CBN & cryptocurrency ban: The need for a payment system regulator

With the recent ban of cryptocurrency by the Central Bank of Nigeria (CBN), there are varying reactions as to the correctness or incorrectness of the decision. Using what other Central Banks are doing with regards to cryptocurrency, the ban is evidently appropriate and expected. However, with the current and potential resilience of cryptocurrency and some forces supporting it, the main challenge we should be concerned with is the sustainability of the ban. From the way things are going, it seems that cryptocurrency will likely be accepted as a means of payment by central banks and other global financial regulatory agencies. It is only a matter of time.

If that is the case, our focus should be on how we can proactively prepare for effective regulation of cryptocurrency and other exponential innovations and developments in the financial sector. Based on what we can see and signs of things to come, there is an urgent need to overhaul the regulatory framework of our financial system. Moreover, as the Nigerian financial sector cannot be said to be efficient, stable and significantly contributing to the economy even with the existence of the formal financial sector in Nigeria since 1892 (about 129 years) and many regulators (CBN, NDIC, SEC, NAICOM, AMCON), the need for an overhaul cannot be overemphasized.

The increase in cryptocurrency and other shadow banking activities also means that there are a large number of financial firms that are not regulated conventionally

The key question is what the main regulatory focus of financial sector regulators are. The first is Prudential regulation and the second is Conduct regulation and oversight. As this is the case, the need for multiple regulators as we currently have is questionable and ineffective. While Central Bank should be restructured with a Prudential Regulatory Authority of Nigeria (PRAN) created within the Central Bank, another agency, the Financial Conduct Authority of Nigeria (FCAN) should be created to regulate and supervise the conduct of the business of all financial institutions within Nigerian financial sector. Of the current regulatory agencies, the best agency that can be turned into FCAN is the Securities and Exchange Commission (SEC). In addition to these two main regulatory agencies, PRAN and FCAN, another agency most urgently needed is a Payment System Regulator of Nigeria (PSRN) that will be responsible for the regulation and supervision of all payments including cryptocurrency when it is unbanned. If possible, the PSRN should function and work directly with or under FCAN.

Generally referred to as the Twin-Peaks approach, its adoption will lead to the scrapping of SEC, NAICOM, NDIC and AMCON with their respective two main functions- prudential regulation and conduct of business supervision allocated to the two sub-agencies (PRAN and FCAN) to be created. This Twin-peak structure will lead to the achievement of the three key objectives of regulation- systemic stability (achieved through macro-prudential and micro-prudential regulation), consumer protection and the maintenance of the integrity of the financial markets. In addition, it will help to refocus the CBN to its core responsibility of monetary policy and then prudential regulation of the financial sector through the sub-agency- Prudential Regulatory Authority of Nigeria (PRAN) to be created.

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As achieving an adequately regulated and contributory financial sector depends among other things on the creation and functioning of an efficient regulatory structure, the question, therefore, is what regulatory structure Nigeria should adopt to achieve a more stable and contributory financial sector. To help us decide on the structure to adopt, it might be helpful to better understand the key objectives and elements of regulation. Of the different objectives of financial sector regulation, the three most significant objectives are systemic stability (achieved through macro-prudential and micro-prudential regulation), consumer protection and the maintenance of the integrity of the financial markets all relate to the five elements of regulation –the first is the aim or objectives of the regulation and these will usually reflect the public interest in some way.

The second element of the regulation is the framework of rules or regulatory standards (it is important to get the content and structure of the rules correct), while the third element is the institutional structure of the regulatory regime, that is, the structure and number of regulators that oversee the regime as well as the powers and responsibilities given to the regulators. The fourth element is the supervisory approach, that is, the approach the regulator takes towards delivering the regulatory objectives for example the intensity with which it carries out on-going monitoring of the regulated firms. The fifth element is enforcement which refers to the sanctions imposed on the regulated for non-compliance with the rules. Getting all these elements right is integral to the success or failure of a regulatory regime.

Which regulatory structure is best for Nigeria? The institutional structure of regulation contributes to the successful achievement of the objectives of the regulatory regime and maintains a significant impact on the overall effectiveness of regulation and supervision. It also impacts the costs of regulation and on the clarity of responsibility for particular aspects or objectives of regulation. It is therefore important that we (Nigeria) put in place the appropriate institutional structure to effectively regulate our financial sector.

Of the key three approaches (institutional, functional and objectives-based), the optimal structure will depend on a number of factors such as the particular circumstances of the country, its financial system, the personalities and abilities of the regulators and the nature of the country’s financial services markets. While no single institutional structure can be argued to be ideal for all countries, it is now clear that the interconnected nature of the modern-day financial system means that insurance and securities firms can be so interconnected to other firms in the financial system that their failure could trigger a crisis in a national or global financial system. In addition, the increase in cryptocurrency and other shadow banking activities also means that there are a large number of financial firms that are not regulated conventionally as banks but which perform similar functions to banks and therefore pose similar risks to the financial system.

As Nigeria currently uses the institutional approach characterized by regulation of every single category of the financial operator or over every single segment of the financial market by a particular regulator, we argue that given the performance so far and the inherent challenges, development and innovations in the global financial sector, it is imperative to adopt an objectives-based approach with a Twin-peak highly advocated. The current institutional approach has outlived its usefulness. It is a simple scheme based on, and conditional on, the uni-dimensional activity of the regulated firms. There is a focus on the type of institution being regulated rather than the range of activities the firm actually performs for example banks, insurance companies and securities firms.