The Central Bank of Nigeria (CBN), at the weekend adduced monetary implications for Nigerian economy’s reasons for restricting Deposit Money Banks and other institutions from transacting business with entities dealing in cryptocurrencies.
The apex bank, in a statement signed by its Acting Director Public Communications, Mr Osita Nwanisobi, pointed out that the clarification became necessary following various reactions by members of the public on issue.
According to him, most of the reactions showed that there was the need by the monetary authorities to provide further justifications of the Bank’s position to the general public on cryptocurrency transactions.
He explained that for people who were not conversant with the universal dimension of the business, “cryptocurrencies are digital or virtual currencies issued by largely anonymous entities and secured by cryptography”.
Acting Director described cryptography as a method of encrypting and hiding
codes that prevent oversight, accountability, and regulation, adding that 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.
He recalled that the apex ban had in recent policy pronouncements, including the circular of February 5, 2021, had long prohibited, through CBN’s circular dated January 12, 2017 and its Press Release dated February 27, 2018, banks not to use, hold, trade and/or transact in cryptocurrencies.
Nwasinobi further clarified that the CBN’s position on cryptocurrencies was not peculiar as many countries, central banks, international financial institutions, and investors and economists have also warned against its use based on the risks, including risks of loss of investments, money laundering, terrorism financing, illicit fund flows and criminal activities associated with cryptocurrency transcations.
Justifying the apex bank’s stance, he listed some of the countries that had placed some level of restrictions on cryptocurrency transactions as China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabia, Jordan, Iran, Bangladesh, Nepal and Cambodia.
He clarified: “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.
“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”, he added.
The Acting Director pointed out that “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”, he stressed.