle innovation, but to establish standards of ethical practices that ultimately make for a fair and efficient securities market.

“The SEC made its statement at the time to provide regulatory certainty within the digital asset space, due to the growing volume of reported flows,” it said.

It, however added that “subsequently, in its capacity as the regulator of the banking system, the CBN identified certain risks, which if allowed to persist, will threaten investor protection, a key mandate of the SEC, as well as

financial system stability, a key mandate of the CBN.

“In light of these facts, we have engaged with the CBN and agreed to work together to further analyse, and better understand the identified risks to ensure that appropriate and adequate mitigants are put in place, should such securities are allowed in the future.”

SEC said for the purpose of admittance into the SEC Regulatory Incubation Framework, the assessment of all persons (and products) affected by the CBN circular “is hereby put on hold until such persons are able to operate bank accounts within the Nigerian banking system.”

It said the planned implementation of the SEC Regulatory Incubation Guidelines for fintech firms intending to introduce innovative models for offering capital market products and services would continue.

“The SEC will continue to monitor developments in the digital asset space and further engage all critical stakeholders with a view to creating a regulatory structure that enhances economic development while promoting a safe, innovative and transparent capital market,” it added.

Despite the positions of the two regulatory institutions – the CBN and SEC, some Nigerian experts and stakeholders in the financial sector have expressed divergent views on cryptocurrencies.

Prof. Kingsley Moghalu

For instance, a former deputy governor of the CBN, Prof. Kingsley Moghalu, said that $500 million worth of Bitcoin had been traded in Nigeria within the last five years.

Reacting to the ban on Cryptocurrencies transactions by the CBN, Moghalu faulted the move of the CBN, saying that regardless of the risks involved in trading in cryptocurrencies, he would not recommend that it should be banned outrightly.

According to Prof Moghalu, a lot of the activities in the world are going digital and I would not recommend banning it (cryptocurrencies) outright.

Moghalu told Channels Television in an interview that “$500 million worth of Bitcoin had been traded in Nigeria within the last five years and that Nigeria is one of the top 10 countries in the use of cryptocurrencies in the world today”.

He explained that it is becoming a real factor in the country’s investment ecosystem, as well as a livelihood for many Nigerians.

However, Moghalu is not alone as many other Nigerians have faulted the decision of the CBN, noting that the move is seen as though the government is always taking actions aimed at taking away opportunities from Nigerians, especially in a depressed Nigerian economy.

In addition, the Digital Rights Lawyers Initiative, DRLI, has sued the CBN and SEC in the Federal High Court in Lagos, asking the court to quash the Central Bank of Nigeria (CBN)’s letter prohibiting banks from dealing in cryptocurrencies and closing down of suspected bank accounts.

DRLI also requested the court for a perpetual injunction restraining the apex bank from regulating and/or further regulating virtual currencies/ cryptocurrencies in Nigeria.

According to DRLI, the CBN lacks the power to regulate cryptocurrencies.

Meanwhile, the Senate had on Thursday, September 11, 2021, summoned the Governor of Central Bank of Nigeria, Godwin Emefiele, and Director General of the Security and Exchange Commission, Lamido Yuguda, over the decision of the CBN to restrict cryptocurrency in the country.

The decision was taken following a motion by Senator Istifanus Gyang and Tokunbo Abiru titled ‘CBN decision to stop financial institutions from transacting in cryptocurrencies and matters arising therefrom

Godwin Emefiele
Godwin Emefiele

. The Senate also asked its committees on Banking, Insurance, and Other Financial Institutions, Capital Market, and that of ICT and cybercrime to summon Emefiele and Yuguda.

The CBN governor and DG SEC are expected to brief the panels on the opportunities and threats of cryptocurrency on the nation’s economy. The committee has two weeks to submit its findings to the Senate for consideration.

Unfortunately, many Nigerians believe that this latest ban of cryptocurrencies by the CBN is another way of blocking any investment opportunities that can assist in improving their wellbeing, especially in an economy currently ravaged by worsening security challenges, rising inflation, Covid-19 pandemic and recession.

-Feb, 17, 2021 |18:59

 

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