What’s behind the Central Bank of Nigeria’s war on cryptocurrencies?

By 'Tofe Ayeni
Posted on Thursday, 16 December 2021 10:28

A bitcoin user buys bitcoins with naira on Bitcoin Teller Machine in Lagos
A bitcoin user buys bitcoins with naira on Bitcoin Teller Machine in Lagos, Nigeria September 1, 2020 - back when it was legal. REUTERS/Seun Sanni

Just as President Buhari has suspended the Twitter social media platform in Nigeria, central bank governor Emefiele has barred crypto currencies in the country.

Central bank governor Godwin Emefiele and his political chieftain President Muhammadu Buhari see eye to eye on economics and politics – and it seems, the links between the two. They prefer the commandist model of government whether it’s about directing credit to neglected sectors of the economy or managing information.

Presumably he sees Governor Emefiele crypto as importing the anarchy of social media into the financial realm.

The problem for Nigeria’s government is that it’s extremely difficult to use national laws to police essentially global digital phenomena such as social media or cryptocurrencies.

Just as Nigerians use VPN accounts to avoid the twitter suspension, holders of cryptocurrencies are keeping their accounts offshore.

We also know that many senior members of the government have cryptocurrency accounts: that much is clear from the logos on their cellphone screens.

Cryptocurrencies are just 11 years old and central bankers everywhere are struggling to lay down the law on these virtual currencies. Yet more and more people are leaning away from traditional banking. Nigeria is no exception.

Nigeria does not have a harmonised legal framework for cryptocurrencies. It’s clear if the regulator for this should be the Central Bank of Nigeria (CBN) or the Securities and Exchange Commission, Nigeria (SEC).

The CBN, however, defines cryptocurrencies as ‘digital or virtual currencies issued by largely anonymous entities and secured by cryptography [a method of encrypting and hiding codes that prevent oversight, accountability and regulation].’

With this definition, the CBN is saying that cryptocurrencies (or at least cryptography) is a negative concept, and this year, directed the closure of all accounts by individuals or entities exchanging virtual currencies.

A crypto enthusiast described the move as “an attempt to block something the CBN can’t control.” For a financial analyst based in Lagos, who requested anonymity: “A blanket ban on innovation with several advantages essentially does not help the perception of a central bank that is seen as largely stringent, very defensive and essentially not business-friendly.”

Our crypto enthusiast adds “….you cannot legally accept bitcoin as payment for services, but the value of a currency lies in how much people trust they can transact in that currency. If the Nigerian government says we are not allowed to use dollars, people will still use it. The users are not worried about the regulators – you can still trade in bitcoin if you want.”

However, he notes: “It is a question of enforcement. If the CBN leans heavily on the government and the government blocks bank accounts (as they have done), the general population will tend not to use cryptocurrencies to trade, so the CBN does have power.”

Nigeria’s low ease of doing business makes cryptocurrencies welcome. In a country scoring low on ease of doing business in traditional sectors, alternative ways of exchanging money are welcomed. One such way is the use of bitcoin or other cryptocurrencies.

During the October 2020 #EndSARS protests, the Feminist Coalition (FemCo) group, which rallied to ensure the youth had access to support during and after protesting, received large sums in bitcoin donations. This was crucial in fundraising to feed protesters and pay for legal fees for arrested citizens.

CBN regulations for cryptocurrencies

Perhaps in reaction to their use by oppositionists, the CBN ruled that these virtual currencies are issued by unregulated and unlicensed entities, and therefore crypto trading is illegal. The CBN confirmed the prohibition of cryptocurrencies in a letter dated 5 February 2021.

This stoked opposition on social media, particularly by the youth who felt their accounts were being targeted. In fact, this was a reiteration of a circular in 2017, which said that all banks and financial institutions in Nigeria should ensure that they do not use, hold, trade, or transact in any way virtual currencies, as they are not legal tender in the country.

This does not completely ban the use of virtual currencies, but it does mean that they cannot be used in Nigeria’s financial system. Many argue it amounts to the same thing. Citizens are calling for the CBN to create a legal framework for virtual currencies in Nigeria.

Why did the CBN react with a ban?

Many other countries around have banned cryptocurrencies. They justify this as a means to counter fraud and terrorism by locking bank accounts.

It is the CBN’s mandate to regulate the banking system in Nigeria, so it has the right to ban cryptocurrencies. But some urge the regulators to allow the trade in crypto, as it does with other currencies that are not legal tender in the country such as the British pound and the US dollar.

The CBN doesn’t accept that parallel. Mr Osita Nwanisobi, the director of the bank’s corporate communications department, says that pounds and dollars cannot be compared to cryptocurrencies.

He told The Africa Report: “The restriction of cryptocurrencies in our financial system is not targeted at anybody but based on deep analysis and the risks it portends to our financial system. The currencies mentioned above [pounds and dollars] are legal currencies of sovereign nations, issued by known entities.”

He added: “The CBN has just issued its CBDC called the eNaira and this is a legal tender in Nigeria. We do not recognise any other virtual currency and therefore have no plans to legalise any other.”

However, as our Lagos-based financial analyst points out: “The issue with the eNaira is that it takes away one of the major attractions of cryptocurrencies which is that a lot of users are very excited with regards to the absence of centralised authority.”

Bottom line

Although many objected to the ban on cryptocurrencies, the CBN is one of many central banks around the world to try to ban crypto.

The regulator wants to maintain centralised authority on all financial transactions within its jurisdiction. That could be helpful in limiting frauds, tax evasion and other criminality.

But in an increasingly digital and globalised world, the central bank in Abuja cannot control what Nigerians around the world do with their cash if it’s held in offshore accounts.

Indeed, cryptocurrencies can help Nigerian enterprises launch cross-border partnerships and raise finance for complex international projects. Lack of capital and the difficulty of raising investment funds are holding back many developing economies.

It would be valuable for both sides – the central bankers and the crypto traders – to open a dialogue to build a financial system that works better for everyone.

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