Weighing the Ban on Cryptocurrency Transactions

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Oluchi Chibuzor writes on the ban of cryptocurrency transactions in Nigeria’s banking and payment systems

The Central Bank of Nigeria (CBN) recently directed banks and other financial institutions to close any accounts dealing in cryptocurrency or facilitating payment for cryptocurrency exchange, with immediate effect.

It also directed banks to expose any individual and entity running such accounts, warning that failure to adhere to the directives would attract strict sanctions.

The apex bank in the circular, cautioned deposit money banks (DMBs), non-bank financial institutions (NBFIs) and other financial institutions (OFIs) and members of the public on the risk associated with transactions in cryptocurrency.

The circular was signed by the Director of Banking Supervision, Mr. Bello Hassan, and the Director of Payments System Management Department, Mr. Musa Jimoh.

The new central bank policy has continued to attract mixed reactions. While some analysts have criticised the central bank’s action, others have expressed support for the policy.

CBN’s Defence

In defending its policy, the CBN insisted in a statement by its Director of Communications, Mr. Osita Nwanisobi, that the restriction regime was to protect Nigerians and the financial system.

It was reported that the federal government and CBN were hinted by the Federal Bureau of Investigation (FBI) on the activities of fraudsters using cryptocurrencies to bring into the country hundreds of millions of US Dollars illegally obtained from the USA and other western economies, giving rise to the policy.

The CBN attributed the ban on cryptocurrency transactions to the need to protect the interest of Nigerians and the financial system from the risks inherent in crypto assets transactions.

It said dealing in cryptocurrency has dire consequences for the integrity of the financial system and financial stability.

The bank raised concerns that due to the fact that cryptocurrency is largely speculative, anonymous, and untraceable, they are increasingly being used for money laundering, terrorism financing, and other criminal activities.

The apex bank added that small retail and unsophisticated investors also face a high probability of loss due to the high volatility of the investments in recent times.

The CBN added that in the light of these realities and analyses, the bank had no comfort in cryptocurrency at this time and will continue to do all within its regulatory powers to educate Nigerians to desist from its use and protect the financial system from the activities of fraudsters and speculators.

The CBN said following the various comments and reactions that had trailed its recent reminder to banks to desist from transacting in/and with entities dealing in cryptocurrency, it had become necessary to provide further justifications about the bank’s position, especially to the public.

The bank added that considering the fact that cryptocurrency is issued by unregulated and unlicensed entities, the 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, stressing that the “use of cryptocurrencies in Nigeria is a direct contravention of existing law.”

The CBN said: “The very name and nature of ‘cryptocurrencies’ suggest that its patrons and users have 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.”

The apex bank added that the role of cryptocurrency in the purchase of hard and illegal drugs on the darknet website called “Silk Road” is well known, adding that there had also been recent reports that cryptocurrency has been used to finance terror plots, further damaging its image as a legitimate means of exchange.

The CBN explained further: “More also, repeated and recent evidence now suggests that some cryptocurrencies have become more widely used as speculative assets rather than as means of payment, thus explaining the significant volatility and variability in their prices.

“For those who are not conversant with the universe of cryptocurrencies, it is important to state that cryptocurrencies are digital or virtual currencies issued by largely anonymous entities and secured by cryptography.

“Cryptography is a method of encrypting and hiding codes that prevent oversight, accountability, and regulation. 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 per cent of all cryptocurrencies.

“As regards our recent policy pronouncement, it is important to clarify that the CBN circular of February 5, 2021, did not place any new restrictions on cryptocurrencies, given that all banks in the country had earlier been forbidden, through CBN’s circular dated January 12, 2017, not to use, hold, trade, and/or transact in cryptocurrencies.

“Indeed, this position was reiterated in another CBN Press Release dated February 27, 2018.”
According to the CBN, its policy “is not an outlier as many countries, central banks, international financial institutions, and distinguished investors and economists have also warned against its use.

“They have all made similar pronouncements based on the significant risks that transacting in cryptocurrencies portend, the risk of loss of investments, money laundering, terrorism financing, illicit fund flows, and criminal activities.

“China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabia, Jordan, Iran, Bangladesh, Nepal, and Cambodia have all placed a certain level of restrictions on financial institutions facilitating cryptocurrency transactions”

The CBN also cited investor, Warren Buffett, who has called cryptocurrency “rat poison squared,” a “mirage,” and a “gambling device” as one of those who have condemned trading in cryptocurrency.

“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 a 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.

Support for Ban on Cryptocurrency

However, amid the criticism of the policy, the Association of Bureaux De Change Operators of Nigeria (ABCON), the Arewa Consultative Youth Movement, Ohanaeze Ndi Igbo Youth Movement, Oduduwa Youths, and Middle Belt Youths expressed support for it.

ABCON lauded the CBN for being proactive in banning cryptocurrency trading.

ABCON President, Alhaji Aminu Gwadabe, said the banking sector regulator acted fast to curtail an emerging dangerous trend capable of eroding Nigeria’s Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) gains.

Gwadabe added that before banning financial dealings that do not conform with the norm, the CBN must have got financial intelligence on such operations, as seen in kidnappers now collecting Bitcoin for ransom.

Gwadabe said the new changing global behaviour towards cryptocurrency trading in Nigeria was not in tandem with Nigeria’s AML/CFT compliance structure as the country battled to move out of the Financial Action Task Force (FATF) sanctions list.

He said cryptocurrency trading has become pervasive and widespread that every segment and all operators in the financial industry are becoming vulnerable to their operations that are not guided by regulation.

“That is why many financial sector regulators, prominent financial institutions, including global banks and investment firms are moving swiftly against the cryptocurrency operators.
“All over the world, no regulatory institution has given a fiat approval of the new digital money due to its vulnerability to money laundering and counter-terrorism financing.

“It is therefore the belief of our association that the measures of the CBN will ensure the confidence of our foreign partners to boost economic growth,” Gwadabe said.

According to him, rather than criticising the CBN, the critics should have advised 5he federal government to introduce digital agri-business to Nigeria’s teeming youth for capacity and self-employment.

“We, therefore, support the CBN measures and urge the apex bank to support a paradigm shift in Bureaux de Change (BDCs) business where we are moving from traditional bricks and mortar operations to a digitised model that boosts transparency, foreign capital inflows, and ease of monitoring and supervision of our operations,” he said.

He added the BDCs have so far introduced four factors authentication digital applications in their operations to improve efficiency and transparency in operations.

Gwadabe said there was nothing wrong with regulating players in the financial sector, and where such regulations are not available, caution should be applied.

“There is a need for every segment of the financial system to be regulated and guided by the CBN Act, BOFIA, Anti-Money Laundering, and Counter Financing Terrorism guidelines, Know Your Customer (KYC) Requirements for a safe and secured Nigeria and stable financial system,” he said.

He said ABCON will continue to support CBN’s moves to tighten and strictly enforce regulations in the foreign exchange market for sustained exchange rate stability and improved economic growth.

Similarly, the Arewa Consultative Youth Movement, Ohanaeze Ndi Igbo Youth Movement, Oduduwa Youths, and Middle Belt Youths also supported CBN’s ban on cryptocurrency trading through Nigeria’s financial system.

They also hailed the CBN Governor, Mr. Godwin Emefiele, for providing the leadership that made the apex bank to take such a proactive move.

The groups, in a joint statement by Ohanaeze Secretary-General, Mr. Nwada Chiamaka, described the ban as patriotic and courageous.

They urged Emefiele not to relent in his efforts to sanitise not only the banking sector but the entire economic landscape.

“We know of a fact that this policy is a hard hit against financial criminals of the underworld who in turn will stop at nothing in their desperate bid to ensure that the policy is changed so that they can continue to have their way. We urge the CBN team not to succumb to any pressure. The policy should be strictly implemented and those who flout the rule should be sanctioned appropriately,” the statement added.

Criticisms

The Managing Director, Financial Derivatives Limited, Mr. Bismarck Rewane expressed reservations about the prohibition of cryptocurrency by the apex bank.

He said rather than outright prohibition, the CBN should have concentrated on regulation of the means of exchange which it started in 2017.

According to him, “In 2017, the CBN raised the alarm and warned that anybody that engaged in cryptocurrency and got his hands burnt would be on his own.

“The best thing is to regulate it, put it under a rule that will stipulate the number of people that can participate. A lot of people do not understand it, they will just lose money.
“So, there are two elements, one is to regulate the market, to protect the investors through capital requirement and the other is to prohibit it’.

“Cryptocurrency is being used as a store of value and also to use it as a medium of exchange and for trade, so it’s parts of the characteristics of money.

It needs to be studied carefully and controlled not prohibited.

Equally, a former Deputy Governor of the CBN, Prof. Kingsley Moghalu, advised the CBN to reconsider its recent decision to ban cryptocurrency transactions in the country banking and payment systems.

He also suggested that the central bank could come up with effective regulation of the evolving digital currency revolution and possibly launch its own virtual currency as being done in some countries.

He argued that it would be preferable to regulate the cryptocurrency by either restricting its usage or subjecting it to some form of surveillance that would alert the CBN when abuses that could affect the financial system stability arise.

He said: “I think that there is need for a very serious study about this thing because many Nigerians are involved in cryptocurrencies. If your country is number 10 in the world usage of cryptocurrencies, I do not think that it is a wise approach to either ignore or banish it.

“My recommendation to the CBN is to really take a deep look of this whole thing and perhaps look at the possibility of the issuance of its own digital currency as China, Sweden

and Uruguay and other countries are doing. What you do not know can be scary for you.”
Moghalu also emphasised the need for the Securities and Exchange Commission (SEC) to launch an investment education campaign to educate Nigerians about the risks associated in trading in cryptocurrency.

“I think the CBN should be imaginative and deploy risk management approach to cryptocurrency. Investments are risks that are personal to the investors as long as they do not affect systemic stability,” he added.