The Central Bank of Nigeria (CBN)
says it will continue to do all within its regulatory powers to educate
Nigerians to desist from use of cryptocurrencies — despite growing criticism.
The bank, in a statement on
Sunday evening, said it is determined to protect the country’s financial system
from activities of “fraudsters and speculators”.
Its directive to banks to close
accounts of persons or entities involved in cryptocurrency transactions has
been criticised, with former vice-president, Atiku Abubakar, asking the bank to
rescind the decision.
Listing various reasons for its
action, the central bank said not only are cryptocurrencies issued by
unregulated and unlicensed entities, the patrons and users value “anonymity,
obscurity, and concealment” and there are risks 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 certain level of
restrictions on financial institutions facilitating cryptocurrency
transactions, the bank said in the statement signed by Osita Nwanisobi, its
acting director of corporate communications.
THE STATEMENT IN FULL
Response to Regulatory Directive on Cryptocurrencies
The attention of the Central Bank
of Nigeria (CBN) has been drawn to various comments and reactions following our
recent reminder to Deposit Money Banks (DMBs) to desist from transacting in /
and with entities dealing in cryptocurrencies. Most of these reactions reveal
that there appears to be a need to provide further justifications about our
position, especially to the general public.
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 percent 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.
It is also important to note that
the CBN’s position on cryptocurrencies 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 of the significant risks that transacting in
cryptocurrencies portend- 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 certain level
of restrictions on financial institutions facilitating cryptocurrency
transactions.
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. They have also been recent reports that cryptocurrencies
have been used to finance terror plots, further damaging its image as a
legitimate means of exchange.
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. Because the total
number of Bitcoins that would ever be issued is fixed (only 21 million will
ever be created), new issuances are predetermined at a gradually decelerating
pace. This limited supply 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 have threatened many sophisticated
financial systems. In fact, the price of ether, one of the largest
cryptocurrencies in the world, fell from US$320 to US$0.10 in June 2017. The
price of Bitcoins has also suffered similar volatilities.
Given that unlike Fiat Money
which accompanied by full faith and comfort of a country or Central Bank,
cryptocurrencies do not have any intrinsic value and do not generate returns by
themselves. When one buys a stock, say of a conglomerate in the Nigeria Stock
Exchange, its price reflects the activity and production of that conglomerate
and the value people place on their goods and/or services. This price may rise
as the conglomerate produces better goods/services and probably gains greater
market share. The reverse would be true if the conglomerate does not innovate
to improve the quality of its goods/services. In other words, the price of that
stock reflects market fundamentals. In contrast, , cryptocurrencies do not have
fundamentals and would never have fundamentals. Investors only buy in the hope
that its use and acceptability will rise, thereby pushing up its demand and
price. But since new versions of cryptocurrencies come on stream with new
mathematical models, an infinite supply may someday crash the price to zero.
At this juncture, the CBN would
like to assert that our actions are not in any way, shape or form inimical to
the development of FinTech or a technology-driven payment system. To the
contrary, the Nigerian payment system has evolved significantly over the last
decade, leapfrogging many of its counterparts in emerging, frontier and advanced
economies propelled by reforms driven by the CBN. This is evident from the
variety of participants, products, channels, cutting-edge technology in the
payments system. It is also validated by the astronomical growth of
volume/value of transactions and the fact that Nigeria is an investment
destination of choice for international financial technology companies because
of CBN’s policies that have created an enabling investment environment in the
payments system.
These developments in the
payments and settlements space has helped to grow the financial system,
improving financial inclusion, the quality and convenience of financial
services and has also created millions of direct and indirect jobs for teeming
youth population.
The innovations in Nigeria’s payment
system were catalyzed by regulatory reforms driven by the CBN which entailed
the issuance of a raft of guidelines and regulations on Operations of
Electronic Payments Channels in Nigeria; Transaction Switching; Card Issuance
and Usage, Licensing of payment service providers; Mobile Money Services,
Electronic Payments of Salaries, Pensions, Suppliers and Taxes, Licensing Super
Agents in Nigeria; and use of USSD for Financial Services in Nigeria, Super
Agents and Agent Banking Operations and Payment Service Banks to mention a few.
The robust regulatory framework
put in place by the Bank opened up the payment system to innovation with
several new players across in the following licensing categories- Payment
Terminal Service Providers (PTSPs), Payment Solution Service Providers (PSSPs),
Mobile Money Operators (MMOs), Payment Terminal Application Developers (PTSAs),
Switches, Super Agents, Agents and Payment Service Banks (PSBs) This has
created both direct and indirect jobs for Nigeria’s youth population.
Several other initiatives are
being implemented to further support FinTech development and creation of jobs.
These include regulatory sandbox and open banking principles that the Bank
recently implemented.
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. Small retail and unsophisticated investors
also face high probability of loss due to the high volatility of the
investments in recent times.
In light of these realities and
analyses, the CBN has no comfort in cryptocurrencies at this time and will
continue to do all within its regulatory powers to educate Nigerians to desist
from its use and protect our financial system from activities of fraudsters and
speculators.
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