The Central Bank of Nigeria’s recent ban on cryptocurrency trading and its directive to Deposit Money Banks and Other Financial Institutions to forbid access to dealers of their platforms and channels for payments and transactions was done to protect the nation’s economy, writes, Group Business Editor, SIMEON EBULU
Save for the COVID-19 pandemic, there’s hardly an issue in recent times that has generated so much interest and such instant and diverse reaction as the ban placed on cryptocurrencies transaction by the Central Bank of Nigeria (CBN).
It was four years ago in 2017 that the CBN foresaw the danger that cryptocurrency transactions portend for the nation’s economy and promptly slammed a ban on it, warning Money Deposit Banks (DMBs) and Other Financial Institutions to steer clear of opening their platforms and channels to traders and others dealing in cryptocurrencies. The CBN, then in 2017, on January 12 to be precise, sent a circular to banks and other financial institutions on virtual currency operations in Nigeria, saying the emergence of virtual currencies has attracted investments in payments infrastructure that provide new methods of transmitting value over the internet.
The circular, signed by Director, Financial Policy and Regulation Department, Kevin N. Amugo, described these virtual currency (VC) transactions as largely untraceable and anonymous, making them in his words, “susceptible to abuse by criminals, especially in money laundering and financing of terrorism.”
The circular indicated that virtual currencies are traded in exchange platforms that are unregulated all over the world. Consequent upon this loophole, Amugo warned that “consumers may lose their money without any legal redress in the event these exchanges collapse or lose business”.
Foreseeing a potential danger in the developing virtual currency payment products and services and their interactions with other new and existing payment products and services, he said there was an urgent need for guidance, as he put it, “to protect the integrity of the Nigerian financial system”.
Specifically, Amugo warned that “there is need to address the money laundering/terrorism financing risks associated with VC exchanges and any other institutions that act as nodes where convertible virtual currency activities intersect with the regulated fiat currency financial system”.
Having laid the groundwork underlying its concern and the associated and potential risks with the emerging trend, the CBN urged banks and other financial institutions to adopt the underlying measures until it reaches a final decision on the matter. As it clearly stated in its narrative in the originating circular four years ago, the CBN advised the DMBs and other financial institutions to ensure that they “do not use, hold, trade and/or transact in anyway in virtual currencies, and as well ensure that existing customers that are virtual currency exchangers, have effective Anti- Money Laundering/Counter Financing Terrorism controls that enable them to comply with customer identification, verification and transaction monitoring requirements.
The CBN said where banks or other financial institutions are not satisfied with the controls put in place by the virtual currency exchangers/customers, the relationship should be discontinued immediately and that any suspicious transactions by these customers should immediately be reported to the Nigerian Financial Intelligence Unit.”
The apex bank explained that because virtual currencies are issued by unregulated and unlicensed entities, cryptocurrencies’ use in Nigeria goes against the key mandates of the CBN, as enshrined in the CBN Act, as the issuer of legal tender in Nigeria. It added: Virtual Currency Transactions, such as bitcoin, ripples, monero, Litecoin, dogecoin, onecoin and similar products are not legal tenders in Nigeria, thus any bank or institutions that transact in such business does so at its own risk.”
Thus the latest action of the CBN to slam a ban on cryptocurrency transactions should not come as a surprise to anyone, crypto dealers inclusive. They are in the purview of the regulator, entities with no legal backing.
The follow-up letter of February 5, 2021 to DMBs, Non-Bank Financial Institutions and OFIs initialled by the Directors of Banking Supervision and Payments Systems Management Department, Bello Hassan and Musa I. Jimoh, came as an enforcement of an otherwise subsisting directive to arrest an illegal enterprise. Which is why the CBN’s letter was more pointed.
It said: “The bank hereby wishes to remind regulated institutions that dealing in crypto currencies or facilitating payments for cryptocurrency exchanges is prohibited. Accordingly, all DMBs, NBFls and OFls are directed to identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately,” adding that “breaches of this directive will attract severe regulatory sanctions.”
SEC aligns with CBN
With the CBN window on crypto transactions closed, some other affected dealers came with the argument that the CBN had overreached itself, pointing out that the regulation and administration of cryptos lie with the Security and Exchange Commission (SEC). How wrong. SEC was to issue a statement in no time, aligning with CBN’s declared vision, saying it has joined CBN to ban crypto trading. SEC said it received inquiries on a perceived policy conflict between its September 11, 2020 statement on Digital Assets, Classification and Treatment and the February 5 CBN circular.
The Commission said there were no contradictions or inconsistencies, but that last year’s statement was to provide regulatory certainty within the digital asset space, due to the growing volume of reported flows, pointing out that as the regulator of the banking system, the CBN identified certain risks that threatened investors’ protection.
“For the purpose of admittance into the SEC Regulatory Incubation Framework, the assessment of all persons (and products) affected by the CBN Circular of February 5, 2021, is hereby put on hold until such persons are able to operate bank accounts within the Nigerian banking system,” SEC said.
Crypto trading ban list
Nigeria is not alone on Crypto currency trading ban. Several countries have been on that turf for long before the CBN joined the league, as it were. Some other African countries like Algeria, Morocco and Libya have laws prohibiting cryptocurrency trading outrightly. South Africa, on the other hand, is proposing new regulations that protect its citizens from frauds using the platforms.
The list includes Asian countries, among them China, Bangladesh and Nepal. Others are Iran, Ecuador, and Bolivia, to mention but a few.
CBN’s timely intervention
The CBN’s deft move to prohibit transactions in bitcoins trading, or VCs, was not haphazard, it was calculated and timeously executed. It was becoming obvious that beyond the criminality associated with virtual currency transactions, trading and payments, the medium was already and substantially deflecting a major source of the country’s source of foreign exchange earnings – diaspora remittances.
Resources, or rather foreign currencies that are usually rooted through the CBN, were now being accessed and warehoused in other channels and entities outside the reach of the apex bank.
Besides the loss of revenue to the Federal Government, the CBN was no longer in a position to track and monitor how these forex earnings were being applied, nor able to ascertain the identities of those involved in the transactions.
In addition, a significant contributory portion to the stock of the nation’s foreign reserves was gradually being threatened.
For and against crypto ban
The CBN’s ban against banks and other financial institutions from engaging in cryptocurrency transactions has sent shockwaves across the country. The reason for the huge debate is evident. Available data from Paxful—a cryptocurrency trading platform – showed Nigeria was second only to the US in volume terms as among the highest downloaders of crypto wallets.The total value of all cryptocurrencies globally grossed the $1 trillion mark in January 2021.
According to reports, “the decision of the apex bank to ban cryptocurrency transactions was aimed at safeguarding the economy from the adverse effects of unregulated cryptocurrency trading’’. Some analysts have said dollar inflows meant for the foreign exchange market and foreign reserves were being channelled into the cryptocurrency market.
Research & Consulting firm, Afrinvest West Africa’s Managing Director, Abiodun Keripe said the apex bank had observed a dangerous trend, where foreign capital inflows into Nigeria were being diverted to cryptocurrency markets with zero regulation. Keripe said the nation’s cryptocurrency market recorded over N2.2 billion daily turnover. The market, he added, remained vibrant where upwardly mobile and youths earned income but was unregulated.
Alluding to CBN’s concern on its ability, or inability to regulate this crypto market, Keripe said Nigeria lacks digital assets needed for effective monitoring and regulation that would enable Nigerian regulators to track crypto exchanges across the world. He underlined the sheer volume of transactions involved in cryptocurrency deals as revealed in the stock exchange, saying the Nigeria Stock Exchange records an average of N2 billion daily transactions, and that the cryptocurrency market is in excess of that, and Nigeria is the biggest crypto market in Africa.
Keripe agreed 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.”
The CBN, like many other major central banks around the globe, is cautious about the use of bitcoins because of the threats its usage posed to the financial system. While noting that no central bank in the world would sit back and not address threats to the financial system it regulates, the CBN has observed 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.
Keripe has equally stressed 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.
He 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,” he explained 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, adding that 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 stated.
He said although genuine dealers are available, their operations, regrettably are now used to pay for kidnapping ransom. He therefore urged the apex bank to develop technology that connects to the crypto exchanges, track 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, he said is not the currency of any nation, and there is no law yet.
Advocates of cryptocurrencies
Among critics of the CBN’s ban of cryptocurrency is the former Deputy Governor, Financial Systems Stability at the CBN, Prof. Kingsley Moghalu, who faulted the blanket ban on trading on cryptocurrency.
According to him, instead of what he termed, the “knee-jerk reactionary step’’ of the apex bank, it ought to have engaged in deep thinking and be more innovative to be at the front of the curve. Moghalu told ARISE TV that during his time at the apex bank, there were a lot of innovations about how to ensure the stability of the financial system.
The CBN should come up with regulations on this area of financial 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.
He said: “Cryptocurrencies are one more facet of a process that continues throughout history which is innovation. Let me remind you that paper money or what we call fiat money which is legal tender as ordered by governments, has not always been in existence through creation,” saying paper money has had its ups and downs, but still remains the currency in the world today.’’
He explained that cryptocurrencies are virtual currencies that people use online to purchase goods and services, adding that one could not obtain a cryptocurrency without a legal tender, but that cryptocurrency value is not aligned to the normal legal tender.
“It has a value on its own and some people will say it is not backed by any fundamental legislation, but there are many reasons,” he said.
“One of them is that many people just want the freedom to exchange value without having to go through the restrictions of fiat money that is issued by the central banks. “Also, there’s a political dimension, that is why it is called freedom money, saying many people around the world who are protesting for human rights or when regimes, try to restrict their rights because cryptocurrencies do not go through the central bank.
“They find that they are able to still communicate with themselves and do transactions that bypass sovereign authorities,” he said, adding that central banks have never been comfortable with cryptocurrency.
On the ban, Moghalu said: “I would have preferred some deep thinking about how to come up with a regulatory framework that restricts the use of cryptocurrency or subject it to some sort of surveillance that alerts the CBN if there are serious abuses that can affect financial system stability.
“The CBN has to be concerned about the financial system stability and that is what it should be concerned about. So you have to be able to monitor and see if these signs are coming, but to ban a financial institution from having an account associated with cryptocurrency exchange or cryptocurrency trading seems to me a bit odd, it was not necessarily the best approach to the problem, that is what I think even though I understand why they did what they did, Moghalu added.
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