In a recent circular dated 5th February, 2021, the Central Bank of Nigeria (CBN) prohibited the trading of cryptocurrencies in Nigeria and directed all Nigerian financial institutions to stop facilitating such. This policy has received a lot of public condemnation and many expect the CBN to reverse this policy in a matter of time. This article shall explain all you need to know about the policy.
What does the circular contain?
The circular is a directive of the CBN prohibiting the use of cryptocurrencies in Nigeria. The circular directs all deposit money banks, nonbank financial institutions and other financial institutions to stop dealing in cryptocurrencies and stop facilitating payments in that regard. The circular further directs financial institutions to identify all accounts trading cryptocurrencies and close them.
Is this the first Nigerian directive on cryptocurrencies?
This is not the first directive to be issued by the CBN on cryptocurrencies. In 2017, the Central Bank of Nigeria issued a circular warning people against the trading of cryptocurrencies. The circular warned people against cryptocurrencies and stated that it was unregulated. The circular also stated that virtual currencies are not legal tenders in Nigeria and contracts in which virtual currencies are the means of payment are unenforceable. However, that circular did not prohibit the trading of cryptocurrencies.
In 2020, the Nigerian Securities and Exchange Commission (SEC) issued a directive that cryptocurrencies would now be classified as commodities. That directive was warmly welcomed by many and the SEC was applauded for taking a step in the right direction. Hence, it came as a surprise to many when the CBN issued a directive to prohibit the trading of cryptocurrencies in Nigeria.
Why are the CBN and other central banks worldwide concerned about virtual currencies?
Virtual currencies are on the rise worldwide. Virtual currencies are mainly traded on blockchains outside the control of everybody including the government. The system cannot be cheated and nobody can direct or regulate trading on blockchains. That is exactly what worries central banks and financial regulators all over the world: the fact that they cannot regulate the cryptocurrency market. Central banks and financial institutions also fear that cryptocurrencies pose danger to the value of their domestic currency.
It is important that states are able to control financial policies and money flow within the economy. Some financial and economic crisis can only be resolved by strategic government policy. In some instances, some countries deliberately devalue their currency or inject inflation to their economy as an economic strategy. That further shows the importance of the state being able to control monetary flow and dictate fiscal policies. The existence of cryptocurrencies threatens that power. That worries central banks and financial regulators.
Also, blockchains on which cryptocurrencies are traded offer anonymity to the users. Users of blockchains cannot be identified and transactions cannot be traced. This offers a perfect platform to criminals and money launderers who do not want to caught. That is another major concern for central banks and financial regulators worldwide. The Central Bank of Nigeria is also concerned just like many other central banks and has gone a step further by prohibiting cryptocurrencies entirely.
What does the CBN aim to achieve with this policy?
The Central Bank of Nigeria did not state any reason for this ban in the original circular. However, some financial analysts have pointed out the likely reason for this policy. The CBN wants to ensure that they can control monetary flow within the economy, some analysts say. Also, the trading of cryptocurrencies also poses danger to the value of the Naira as Nigerians keep buying cryptocurrencies with a huge volume of Naira chasing a few cryptocurrencies.
In 2015, the CBN issued a circular prohibiting the pricing and denomination of local goods and services in foreign currencies. This was most likely to ensure that the Naira does not lose more value against the dollar. Possibly, this could also be the reason for this policy on cryptocurrencies.
The Central Bank of Nigeria has issued a further circular for the purpose of clarification. The circular reiterates that cryptocurrencies are not legal tenders in Nigeria and that cryptocurrency affords anonymity which eases financing crimes. The circular also states that the CBN is not the first to place restrictions on cryptocurrencies as several countries have a level of restriction on trading of cryptocurrencies. The circular also states that cryptocurrencies are more of speculative assets than means of payment. Hence, it increases price volatility and threatens sophisticated financial systems.
Is Nigeria the only country that has banned cryptocurrencies?
The answer is no. There are a number of other countries where it is illegal to trade cryptocurrencies or use it as a means of payment. Those countries include: China, Russia, Vietnam, Bolivia, Columbia, and Ecuador among others.
What practical implication does this policy have on trading of cryptocurrencies in Nigeria?
The new CBN policy has its impact on how cryptocurrencies would be traded in Nigeria from now on. Nigerian businesses and start-ups that buy and sell cryptocurrencies might not be able to offer such services again. Banks will ensure that they do not facilitate the purchase and sale of cryptocurrencies. However, these changes do not halt the trading of cryptocurrencies in Nigeria. Cryptocurrencies do not have to be facilitated by banks or financial institutions. In fact, banks and other financial institutions are not really relevant in trading of cryptocurrencies. Some start-ups that deal with cryptocurrencies are very relevant because they make trading of cryptocurrencies very easy. However, their absence will not stop trading of cryptocurrencies. Nigerians will now have to buy/sell cryptocurrencies directly from/to people who have/need it. Then, they transfer the money directly to the person’s bank account while ensuring that they do not include anything that relates to cryptocurrencies in their transaction description.
What has been the reaction of financial institutions since this directive was issued?
Many financial institutions have started to make adjustments in their operation so as to comply with this new CBN directive. Some have sent mails to their customers to assure them that their fund is safe. For instance, Flutterwave sent mails to their customers to put their mind at rest as to the safety of their funds. Majority of financial institutions have stopped trading cryptocurrencies and some of them have indicated that it is temporary till they find an alternative. Binance has notified its users that they are unable to trade in Naira as their Nigerian partners have suspended operations. Many more financial institutions have issued one statement or the other.
Can people be arrested and jailed for trading cryptocurrencies as a result of this policy?
The answer to this is no. The new CBN policy only directs financial institutions to stop facilitating the trading of cryptocurrencies and does not criminalize the action. Furthermore, the CBN does not have the power to criminalize an act. Only a legislation made by the National or State House of Assembly is capable of criminalizing an act. Hence, people cannot be arrested nor prosecuted for trading cryptocurrencies on the basis of the new CBN policy.
What implication does this policy have on the economy?
There are a number of start-ups in Nigeria who deal mainly in cryptocurrencies in Nigeria. Some of them might have to fold up and fire employees or find other means of conducting their business without breaching any law. This is not the first time that start-ups have had to fold up as a result of government policy in Nigeria. In 2020, the Lagos State government made a new law which prohibited the use of motorcycles in the state. This forced some motorcycle transportation start-ups to fold up and move out of Lagos. There seems to be a trend of driving start-ups out of business in Nigeria. This CBN policy adds to that trend. With this pattern, start-ups and foreign investors need to be very careful before establishing a business in Nigerian as a governmental policy could drive them out of business at any time.
Is this policy politically motivated?
A lot of Nigerians have attributed different reasons to this policy. Some have said that President Buhari is passionate about making Nigerians poor and his administration makes deliberate efforts to achieve that. Some Nigerians have said that this policy is part of the efforts of billionaire Nigerians to ensure that they displace any business that could rival their wealth. There is no proof to back up these assertions. The Nigerian economy is in a dire situation with the value of the Naira continuously going down. While this CBN policy might not be the best, it could best be categorized as one of those desperate measures always resorted to by the Buhari administration. Just like in most cases, it has a negative impact on the economy.
What changes from now on?
As has been said, the directive is not without its practical implication. A number of start-ups might have to fold up and some investors would have to leave Nigeria. Alternatively, these start-ups might have to devise other innovative means to trade cryptocurrencies while ensuring that they do not break any law. For now, cryptocurrency traders would have to buy from people who want to sell. Also, one might not be able to pay with cryptocurrency when they buy things online as is now being done on some platforms. We can always speculate on what will happen but have no choice but to wait and see how this turns out.
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