The attention of the Central Bank of Nigeria (CBN) has been drawn to various comments and
reactions following our recent reminder to Deposit Money Banks (DMBs) to desist from
transacting in / and with entities dealing in cryptocurrencies. Most of 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, 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.
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.
It is also important to note that the CBN’s 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.
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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. China’s Central Bank, called the Peoples Bank of China (PBoC) has
provided several directives ruling out the use of these currencies. The PBOC views
cryptocurrencies as illegal because they are not issued by any recognized monetary
institution and do not hold any legal status that can make them equivalent to money. Hence
banks and all stakeholders are strongly advised against their use as a currency.
Even famed investor Warren Buffett has called cryptocurrencies “rat poison squared,” a
“mirage,” and a “gambling device.” Mr. Buffett believes it is a “gambling device” given that
they are mostly valuable because the person buying it does so, not as a means of payment;
but in the hope they can sell it for even more than what they paid at some point.
During an online forum hosted by the Davos-based World Economic Forum few weeks ago,
Andrew Bailey, the Governor of the Bank of England, highlighted 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.
“Have we landed on what I would call the design, governance and arrangements for what I
might call a lasting digital currency? No, I don’t think we’re there yet, honestly. I don’t think
cryptocurrencies as originally formulated are it,” he said.
It is not surprising he would take that position because, Bitcoin, the best-known
cryptocurrency, hit a record high of $42,000 per unit on January 8, 2021, and sank as low as
$28,800 about two weeks later. This is far greater volatility than is found with normal
currencies.
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.
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.
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Second, the very name and nature of “cryptocurrencies” suggests that its patrons and users
value anonymity, obscurity, and concealment. 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. Indeed, many banks and investors who place a high value
on reputation have been turned off from cryptocurrencies because of the damaging effects
of the widespread use of cryptocurrencies for illegal activities. In fact, the role of
cryptocurrencies in the purchase of hard and illegal drugs on the darknet website called “Silk
Road” is well known. They have also been recent reports that cryptocurrencies have been
used to finance terror plots, further damaging its image as a legitimate means of exchange.
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. Because the total number of
Bitcoins that would ever be issued is fixed (only 21 million will ever be created), new
issuances are predetermined at a gradually decelerating pace. This limited supply has
created a perverse incentive that encourages users to stockpile them in the hope that their
prices rise. Unfortunately, with a conglomeration of desperate, disparate, and unregulated
actors comes unprecedented price volatility that have threatened many sophisticated
financial systems. In fact, the price of ether, one of the largest cryptocurrencies in the world,
fell from US$320 to US$0.10 in June 2017. The price of Bitcoins has also suffered similar
volatilities.
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. When one buys a stock, say of a conglomerate in the Nigeria Stock
Exchange, its price reflects the activity and production of that conglomerate and the value
people place on their goods and/or services. This price may rise as the conglomerate
produces better goods/services and probably gains greater market share. The reverse would
be true if the conglomerate does not innovate to improve the quality of its goods/services. In
other words, the price of that stock reflects market fundamentals. 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
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and price. But since new versions of cryptocurrencies come on stream with new
mathematical models, an infinite supply may someday crash the price to zero.
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. To the
contrary, the Nigerian payment system has evolved significantly over the last decade,
leapfrogging many of its counterparts in emerging, frontier and advanced economies
propelled by reforms driven by the CBN. This is evident from the variety of participants,
products, channels, cutting-edge technology in the payments system. It is also validated by
the astronomical growth of volume/value of transactions and the fact that Nigeria is an
investment destination of choice for international financial technology companies because of
CBN’s policies that have created an enabling investment environment in the payments
system.
These developments in the payments and settlements space has helped to grow the financial
system, improving financial inclusion, the quality and convenience of financial services and
has also created millions of direct and indirect jobs for teeming youth population.
The innovations in Nigeria’s payment system were catalyzed by regulatory reforms driven by
the CBN which entailed the issuance of a raft of guidelines and regulations on Operations of
Electronic Payments Channels in Nigeria; Transaction Switching; Card Issuance and Usage,
Licensing of payment service providers; Mobile Money Services, Electronic Payments of
Salaries, Pensions, Suppliers and Taxes, Licensing Super Agents in Nigeria; and use of
USSD for Financial Services in Nigeria, Super Agents and Agent Banking Operations and
Payment Service Banks to mention a few.
The robust regulatory framework put in place by the Bank opened up the payment system to
innovation with several new players across in the following licensing categories- Payment
Terminal Service Providers (PTSPs), Payment Solution Service Providers (PSSPs), Mobile
Money Operators (MMOs), Payment Terminal Application Developers (PTSAs), Switches,
Super Agents, Agents and Payment Service Banks (PSBs) This has created both direct
and indirect jobs for Nigeria’s youth population.
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Several other initiatives are being implemented to further support FinTech development and
creation of jobs. These include regulatory sandbox and open banking principles that the Bank
recently implemented.
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..
Osita Nwanisobi
Ag. Director, Corporate Communications
