In the five days since CBN released a circular on the ban of financial institutions in Nigeria from participating in cryptocurrency and for banks to close all accounts linked to crypto exchanges; Bitcoin, the flagship of cryptocurrency has gained from $38,300 to $48,600 (according to coinbase.com) while the Naira has moved from 474/480 on the parallel market to 465/475 as buy/sell rates for the Dollar (according to abokifx.com).
Obviously, there is no correlation between CBN’s announcement and the BTC movement nor can any be traced between it and the parallel market rates, statistics like this has continually been used by proponents of this CBN reminder – and opponents alike.
Proponents argue that BTC’s movement shows that CBN’s move to save Nigerians from the volatility of cryptocurrencies is well-founded, while opponents argue that the CBN paid too steep a price in a failing battle to stabilize the Naira. Each school of thought claims to have the necessary data to buttress their argument.
In all of these, however, there has been a loud silence from the one sector that seems the most affected. Recall that although CBN’s directive will have far-reaching implications for the populace, it was addressed to the banks operating under their regulatory purview. Hence the question of how this new directive affects the banks.
The crypto dilemma
How to deal with cryptocurrency has been a recurring headache for Central Banks globally. It may not have been evident in 2009 when bitcoin was created, but over the years as more coins have been added to the cryptocurrency market and more investors and companies see cryptocurrency as the future of money, Central Banks have been forced to respond to the diversion from fiat money from which they find their relevance.
The recent spike in the value of Bitcoin and other cryptocurrencies has seen Central Banks frantically pursuing ways to regulate the force that could bring about their extinction. While there is no right or wrong way to go about this regulation, the most consistent form of regulation amongst Central Banks has been varying degrees of ban on the trading and owning of cryptocurrencies. Nigeria’s Central Bank reiterated its ban about a week ago.
The ramifications for Nigerian banks
Nigerian banks are at the center of the country’s financial ecosystem. Hence, a look into how they are affected can give a reliable background into how other financial institutions will feel the pinch of any of CBN’s policies.
Having your regulator level the playing ground for you is an added advantage in any business pursuit and reinforces belief in the system. The CBN, with the crypto ban, has once again propped the fiat currency and ensured that the Nigerian banking system continues to stay relevant. Although the CBN’s crypto ban falls short of being a law prohibiting cryptocurrency as has been proposed in India, the negative publicity around cryptocurrency that the CBN circular has created could stem the tide of potential crypto users who would rather invest in cryptocurrency exchanges than the banks or stock exchange.
Secondly, the ban will help protect Nigeria’s diaspora remittance that has been valued at $24billion and has been a strong focus of the CBN (if its last three circulars are anything to go by). Cryptocurrency has been widely adopted to circumvent these policies resulting in income leakage for banks and loss of relevant data for CBN’s GDP analysis. The crypto ban should help to redirect remittances through the appropriate channels.
Nigeria’s Fintech startup space has been buoyant in recent years and has continued to be an avenue for the influx of foreign investments. The sector raised over $600m between 2014 and 2019 and was able to raise $55 million in Q1 of 2020 from 99% foreign sources.
CBN’s renewed stance on cryptocurrency, while seeking to protect these institutions under its purview (including Fintechs), could see Nigeria’s Fintechs suffer the loss of investment as more forward-thinking tech companies and their highly influential CEOs endorse cryptocurrency.
Also, Millennials and Generation Z Nigerians who have had reason to distrust the CBN following the regulatory body’s role in freezing of the accounts of #ENDSARS protesters already see this move as a political one and the commercial banks as the accomplice of the CBN; further deepening their distrust of mainstream commercial banks.
CBN’s renewed directive is not a law per se. It does not criminalize holding or trading in cryptocurrency, it just restricts banks from facilitating these trade. Crypto trading, on the other hand, has metamorphosed over time that peer to peer (P2P) exchanges is already a booming sub-sector where agency sites use the escrow system to take their charges in cryptocurrency while the trade parties can transfer fiat under innocuous-looking narrations making banks to be unwilling conduits of cryptocurrency.
Also, the directive for closing accounts of individuals with cryptocurrency history does not come with a blacklist option on the BVNs of such customers. Some banks may see this as self-sabotage and feel reluctant to close such accounts knowing fully well that the aggrieved customer will most likely walk into the next bank and open another account; move their funds there and continue transactions as usual.
While there is unlikely to be an effect on the bottom line of banks in the short term, the CBN’s enforcement of a cryptocurrency ban may leave Nigerian banks ill-prepared for a global crypto economy as we continue to see evidence that cryptocurrency is no longer a fad but a growing form of payments that is fast gaining acceptance worldwide.
CBN’s drive has always been financial inclusion for the unbanked through digitization. Perhaps it would have borrowed a leaf from SEC as to how to regulate this cryptocurrency, and subsequently, adapt it as a tool for financial inclusion instead of restricting banks from playing in this market.
One way or the other, the future of cryptocurrency and its relevance in the global economy in the next few years will tell whether the CBN missed a golden opportunity for Nigerian banks to harness Nigeria’s place as the biggest market for cryptocurrency in Africa. As with most financial decisions, time will tell.