The Central Bank of Nigeria (CBN) issued a circular some years back advising banks and other financial institutions to take note of its stance as regards the trade of cryptocurrency. In that circular, dated January 12, 2017, the CBN seemed to have recognized the emergence of Virtual Currency Payment Products and Services (VCPPS), its interaction with New Payment Products and Services (NPPS) and the rise of Virtual Currency Exchangers.
Also contained in that circular were a list of actions banks and financial institutions were required to adhere to when dealing with customers or virtual currency exchangers in addition to not holding nor in any way transacting with these currencies, “pending substantive regulation or decision by the CBN.”
That circular as seen above did not seem to extend this regulatory position to non-financial institutions. It only mentioned that category in passing to reiterate its stance that virtual currencies and all forms of cryptocurrency are not legal tender in Nigeria with an added warning that any institution that carries out such transactions will be doing so at their own risk.
However, it recently issued a follow-up circular in a somewhat slightly updated regulatory stance on the trading of cryptocurrency, directing Deposit Money Banks (DMBs), Other Financial Institutions (OFIs) as well as Non-Bank Financial Institutions (NBFIs) which wasn’t included in the previous circular, to “identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately”. This recent letter also carries the promise of severe regulatory sanctions on the account of breaching the directive it set forth, a threat absent from the first circular.
Why did the CBN institute a Ban on Cryptocurrency?
All sorts of insinuations, guesses, and angst have emanated from various quarters following this circular sent out in February 2021 that seem to further clamp down on cryptocurrency trading within Nigeria. Some people have argued that it is political, some have said it is an attempt to increase regulatory measures and establish more barriers of entry into the Nigerian economy and many other assertions.
We don’t hold the mic for the CBN and so we will not be able to say what could be the exact motivation for this new circular and sudden change in position as well the closure of account of persons/entities transacting in crypto currencies. The circular according to the CBN is just a wake-up call to remind banks and requisite institutions of the previous circular which hinged on the risk associated with crypto transactions.
So, What does this Directive Really Mean?
In plain terms, what this circular means is that no individual or entity can trade cryptocurrency with the Naira. Hence the word used is ‘prohibited’, that is it is not allowed or forbidden. Albeit, as much as the CBN has reiterated its stance, it doesn’t have the legal right to stop people from owning cryptocurrencies or trading with them as it is grossly beyond its purview.
The hassle really is the fact that this directive has made it difficult to trade and carry out any form of business or transaction involving cryptocurrency within Nigeria. And this is not too far fetched because while you might be able to use other foreign currency, have bank accounts in other countries and a wide array of virtual wallets, there is still a limit to how much Forex you can access, especially for persons whose primary means of trade is with the Naira.
Apart from just trading and investment in virtual currencies, there are still so many other significant economic problems that will arise from this directive. Top of that list is the question of what happens to businesses, organizations that are able to sell across borders because they can receive payment with cryptocurrency? Right on the heel of that is the question of what happens to businesses/startups who offer solutions or services using blockchain? Now, while some of such businesses will definitely try to find their way around it, some will invariably drop along the way because there is only so much that can be done with such regulatory conditions. Hence, these are some of the real-time issues that we have to find answers to in real time.
Is there a Way Forward?
From the look of things, there seem to be different ways forward because if the tempo on social media is anything to go by, people are already finding and sharing different hacks to continue with their cryptocurrency businesses and trading. And if the clear unpolled consensus is a resolve to still carry out cryptocurrency transactions, then it would only be progressive for the CBN to review its directive to avoid a shadow economy and ending up enriching other economies with investments that could have stayed within our economy. Of course, this largely hinges on the willingness of the CBN, SEC, NITDA, NFIU and operators to sit together at the table to chart possible pathways around this dilemma.
Moreover, this directive brings to the fore the AfCFTA that commenced on the first of January 2021 and the possibility of exploring potentials of that agreement to its fullest. What happens with African countries that allow crypto as means of value exchange? Would businesses that trade or run a model via virtual or crypto currencies in some of the African countries not be able to buy or sell with any Nigerian business?
The Securities and Exchange Commission (SEC) in its circular on Blockchain and Digital Assets in 2020 recognized crypto as assets and securities and not as currencies, so are we in for regulatory clashes? We do not see this; we believe interoperability among the regulators going-forward will be healthy for the economy.
The issue of risk and anonymity that characterize crypto and virtual currency is a valid risk that the CBN raised for its renewed interest to further prohibit trading of the crypto currencies.
Certain countries have found and are still finding their way around this relatively new terrain of cryptocurrency as seen with the FATF framework and recommendations in its recent Report to the G20 Finance Ministers and Central Bank Governors. A financial system is as stable as the regulations that govern it, however, what should be regulated and how should it be regulated becomes the critical questions. Subsequently, it will be lackluster and irresponsible for the CBN to deny the risk associated with these currencies as it would likewise be wrong to totally ban or discard its potential because of the perceived risks. Problems are created so we can find solutions not to avoid or run away from them.
As done in India, the CBN should give the exchanges a few months to sort out their accounts and refund monies to consumers who have made deposits with them, this will help to calm the atmosphere, while at the same time work with other regulators and stakeholders to chart a way forward that will be a win-win for regulators, operators, investors and consumers alike.