Redefining Digital Assets in Nigeria Godwin Emefiele

CBN Governor, Mr. Godwin Emefiele

Money

Recently, the financial market was rattled to its core, when the Central Bank of Nigeria (CBN) banned the

cryptocurrency and shut down all its exchanges. Prohibiting its use in banks and other financial institutions, the apex bank effectively shut the door against access to the digital currency in Nigeria. However, coming at a point when so much pressure is on the country currently, in terms of insecurity and citizens cry against bad governance, some conspiracy theorists believe the decision may have some political undertone. But then, the anonymity value of the digital asset, may actually be the Achilles heel of the cryptocurrency, because that is a major minus the CBN holds on to in defence of its decision. Following interventions by the National Assembly and other voices of reason, discussions and consultations are ongoing to find ways to stir a middle course on the matter. Like a cherry on the cake of support for the blockchain business, Vice President Yemi Osinbajo’s statement two days ago finally made the point for a guided cryptocurrency regulation in the country rather than an outright ban. Chris Paul reports

On 5th February, 2021, the Central Bank of Nigeria (CBN) sent a memo to banks and other financial institutions to notify them of the prohibition of any dealing in cryptocurrencies and payment facilitation for cryptocurrency exchanges. The CBN further instructed all banks and other financial institutions to identify individuals or entities, who transact in cryptocurrency or operate cryptocurrency exchanges and close the accounts of such persons or entities.

Predictably, the letter caused a major stir amongst experts and in the court of public opinion with many concerned about the negative impact it could have on Nigeria’s growing cryptocurrency market and innovation in the fintech industry.

Responding to these concerns, the CBN it seemed, was able to put its thoughts together to modify its earlier memo to the banks, giving reasons, explaining the rationale, for its decision. It issued a press release, two days later, on 7th February 2021, explaining its earlier directive and providing reasons for its prohibition of cryptocurrency transactions by banks and other financial institutions.

The CBN’s decision on cryptocurrency had also attracted attention from the highest levels of government.

During its deliberation on the CBN’s directive on February 11, the Nigerian Senate resolved to invite the CBN Governor to brief them on the actions of the apex bank.

The meeting was further necessitated by some senators, who expressed reservations about the ban on cryptocurrency transactions.

One other excuse the apex bank advanced as reasons for shutting down cryptocurrency exchanges, is the unregulated nature of and unlicensed entities running the digital currency sector.

For the bank, the use of cryptocurrencies in Nigeria contravenes existing laws as they are not legal tender.

It also identified the anonymity of cryptocurrency as an issue; stating that anonymity and the lack of Know Your Customer (KYC) made it vulnerable to illegal use such as money laundering and the financing of terrorism. Another justification for slamming the hammer on the virtual financial subsector, was the volatility of cryptocurrencies, which it maintains, threatens the stability of financial systems in other countries.

With over $500 million worth of Bitcoin traded over the last five years, Nigeria has the second largest Bitcoin market in the world. So, a total shut down may not be in the interest of a weak economy as Nigeria’s.

This consideration might be what informed the cautious approach adopted by the capital markets regulatory.

On September 14, 2020, the Securities Exchange Commission (SEC) issued a statement announcing its intention to regulate “digital assets” which includes cryptocurrencies.

In the light of CBN’s directive, SEC faced calls to clarify whether there was a contradiction in the policies of the two regulators.

But in what industry analysts regard as a face-saving policy moderation, ‘double-speak,’ to cover CBN’s perceived flawed reactionary policy, SEC subsequently issued a statement on February 11, 2021, stating that it would partner the CBN to analyse and better understand the identified risks of cryptocurrency to ensure that appropriate regulations are put in place if cryptocurrency transactions are to be allowed in future.

So, CBN’s directive on cryptocurrency transactions understandably has an effect on the cryptocurrency market in Nigeria, because it means those trading in the digital asset will be essentially prevented from buying cryptocurrencies with their credit/debit cards issued by Nigerian banks or receiving proceeds of cryptocurrency sales from exchanges which facilitate the buying and selling of cryptocurrency.

In compliance to the CBN’s directive, banks begun to identify and deactivate the account of individuals with inflows/outflows from/to cryptocurrency exchanges. It is unclear if affected individuals would be able to reopen accounts with these banks in future.

Fortunately, for the crypto community, however, some of their members have come up with ideas that have outsmarted the new, but hostile system; as some exchanges may have found a way around the restriction; by switching to peer-to-peer trading; which enables individuals to buy or sell crypto currency, from individual traders as opposed to the exchanges.

In other words, this does away with the need for exchanges to operate settlement accounts in Nigerian banks.

This anti-CBN fix is a graphic demonstration of the very essence and spirit of the cryptocurrency initiative which was berthed during the global economic meltdown of 2008.

The idea of the digital asset is to decentralize central banking system. The state of affairs in the global financial market today, is that 60 per cent of central banks are under pressure to create digital money.

This development is consequent upon the sudden rise in value and acceptability of cryptocurrencies and the search by investors for alternative places to put their money.

At the February edition of the Finance Correspondents Association of Nigeria, (FICAN), monthly forum in Lagos, held on Tuesday, 24 February 2021, an Economist and Chief Executive Officer, Global Analytics Derivatives Ltd, Mr. Tope Fasua, said, though no banker to the government will support cryptocurrency; “They have no option than to begin to issue their own Central Bank Digital Currency (CBDCs).”

China, Ecuador, Senegal, Tunisia and Singapore, according to him, are the five countries that have issued digital currencies, not Cryptocurency, adding that “bankers know that they are done, if cryptocurrencies really take off and replaces traditional currencies.”

Fasua said a number of bankers have invested in cryptos just to hedge their bets; but explained that “the traditional financial system is deeply rooted, organised and backed by government, unlike the cryptocurrency mining space.”

Fasua further made the point that the days of cryptocurrency are here and cannot be ignored.

Speaking on the topic: “Ban on Cryptocurrency-related Accounts in Nigeria and Concerns of Global Central Banking,” Fasua stated that the proponents of the cryptocurrency believe there is a need to push back and do something different, that will mimic the attributes of a gold-backed currency in view of durability and scarcity, but better than the current system by being smart, secure and not possible for central banks to issue at will.

“If it started as a rebellion (which is the case), then you must think of the incentive for the global economy to sign on to that rebellion with you against the devil they know. This then means that until there is global acceptance of the currencies, it will continue to be easy to create panic in the crypto world and big players can dump the currency when they have achieved gains. It then becomes worse than the stock market because, for cryptocurrencies, the fundamentals are non-existent apart from an analysis of how many are adopting the currency and who is winning between an established traditional banking system and the new kids on the block,” Fasua posited.

Cryptocurrency, according to him, is heading to global single currency, but one major challenge, he said, “is that there is a lot of losses in it and that when most coiners die, no one is able to access their investments which ab initio are encrypted with passwords, passphrases and whatnot. People don’t usually plan to die. Now, this is where regulation helps in the financial markets. Apart from deposit insurance, which kicks in, in the event of the collapse of an insured and regulated financial institution, the relations of a dead account holder in a traditional bank could still have access to their balances.”

Unfortunately in the case of cryptocurrency, however, once the currency owner dies without transferring the codes to any trusted aid or relative, that money is gone; with him or her.

Former Central Bank of Nigeria (CBN)’s Deputy Governor, Prof. Kingsley Moghalu, faulted CBN’s action on the cryptocurrency transactions.

For him, the ban on cryptocurrency transactions in Nigeria’s banking sector could have been handled in a different manner.

Admitting the threat cryptocurrency poses to financial stability, Moghalu said a risk management approach should have been adopted in tackling the issue.

In an interview on a national television recently, Moghalu said: “When I saw news of this directive, I was a bit concerned but I was not surprised. I was not surprised because you have to first of all understand that there are many dimensions to the question of cryptocurrencies. There are financial stability issues and concerns.

There is the question of whether or not it is a legal tender in Nigeria because it is not; the central bank had, in 2017, put out that regulation.

But now that the apex bank has put out a new directive, basically banning all deposit money banks, from transacting in cryptocurrencies, the former deputy Governor acknowledged SEC’s recognition of cryptocurrencies, as a financial asset. He recalled that in September, the Capital markets regulatory agency had said they were going to put out a regulatory framework.

“And we know that bitcoin and other kinds of cryptocurrencies have now become known as ‘freedom money. We have to go back to understand what cryptocurrencies actually are, which are virtual currencies that can be exchanged online to purchase goods and services and the value is not determined by the value of legal tender currencies,” he said.

Clarifying that legal tender currencies have to be used to purchase those cryptocurrencies, he said: “The most popular of cryptocurrencies is bitcoin. Also, they don’t have an underlining value, so many people would say it is speculative; because unlike a normal currency, that currency is backed up by either foreign reserves, the productive nature of the economy of the country that owns the currency and various other elements.”

A former presidential candidate of the Young Progressive Party in the 2019 election, Moghalu noted that, “We live in a world of innovation. Cryptocurrencies bypass central banks globally.

So, there is the financial stability aspect, there is political aspect, there is the private and economic investment aspect of it and there is the aspect of the business opportunities of the incomes and earnings of many young Nigerians who trade in this instrument. So, it is a very complex issue.”

The directive by CBN, according to him, was aimed at making the space difficult for people who deal in the virtual currency, adding that, “The CBN directive is legal, but was it the wisest way to approach either the risks of cryptocurrencies or any other consideration that it might have had? I am not sure about that and that is why I was worried on this response by the CBN.”

He interprets the hurried memo as a directive to financial institutions under the control and supervisory remit of the central bank, not to deal with these digital assets, saying, “The directive is targeted at exchanges of cryptocurrencies. It makes it difficult, but it does not criminalise it.”

As deputy governor in charge of financial stability, Moghalu was the head of the directorate that controls the financial system and so, as one with an authoritative understanding of the global financial system, he believes the move by the CBN was definitely, not the best way to handle the situation.

“And if I was in the CBN today in that role, it is one of the departments under me that would have issued this directive. But my response as someone, who is versed in risk management will be that there is a reality today that the world in going digital and there is a lot of innovation in the world and cryptocurrency are part of it,” said Moghalu.

His attitude, therefore, would have been how the nation’s banking regulatory authority would have best managed the risks of cryptocurrencies to ensure that they do not affect the stability of the financial system.

Considering the fact that the country is just recuperating from the groundswell impact of the EndSARS Protest which, greatly, exploited the crypto window to fund its agitation coupled with the current Sunday Igboho Southwest’s anti-Fulani domination resistance, conspiracy theorists are wont to aver that the ban may be politically motivated.

For them, the only means known to killer-bandits and kidnappers, (who are largely dominated by Northern elements of the Fulani ethnic stock), is ransom collected from victims’ relatives to fund their operations.

While, on the other hand, the largely well-educated and sophisticated Southern youths found expression for their funding needs via the cryptocurrency.

That is why many believe the CBN action, considering the haste with which it came, is targeted at disrupting the growing agitations by youths from the South; in their battle against the onslaught by Boko Haram terrorists posing as killer-herdsmen to capture and destroy the Southern part of the country.

In his interaction with members of the Senate Joint Committee on Banking Insurance and other financial institutions, (including ICT and cybercrime), who had summoned him to explain his actions, CBN Governor, Godwin Emefiele stood his ground; although he enlightened the legislators on the security implication of allowing cryptocurrency a free reign on the nation’s financial sector.

Briefing the men of the upper legislative chamber, on February 23, 2021, Emefiele spoke on the opportunities and threats of cryptocurrency on the nation’s economy.

The CBN Governor told the Senators that the bank is not in a popularity contest, saying its actions are applauded by all Nigerians with nothing to hide.

Affirming the banks’ commitment to protecting all actors in the financial space especially the uninformed; Emefiele disclosed that money laundering, terrorism financing, and other nefarious activities are being carried out using cryptocurrencies and the opacity of financial dealings using cryptocurrencies to threaten the soundness of Nigeria’s financial institutions.

The decision by the Senate to invite the CBN governor was sequel to a motion by a federal lawmaker, Senator Istifanus Gyang during plenary on February 11, on the CBN’s directive to stop financial institutions from transactions in cryptocurrencies and matters arising from them.

Calling for caution, the federal lawmakers pointed out that while cryptocurrency has its negative sides, it has become the fastest-growing form of transaction all over the world.

They argued that technology has changed the way business is conducted in Nigeria and the country cannot run away from cryptocurrency.

The cryptocurrency issue is a money matter and policies that have to do with financial transactions, systems and processes that are very sensitive, and which could be susceptible to varied interpretations.

Sifting through the maze of perspectives against the backdrop of the directive, it is obvious that the CBN could and can still explore other less volatile options to address the cryptocurrency challenge.

Otherwise, under the tense atmosphere Nigeria has found herself, currently, such a directive has the potential of further fanning the embers of division, simmering in her underbelly, today.

It is in the light of this, that Vice President, Prof. Yemi Osinbajo’s statement, last Friday, hit the bull’s eye.

Laying his premise on two solid points, he said

“First is that there is no question that blockchain technology generally and cryptocurrencies, in particular, will in the coming years challenge traditional banking, including reserve banking, in ways that we cannot yet imagine. So we need to be prepared for that seismic shift. And it may come sooner than later.”

Already, according to him, remittance systems are being challenged. Blockchain technology, he affirmed, will provide far cheaper options to the kind of fees being paid today for cross-border transfers by banks.

“I am sure you are all aware of the challenge that the traditional SWIFT system is facing from new systems like Ripple which is based on the blockchain distributed ledger technology with its own crypto tokens.

There is of course a whole range of digital assets spawned daily from blockchain technology,” he said.

Thankfully, the Vice President knows that decentralised finance, using smart contracts to create financial instruments, in place of central financial intermediaries such as banks or brokerages, is set to challenge traditional finance.

The likes of Nexo Finance offer instant loans using cryptocurrency as collateral. Some reserve banks are investigating issuing their own digital currencies.

“Clearly, the future of money and finance, especially for traditional banking, must be as exciting as it is frightening. But as we have seen in many other sectors, disruption makes room for efficiency and progress,” the Vice President enlightened.

On his second point, Prof. Osinbajo made known that he fully appreciates the strong position of the CBN, SEC and some of the anti-corruption agencies on the possible abuses of cryptocurrencies and their other well-articulated concerns. But he believes that their position should be the subject of further reflection.

There is a role for regulation here, he pointed out, adding that, “It is in the place of both our monetary authorities and SEC to provide a robust regulatory regime that addresses these serious concerns without killing the goose that might lay the golden eggs.”

The vice president believes the interventions of the relevant government agencies should be thoughtful and knowledge-based regulation, not prohibition.

“The point I am making is that some of the exciting developments we see, call for prudence and care in adopting them and this has been very well articulated by our regulatory authorities, but we must act with knowledge and not fear. We must ensure that we are in a position to benefit and in a position to prevent any of the adverse side effects or even possible criminal acts that may arise as a consequence of adopting any of these options,” he concluded.

An erudite scholar and respected law professor, himself, Osinbajo clearly aligns with the views of the former CBN deputy Governor and other voices of reason on this cryptocurrency conversation.

So, there is nothing more to add; other than to advise the current leadership of the nation’s apex bank to toe the line the vice president has drawn in his intervention.

Besides the fact that he spoke truth to power, placed the issue in its proper perspective.

What is gratifying is that his statement as the vice president, would not be taken as mere advocacy, but a public repair of the initially policy of the central bank on the matter concerning the financial regulator’s management of cryptocurrency and the growing blockchain business.