Admin l Thursday, February 11, 2021
ABUJA, Nigeria- Central Bank of Nigeria(CBN) has explained why it took the decision to ban banks from dealing in cryptocurrencies in Nigeria. In a press statement by Osita Nwanisobi, Ag. Director, Corporate Communications the bank said, the CBN position on cryptocurrencies is not an outlier since central banks, many countries, international financial institutions , investors and economists have also warned against its use.
“They have all made similar pronouncements based on the significant risks that transacting in cryptocurrencies portends risks of loss of investment, 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.
Explaining further, the CBN alluded to China where 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 Central Bank, called the Peopled Bank of China 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 institutions and do not hold any legal status that can make them equivalent to money. Hence banks and all stakeholders are strongly advices against their use as a currency.
“Even famed investor, Warren Buffet, has called cryptocurrencies “ rat poison Squared’ a “mirage”, and a gambling device, given that they are mostly valuable because the person buying them does so, not as a means of payment but in the hope that they can sell it even more than what they paid at some point”, the bank said.
It went further to explain that during an online forum hosted by the Davos-based World Economic Summit, few weeks ago, Andrew Balley, the Governor of the Bank of England, highlighted the exteme 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 would call a lasting digital currency? No, I don’t think we are there yet, I don’t think cryptocurrencies as originally formulated are it’, he said.
The CBN added, that It is not surprising he would take that position because, Bitcoin, the best known cryptocurrency hit a record high of $42,000 per unit in January 8, 2021 and sank as low as $28,800 about two weeks later. This is far greater volatility than is found of with normal currencies.
CBN explained that the use of Cryptocurrencies goes against the mandate enshrined in CBN Act 2007 as the issuer of legal tender in Nigeria and that the use of crptocurrencies contravenes existing law in the country and that there is clear difference between a digital currency issued by CBN and cryptocurrencies.
“As the name implies, while Central Banks can issue digital currencies, crytocurrencies are issued by unknown and unregulated entities”, the bank said. Besides, CBN said that cryptocurrencies by its name suggests that its patrons and users value anonymity, obscurity, concealment and wondered why any entity would want to 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 turned off from cryptocurrencies because of the damaging effect 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. There have also been recent reports that cryptocurrencies have been used to finance terror plots, further damaging its image as a legitimate means of exchange”, the apex bank said.
In addition, the CBN said cryptocurrencies have been used as a speculative assets than as a means of payment hence its volatility. CBN said price volatility has threatened the most sophisticated financial system, noting that the price of one of the highest cryptocurrencies in the world fell from US$320 to US$0.10 in 2017 and that the price of Bitcoin has also suffered similar volatility.
The CBN stated that its actions are not in anyway inimical to the development of Fin Tech or a technology driven system.
“Given that unlike Fiat Money which is 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”, the bank said.
The CBN asserted that its actions are not in any way, shape or form inimical to the development of FinTech or a technology-driven payment system but that 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, the bank said 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 bank added.
The CBN said 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”, the CBN noted.
