The decision of the Central Bank of Nigeria (CBN) banning banks and other financial institutions from engaging in cryptocurrency transactions is sending shockwaves across the country. The reason for the huge debate is evident. Data from Paxful—a cryptocurrency trading platform, showed Nigeria was second only to the United States in volume terms. Nigerians are one of the highest downloaders of crypto wallets.
The total value of all cryptocurrencies globally passed $1 trillion mark in January 2021. Bitcoin remains the market leader with a $676 billion market capitalisation, followed by Ethereum with a $136 billion market capitalisation. Tether, XRP and Litecoin round out the top five.
Market sources said the decision of the apex bank was aimed at safeguarding the Nigerian economy from the adverse effects of unregulated cryptocurrency trading. Some analysts said dollar inflows meant for the Nigerian foreign exchange market and foreign reserves were being channelled into the cryptocurrency market.
Research & Consulting at Afrinvest West Africa Managing Director Abiodun Keripe said the apex bank had observed a dangerous trend, where foreign capital inflows into Nigeria are diverted to cryptocurrency markets with zero regulation.
Keripe said the Nigerian cryptocurrency market records over N2.2 billion daily turnover. The market, he added, remains vibrant where upwardly mobile and youths earn income but is unregulated. He said Nigeria lacks digital assets needed for effective monitoring and regulation that would enable Nigeria regulators to track crypto exchanges across the world.
He said: “The Nigeria Stock Exchange records an average of N2 billion daily transactions, the cryptocurrency market is in excess of that, and Nigeria is the biggest crypto market in Africa. Nigeria has sold over 600,000 Bitcoins in the last one year. With each Bitcoin worth about $38,000.”
Keripe disclosed that funds, which previously entered the country as diaspora remittances are now flowing into the cryptocurrency market after CBN tightened policy mandating International Money Transfer Operators (IMTOs) to pay diaspora remittances beneficiaries in dollars.
In a tweet, Software & Blockchain Engineer, Tosin Olugbenga, said: “America has started putting Crypto returns on tax forms
The United Kingdom wants to start the same. But Nigeria banned naira deposits and withdrawals from cryptocurrency exchange platforms.”
Market sources say the latest move may not be unconnected to the activities of a cyber-criminal cartel that recently hijacked the data of one of the banks and demanded ransoms in bitcoins.
According to a source, who noted that the CBN was not against the use of cryptocurrencies and had not banned any individual from using it, the regulator would be failing in its responsibilities if it allowed unregulated actors to use the platforms of institutions it regulates to facilitate illegal transactions.
The source, who pleaded anonymity, further noted that the CBN, like many other major central banks around the globe, were cautious about the use of bitcoins in their respective economies because of the threats its usage posed to their financial systems.
According to him, the concerns of the central banks prompted them to float the idea of issuing digital currencies, which would allow holders to make payments via the internet and offline, in a direct move to fend off threats of other existing means of electronic payment such as digital wallets, online banks or cryptocurrencies, which are risk-prone due to their speculative nature.
Citing the proposed e-krona by the Riksbank of Sweden and advanced moves already made by the Peoples’ Bank of China (PBoC) to issue a digital currency as well as consultations by the European Central Bank and the Bank of England on the issue of digital currencies, our source said the concern of the CBN was valid and supported by all.
While noting that no central bank in the world would sit back and not address threats to the financial system it regulates, the source said investigations revealed that cryptocurrencies had been used for laundering illicit funds, defrauding unsuspecting investors, scams and monetising ransomware as was the case with the unnamed commercial bank in Nigeria.
He reiterated the need for Nigerians to be cautious in transacting in cryptocurrencies since they were highly volatile and not regulated by any central bank in the world nor insured by the government of any major economy.
Keripe said the apex bank had watched as diaspora remittances inflow to the country dropped by over $2 billion in the third quarter of 2020.
“Diaspora remittances dropped from about $5 billion quarterly inflows to $3 billion in the third quarter of 2020. The statistics could even be worse when the fourth-quarter data is released. And these reduced inflows are having a negative impact on the foreign reserves and naira stability,” he said.
He said the CBN cannot regulate and track assets within the crypto market, because of the cumbersome nature of its operations. “Due to the downturn in the economy, Nigerians in the diaspora now use crypto to move funds home, which means forex market will continue to dry up fueling high premium between official and parallel market rates and making it difficult for the reserves to provide a buffer for the local currency,” he added.
He said although genuine dealers are available, their operations are now used to pay for kidnapping ransom.
He urged the apex bank to develop technology that connects to the crypto exchanges, track and funds flow for effective regulation.
“The CBN holds the responsibility of protecting the nation from financial risks hence the need to ensure that financial dealings within the country follow set rules and regulations. Cryptocurrency is not the currency of any nation, and there is no law yet.
The CBN should come up with regulations on this area of finial dealings, demand Know Your Customer (KYC) for the crypto exchanges and corporate entities trading on such assets. This will help in identifying who is trading and validating their identity, and fish out fraudsters,” he advised.
deVere Group’s chief executive and founder, Nigel Green – a long-time advocate of cryptocurrencies, called for greater regulatory scrutiny of cryptocurrencies such as Bitcoin.
He spoke after both the UK’s Financial Conduct Authority (FCA) and the president of the European Central Bank (ECB) called for more robust regulations for cryptocurrencies.
The calls follow the price of Bitcoin jumping more than 300 per cent last year and gained a further 40 per cent in January to reach an all-time high.
Green said: “The calls by financial watchdogs and central banks for greater regulatory scrutiny must be championed as digital currencies, including Bitcoin, are set to play an ever-greater role in the international financial system.
“What’s needed is a strong regulatory framework to be established and approved at an international level. The forthcoming UK-hosted G20 summit might prove to be the ideal opportunity.
“Such regulation will help protect investors, tackle cryptocurrency criminality, and reduce the potential possibility of disrupting global financial stability, as well as offering a potential long-term economic boost to those countries which introduce it.”
He continued: “There is sustained and growing interest in the likes of Bitcoin from both retail and institutional investors. They are now increasingly handling the assets as they would any other asset in the portfolio –for example, sometimes profit-taking, sometimes reinvesting, using the volatility to their advantage, and using these alternatives to help with all-important diversification.
“These mainstream, normalised investor strategies demonstrate that cryptocurrencies must come into the regulatory tent and beheld the same standards as the rest of the financial system.”
A financial expert, Yakub Aliyu is in support of the CBN decision. Analysing the CBN decision, he argued that “the CBN Act recognises the Naira as the only legal tender in the Nigerian financial system. The CBN never prevented any individual from dealing in cryptocurrency”.
The CBN said, “deposit money banks under its purview cannot partake in cryptocurrency because it will be illegal. It will also undermine monetary policy which is anchored on Naira money supply and demand”.
Aliyu said the CBN is “concerned that bitcoin valuation is excessively speculative, akin to betting, and it will not make sense to run a currency system based gambling”.
Yakub Aliyu maintained that “bitcoin and other variants of digital currencies are not only unregulated the world over, but they are also now used as weapons by cybercriminals”.
According to him, “the last time cybercriminals hijacked the customer database of a Nigerian bank, they demanded ransoms in bitcoin before they released the database. And since bitcoin addresses are pseudonymous, it is not possible to trace them”.
The CBN, he said, “cannot fold its arms and see cryptocurrency destroy the entire banking system with all the unsavoury consequences of the banking crisis and bailouts. Turkey had also banned bitcoin because it was becoming a channel for money laundering on an unimaginable scale”.
Aliyu insisted that “if any Nigerian wants to deal in digital currencies, bitcoin, or whatever, such person is free to do so, only that there is no platform for a cryptocurrency payment system. Such a person could as well go to wherever such platform is legalised since the bitcoin market is virtual 24/7” he said.
Aliyu’s view on the use of cryptocurrency for the commission of a crime is buttressed by a Reuters report that “German prosecutors have confiscated more than $60 million worth of bitcoin from a fraudster. There’s only one problem: they can’t unlock the money because he won’t give them the password”.
Reuters reported that “the man was sentenced to jail and has since served his term, maintaining his silence throughout while police made repeated failed efforts to crack the code to access more than 1,700 bitcoin, said a prosecutor in the Bavarian town of Kempten”.
“Bitcoin is stored on a digital wallet that is secured through encryption. A password is used as a decryption key to open the wallet and access the bitcoin. When a password is lost the user cannot open the wallet. The fraudster had been sentenced to more than two years in jail for covertly installing software on other computers to harness their power to ‘mine’ bitcoin” Reuters reported.
However, Stears Business which analysis economic developments said, “cryptocurrencies have gained popularity since bitcoin, the most valuable crypto, rose significantly four years ago. The coin went from $900 in January 2017 to almost $20,000 by the end of that year”.
The medium added that “cryptocurrencies are known for people making (or losing) money from trading, they have many use cases, including making cross-border payments, remittances or storing wealth (protected from inflation or exchange rate depreciation)”.
Stears Business noted that “for many in Africa’s largest country, cryptocurrencies were a breakthrough, and in 2017, we started to see a rise in bitcoin volumes. According to one estimate, local bitcoin trades hit $1 million in a single week”.
Stears Business admitted that cryptocurrency has become susceptible to the antics of fraudsters. “It wasn’t all good news, though. Bitcoin was also very popular for individuals who wanted to get involved in a Ponzi scheme called MMM (Mavrodi Mondial Moneybox)”.
“This connection, coupled with a few fraud causes, made African governments and regulators slightly cautious. For central banks, though, the rise of cryptocurrencies was a potentially scary movement. The idea of digital currencies that central banks have no control over was seen as a threat to conducting monetary policy” Stears Business said.
It also stated that “last year, estimates from BuyCoins showed that total volumes of bitcoin traded in Nigeria stood at $200 million per month. That’s more than what was traded on the Nigerian Stock Exchange ($131 million) in Q2’2020.
Stears Business argues that “it’s early to say what the impact would be. In Nigeria, announcements like this can either be implemented instantly or quickly retracted. The worst-case scenario is that both individuals and exchanges will no longer engage in transactions using a Nigerian bank account.
Stears Business noted that following the CBN’s decision, exchanges like BuyCoins and Binance would have to find other ways of storing their cash. Nigerians traded over $141 million worth of bitcoin on BuyCoins alone last year, the CBN clamping down on this activity will harm startups across Nigeria’s crypto landscape (not just the exchanges). Investors will have more reasons to be worried.
The CBN had to take action because “as the crypto market has boomed more and more Nigerians were exchanging their naira for cryptocurrencies ranging from bitcoin to dogecoin. Individuals deposit naira on exchanges and buy these coins directly. However, these companies acquire dollars from mainly the parallel market to buy these cryptocurrencies on the international market. As more people buy crypto assets, more US dollars are being taken out of Nigeria” thus leaving the CBN with no choice but to clamp down on cryptocurrencies.
One of the exchanges, Binance, urged its clients to “withdraw your Nigerian Naira (NGN) as early as possible to avoid potential channel issues”.
To err on the side of caution, Binance “disabled deposits to prevent more NGN coming in. Many transactions were disabled before the full termination of the transactions thus prompting the executors of the transactions to call for help”.