CBN outlines three reasons for banning crypto transactions in Nigeria

The Central Bank of Nigeria (CBN) last week reiterated that Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NBFIs) and Other Financial Institutions (OFIs) must not use, hold, trade and/or transact in crypto currencies.

The move by the apex bank cemented its long-standing position on its non-acceptance of the digital currency.

While the policy by the CBN does not stop people from dealing in crypto currencies as clarified in a statement by Osita Nwanisobi, acting director, corporate communications, which reveals that the apex bank has no restrictions on crypto currencies, the policy, however, means that crypto traders cannot make any transactions with crypto currency through Nigeria’s banking system.

“Given that unlike Fiat Money, which is accompanied by full faith and comfort of a country or central bank, crypto currencies do not have any intrinsic value and do not generate returns by themselves,” the CBN said.

According to the CBN, its position on crypto currencies is not a peculiar one as among others, countries like China, Canada, Taiwan, Indonesia, Algeria, and Egypt have all placed a certain level of restrictions on financial institutions facilitating crypto currency transactions.

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“Even famed investor Warren Buffett has called crypto currencies rat poison squared, a mirage,” and a gambling device,” the CBN said in a statement on Sunday.

According to the CBN, 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.”

The CBN explained in its ‘Response to Regulatory Directive on Cryptocurrencies’ circular that it is not surprising Andrew Bailey, the governor of the Bank of England, believes that crypto currencies are highly volatile because, Bitcoin, the best-known crypto currency, 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,” it said.

Some of the justifications provided by the central bank on its recent move to prevent financial institutions from allowing transaction that involves crypto exchanges include.

Lack of regulation

The apex bank said because crypto currencies 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 crypto currencies in Nigeria is 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 crypto currencies,” it said.

According to the apex bank, while central banks can issue digital currencies, crypto currencies are issued by unknown and unregulated entities.

Anonymity

The very name and nature of “crypto currencies” suggests that its patrons and users value anonymity, obscurity, and concealment, the central bank highlighted, asking why any entity would disguise its transactions if they were legal.

“It is based on this opacity that crypto currencies have become well-suited for conducting many illegal activities including money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion,” it said.

Explaining further, Nigeria’s financial industry regulator said, indeed, many banks and investors who place a high value on reputation have been turned off from crypto currencies because of the damaging effects of the widespread use of crypto currencies for illegal activities.

“The role of crypto currencies 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 crypto currencies have been used to finance terror plots, further damaging its image as a legitimate means of exchange.”

Speculative assets

One of the reasons the apex bank reiterated its position on crypto currency transaction on February 5, 2021, as the regulator had earlier forbidden financial institutions to desist from transacting in/and with entities dealing in crypto currencies is because it is more of a speculative asset than a currency.

“Repeated and recent evidence now suggests that some crypto currencies have become more widely used as speculative assets rather than as means of payment, thus explaining the significant volatility and variability in their prices,” it said.

Trying to explain its point, the apex bank said, “because the total number of Bitcoins that would ever be issued is fixed (only 21m will ever be created), new issuances are predetermined at a gradually decelerating pace.”

This limited supply, according to the CBN, 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 has threatened many sophisticated financial systems,” it noted.