The recent pronouncement by the Central Bank of Nigeria (CBN) warning Nigerians against investing in or using virtual currencies, gradually gaining acceptance in some part of the world, may have dealt a massive blow to moves to lure Nigerians into investing in Ponzi Schemes. James Emejo and Adedayo Adejobi write
At first, there was a glimmer of hope that Nigerians could finally have an alternative legal tender in digital form anything soon when last December in Kaduna, the Managing Director/Chief Executive, Nigeria Deposit Insurance Commission (NDIC), Alhaji Umaru Ibrahim, hinted that the commission and the CBN had set up a committee to consider the possibility of legalising the use of the digital currency, the Bitcoin, for transactions, a move which could give legal backing for its use in the country.
Umaru’s statement had further given impetus to the promoters of the digital currency as the information that the regulatory authorities may soon approve its use became widespread and raising confidence.
But the committee set up by the NDIC and CBN had hardly concluded its findings on the prospects and consequences of the adoption of the digital currency before its seeming popularity and acceptance began to spread like wild fire.
The increasing acceptance of the virtual currency apparently stemmed from the eagerness of Nigerians to invest in the growing trend of Ponzi schemes, promising mouth-watering profits, and to which many Nigerians have made huge financial commitments.
However, what appeared to be a rollercoaster initially for patrons of the Ponzi schemes, particularly the now infamous Mavrodi Mondial Moneybox popularly known by its over 3 million subscribers as MMM has gradually turned a nightmare as subscribers are unable to get out monies invested in the scheme.
The development reached a point whereby MMM proposed to subscribers, payment in Bitcoin, which had not even been legalised in the country.
Amid the ensuing uncertainty which pervaded the atmosphere as a result, and given that both the NDIC and CBN had repeatedly warned Nigerians to desist from patronising the Ponzi establishments, the apex bank issued a definite circular, stating its objection to the adoption of the digital currency at least for now.
Among other things, the CBN warned that any bank or individual, which transacts in digital currency does that at its or his own risk, stressing that virtual currencies including bitcoin, ripples, monero, litecoin, dogecion, onecoin, among other products are not legal tenders in the country.
Although the use of digital currency has the potential to curb inflation and reduce cost of producing the paper currency, it could however, make it difficult for the apex bank to exert control and influence over its use, a development which could worsen current macroeconomic conditions if allowed unchecked.
MMM had told its subscribers: “Bitcoin does not belong to any government, companies or particular persons, which allows you to be independent from the banks and to manage your money as you want. MMM and Bitcoin strives to beat social inequality and to make the world more fair. With the help of Bitcoin MMM participants can provide financial help to each other worldwide.”
Nevertheless, the CBN’s position has had far-reaching implications for as many who have had their investments trapped in existing Ponzi schemes, now in their tens.
The development has further drawn the interest of analysts who voiced their perspectives over the ensuing controversy.
An Associate Professor of Finance and Head, Banking and Finance Department, Nasarawa State University, Keffi, Dr. Uche Uwaleke, told THISDAY that adopting virtual currency will be disruptive to the economy as it is outside the control of regulatory establishments.
According to him, “The regulatory authorities must have thoroughly weighed the possible effects of Bitcoin on the Nigerian economy before taking a position against it. A virtual currency that is outside the control of Central Banks weakens considerably the transmission channels of monetary policy and so the CBN has got reason to worry about it. As the experience in China has shown, the crypto currency could prove a veritable channel for capital flight and movement of illegal funds abroad which explains why the EFCC is equally worried.
“The fact that bitcoin enhances the operation of Ponzi schemes and other unregistered investment platforms is sufficient to give the SEC sleepless nights. What is more, bitcoin has shown to be the most volatile currency in the world and provides no buffer to high-risk investors who turn to it in search of high returns especially when confidence in the domestic currency is low. This can have grave consequences for the economy, which is an issue of concern to the NDIC. Against this backdrop, I am of the opinion that the advice of the money and capital market authorities be taken regarding the use of Bitcoin being a product of informed research on its implications for government’s macroeconomic goals.”
In the same vein, Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola, while citing associated risks said the Bitcoin should not be used as a medium of exchange given that it is not recognised as a legal tender.
He said, “Every currency is being managed by the Reserve Bank of a country. The rate, the risk and the supply are the responsibility of the Central Banks. Any currency that is not regulated therefore is risky and difficult to determine its true value. And since the CBN is responsible for determining what is acceptable as a legal tender in Nigeria, it follows that outlawing the Bitcoin indicates that it is not a recognised legal tender and should not be used as a medium of exchange in Nigeria.
“If you chose to use it, you are not protected and if any conflict arises, it cannot be adjudicated in Nigeria. The risk involved in the use of crypto currencies has not been evaluated, analysed and mitigated; hence no country has approved its use. It is therefore okay for the CBN to outlaw it.”
Bitcoin and Integrity of KYC
Bitcoin does not belong to any government, companies or particular persons, which allows you to be independent from the banks and to manage your money as you want.
Superficially weighing in on the current desperation by Nigerians to invest in the growing trend of Ponzi schemes, promising mouth-watering profits, the CBN has warned Nigerians against the use of virtual currencies, including bitcoin, ripples, litecoin.
Considering its anonymity, virtual currencies are largely used in terrorism financing and money laundering, the attention of bank and other financial institutions has been drawn to the risks , thus customers are required to ensure that they do not use, hold, trade and/or transact in any way in virtual currencies.
Also lending a voice to Central Bank of Nigeria’s Resolution and ardent advice to vulnerable Nigerians, a financial expert and Managing Director DataPro Limited, Abimbola Adeseyoju, said: ‘’The Central Bank has finally issued the guidance on Virtual and Digital Currencies of which the most popular is Bitcoin. ‘Virtual or Digital Currency is the most convenient means of payment for internet transactions but it is prone to a lot of abuse by criminals.
“For users of virtual or digital currencies the meeting point between Fiat Money- that is, Naira, Dollar etc., and Digital Currency is the bank through which the accounts are operated by the digital Exchanges . That is where vigilance is important for all of us serving customers in our banks. The exchanges used by the operators of digital currencies are unfortunately customers of the bank but the industry is largely unregulated so there is no customer or investor protection and governance against abuse.’’
Adeseyoju said: ‘’Most of the exchanges in Nigeria have not disclosed their real line of business to the banks thereby jeopardising the KYC process. Where KYC fails, then we do not know the customer and stand the risk of non-compliance which is heavy penalty for our bank.’’
Unique Investment Risks in Bitcoin Investment
Bitcoin was not designed as a normal equity investment and there is need to understand its unique investment risks: regulatory risk, security risk from hackers, malware and operational glitches, insurance risk, fraud risk, market risk and tax risk.
While Bitcoin uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false Bitcoins.
Like with any investment, Bitcoin values can fluctuate. Indeed, the value of Bitcoin has seen wild swings in price over its short existence. If fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless. More so, Bitcoin is ineligible to be included in any tax-advantaged retirement accounts, there are no good, legal options to shield investments in Bitcoin from taxation.
Still too new. Bitcoin is only a few years old. It’s possible that a competing crypto currency becomes more successful than Bitcoin or that somebody somehow finds a major flaw in the system. We don’t have decades of history yet.
Too volatile. Currently Bitcoin prices are going up astronoically. It’s likely that the price will stabilise at around US$10 from the current US$200. Currently the price is going up so fast a webshop would have to adjust their prices almost daily if they wanted to accept Bitcoins. It’s not very convenient.
Bitcoin has proven to be a volatile investment. However, what makes it even more volatile to the Nigerian investor than it might have been is the fact that investors from other cultures may have different approaches to investing that make it even more unpredictable. In particular, the approach to investing in Nigeria is more similar to gambling than it is in the West.
Inevitably, the question arises whether one should get involved in this new phenomenon. Analysts don’t recommend putting large sums of money into it as the bubble will inevitably burst in a matter of weeks but nobody knows when exactly.
