The Central Bank of Nigeria, CBN, has a ban culture, an irresistible impulse to crack down on legitimate economic activities. From its infamous list of 43 items, whose importers are excluded from accessing foreign exchange through the official window, to its wider trade restrictive measures and exchange controls, the CBN, under Godwin Emefiele, is highly interventionist. But nothing demonstrates that pattern of behaviour more than the recent ban on cryptocurrency investments or digital currency trade.
A Nigerian bank executive told the Financial Times: “It’s just par for the CBN course to stifle anything and everything it doesn’t understand or can’t fully control.”But that trigger-happy, ban culture doesn’t only signal to the outside world that Nigeria is not open for business, but it also disincentivises wealth-creation initiatives at home.
But before we come to the cryptocurrency ban, which betrays an ignorance of the history and evolution of money, let’s first consider some principles of economic prosperity and the roles of central banks in that ecosystem.
The first principle is that it is private citizens, not the state, that generate prosperity. As David Hume, the 19th-century Scottish philosopher, puts it in his treaties titled Of Commerce: “The state becomes prosperous in proportion to the opulence and extensive commerce of private men.” In other words, the prosperity of a nation is linked to the robustness of the economic and commercial activities of its citizens.
The second principle is that the more powerful, overbearing and intrusive a state is, the less prosperous and happy its citizens will be. Which is why, in his seminal book The Wealth of Nations, Adam Smith describes free enterprise as a “system of natural liberty”, where governments provide sensible framing rules and good governance but leave the individuals free to pursue their economic interests.
Here comes the third principle. It is that central banks have a critical enabling role to play in generating prosperity. Central banks primarily do this by ensuring price stability, i.e., controlling inflation, but they also do it through supporting free enterprise and private-sector growth. The characteristics of free enterprise, namely, economic freedom, voluntary exchange, private property rights, the profit motive and competition, are the bedrocks of economic prosperity, and every central bank must support and not undermine them.
All of which brings us to the CBN’s cryptocurrency ban. In February, the CBN barred banks and other financial institutions from facilitating cryptocurrency trading. But why? Well, first, the CBN said cryptocurrency trading is highly volatile and, thus, Nigerian crypto investors could suffer losses. Then, the CBN cited fears of illicit financial transactions, such as money laundering and the financing of terrorism and other criminal activities. But these reasons are either paternalistic or dubious, even sinister.
What Vice President Osinbajo’s intervention also showed is that he understands the history and evolution of money better than CBN Governor Emefiele
Take first reason – potential loss of investments. It is a typical paternalistic rationale for government intervention. Basically, the government is saying to the citizens: “We are restricting your economic freedom or choices in your own interests!”But anyone engaging in any speculative trading, such as cryptocurrency investments, knows that it’s inherently risky. The regulator’s role is not to ban such investments, but to warn people about their inherent risks.
The second set of reasons – the fear of illicit or other criminal financial transactions – is dubious. Illicit financial transactions, such as money laundering, existed long before bitcoin was created in 2008, and there’s no evidence that its creation has led to a significant increase in such activities. Then, there’s the sinister rationale: financing of criminal activities. Surely, an authoritarian government could ban cryptocurrencies to stop them being used to fund legitimate protests, such as the bitcoin-funded #EndSAR protests.
Truth is, whatever the reasons, banning cryptocurrencies is not the answer. Which is why the vice president, Professor Yemi Osinbajo, should be highly commendable for his recent intervention on the issue. Urging the CBN to regulate and not ban the use of cryptocurrency, the vice president said: “We must act with knowledge and not fear.”Professor Osinbajo added that digital currencies disruption will only make “room for efficiency and progress”, which suggests he understands Joseph Schumpeter’s theory of creative destruction.
But what Vice President Osinbajo’s intervention also showed is that he understands the history and evolution of money better than CBN Governor Emefiele. It’s interesting – isn’t it? – that the vice president, a lawyer, is more familiar with the evolution of money than the central bank governor, a banker!
In his fascinating book, ‘The Ascent of Money’, Professor Niall Ferguson, the renowned economic historian, gives a comprehensive account of the financial history of the world. Emefiele is probably not familiar with that history, because, if he is, he would not be so hostile to cryptocurrencies as to ban their use. Truth is, throughout history, money has evolved through innovations, and cryptocurrencies are the latest in that innovative journey.
Apart from the hunter-gatherers, who didn’t need money because they consumed food as and when they found it, every human civilisation has used money and it has evolved ever since. In the medieval ages, the Maldives used cowrie shells as money, then we had the Micronesian island of Yap, which used large limestone discs, called rai, as a medium of exchange, that is, as money.
Then came the use of coin money, with the earliest known coins dating back as long ago as 600 BC and became popular when the Romans produced coins in three different metals, namely, the aureus (gold), the denarius (silver) and the sestertius (bronze). After coin money came paper money, i.e., banknotes, which originated in 7th-century China, but was first issued in the Western world by the Bank of England, which was established in 1694.
But after these conventional, physical money, came electronic money in the 1870s when electronic fund transfer (EFT) was first introduced. Today, most of what economists call the money supply is electronic. Now, with cryptocurrencies, the world is talking about digital money. Consider the evolution: cowrie shells, limestone discs, coin money, paper money, electronic money, now digital money or cryptocurrencies – the world has not stood static!
As Professor Fergusson put it, “anything can serve as money” and in the electronic or digital age, “nothing can serve as money too.” It’s all about trust. Money is not the paper, the metal or the virtual medium, it’s the trust people have in the medium of exchange. And it seems that cryptocurrencies or bitcoin will be a credible currency platform.
Think of it. China has its virtual renminbi. The US Federal Reserve is consulting on the digital dollar, and the EU is creating the digital euros. Even more importantly, the private sector is massively driving the digital currency trade. Tesla, the electric carmaker, led by billionaire Elon Musk, has invested billions in bitcoin. Citibank told its clients that digital currency could one day “become the currency of choice for international trade.”
Nigeria is certainly unwise to turn its back on this new currency platform – cryptocurrencies. First, young Nigerians are investing in and making money from cryptocurrency trading. Second, Nigeria badly needs foreign exchange, which is why the CBN insists that diaspora remittances must be in dollars, not naira, even promising to give additional N5 for every dollar remitted. Yet, given its low transaction costs, cryptocurrencies can increase remittances significantly. According to one study, “bitcoin transaction costs can be 50 per cent to 90 per cent lower than those of traditional methods.”Third, Nigeria needs foreign investors, and cryptocurrencies could attract those that prefer to use digital currencies to transfer finds.
Sadly, by banning cryptocurrency transactions, the CBN unwisely rejects potentially powerful tools to stimulate private enterprise, reduce poverty, attract foreign investors and generate foreign exchange. But why? Well, because the CBN governor, Emefiele, doesn’t understand the historical evolution of money or, if he does, conveniently ignores the history!
