CBN clears the air on ban on Cryptocurrencies

The Central Bank of Nigeria (CBN) on Sunday cleared the air on its recent  reminder  to  Deposit  Money  Banks  (DMBs)  to  desist  from transacting in/and with entities dealing in cryptocurrencies.

It said in a statement issued in Abuja that most of the reactions trailing the reminder “reveal that there appears to be a need to provide further justifications about our position, especially to the general public.”

Below is the rest of the statement:

“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.”

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