The Central Bank of Nigeria in a press release on Sunday explained why it prohibited regulated financial institutions from “dealing in crypto currencies or facilitating payments for crypto currency exchanges.”
CBN said that it’s attention has been drawn to various comments and reactions following its recent reminder to Deposit Money Banks (DMBs) to desist from transacting in/and with entities dealing in cryptocurrencies.
The apex said that these reactions reveal that there appears to be a need to provide further justifications about our position, especially to the general public.
For those who are not conversant with the universe of cryptocurrencies, CBN said, it is important to state 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.
The CBN said that the recent circular “did not place any new restrictions on cryptocurrencies” since all the banks had already been forbidden to use, hold, trade and/or transact in cryptocurrencies in 2017.
“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.
The apex bank said that 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.
They have all made similar pronouncements based of the significant risks that transacting in cryptocurrencies portendrisk 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 CBN went further to explain that 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.”
The apex bank recalled the comments of Andrew Bailey, the Governor of the Bank of England during an online forum hosted by the Davos-based World Economic Forum few weeks ago, about 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.
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.
The CBN said that cryptocurrencies are issued by unregulated and unlicensed entities and that their use undermines the CBN’s key mandates in the CBN Act (2007).
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 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.
Second, 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. In fact, the role of cryptocurrencies in the purchase of hard and illegal drugs on the darknet website called “Silk Road” is well known.
The CBN added that cryptocurrencies are widely used for speculation rather than as a means of payment.
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.
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 CBN said.
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.
The CBN stressed that its actions is not intended to obstruct the Fin-tech development in the nation and that it will continue to do everything within its regulatory powers to protect Nigeria’s financial system.
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.
The recent regulatory directive became necessary to protect the financial system and the generality of Nigerians (including the youth population) from the risks inherent in crypto assets transactions, which have escalated in recent times, with dire consequences for the integrity of the financial system and financial stability.
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.
Ifunanya Ikueze is an Engineer, Safety Professional, Writer, Investor, Entrepreneur and Educator.