Cryptocurrency (crypto) is not accepted as a global legal tender, but 111 countries in the world are tolerating it as they understand its potentials and risks. These include all the countries with strong financial centres, like the United States, United Kingdom, European Union, etc. Central banks are also exploring digital currencies to compete with crypto.
Instead of joining global players, the Central Bank of Nigeria (CBN) decided to join the minority of countries to make dealing in crypto difficult. The CBN governor explicitly stated that “crypto has no place in our monetary system at this time, and crypto transactions should not be carried out through the Nigerian banking system.’’
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There was a public uproar following CBN’s letter to local financial institutions on the ban. The five-page clarification statement did not stop the backlash as the vice president and the National Assembly joined the list of those who demanded for a rational decision instead of an outright ban.
The goal of a public policy statement should be directed towards the people’s benefit. However, the CBN did not clarify how the public would benefit from such a policy.
To be fair, the CBN highlighted the existing problems with crypto; and they are not wrong. However, the ban on crypto makes the public doubt whether the apex bank actually understands the problem.
It is believed that crypto is used for money laundering, terrorism financing and other criminal activities. It is not wrong to presume that the movement of money across international borders is much easier now than four years ago. With the acceptance of crypto in Nigeria, we will not be seeing aeroplanes full of cash flying across states and international boundaries as we did in 2014 and 2019 respectively. However, with the ban on crypto, financing political movements like the EndSARS protest could also be limited.
The crypto has its benefits too, which the public should know. Unlike traditional money, crypto does not use intermediaries. Thus, transactions are easier, faster, and requires less or no additional fees. As an import-dependent economy, faster international transactions can occur given the existing problems of dollar shortage. Since it is favourable to have lower pressure on the country’s foreign reserves, the use of crypto for international transactions can facilitate economic activities.
Nigeria has a high inflation and unemployment rate, as well as existing jobs that cannot cover individuals’ expenses.
Policymakers need to combine all resources to improve the lives of the people. As more people have access to the internet than banks or other currency exchange systems, the opportunity for underprivileged people to establish credit is opened; thus, the opportunity for higher economic activity is provided.
A Statista survey from last year showed that 32 per cent of Nigerians used or owned crypto. Nigerians view crypto, like Bitcoin and Ethereum, as a better currency than the Naira. The latter is devalued by 24 per cent last year, with a potential devaluation of 10 per cent happening in 2021. But realistically, the highly speculative nature of crypto, like Bitcoin, is a legitimate concern. Notably, it is a speculative bet and will one day leave many in ruins.
Instead of banning, it will be better to educate those who view crypto as a commodity or security about the investment risks. For these reasons, global economies are looking at possible alternatives, like regulation and introducing competition with digital currency.
In the UK, there are regulations in place for crypto. The Financial Conduct Authority (FCA) assumed oversight of the crypto’s anti-money laundering and counterterrorism financing activities. The UK crypto exchange operation needs to be FCA-registered. Some crypto-asset services can obtain e-licenses instead of registering for FCA. In the European Union (EU), crypto providers must register their businesses with local authorities, implement transparent customer due diligence and suspicious activity reporting. They must provide identifiable user information to Financial Intelligence Units (FIUs) if requested. These practices can be applied in Nigeria. It will also create further employment and income for the 1.1 million Nigerians who trade on the Pax platform, where $65million is traded every month, with $100 being spent on each trade on average.
Another option for the CBN to consider is to follow the path of 80 per cent of the world’s central banks to explore the options of issuing a CBDC at some level. The European Central Bank (ECB), People’s Bank of China, Federal Reserve, Bank of England, among many others, are testing or considering this option. It is a way to compete with crypto.
The advantages of CBDC includes the potential for a more efficient payment system, like in Nigeria, where the cost of managing cash is high. A CBDC could lower barriers to entry for new firms in the payments sector. A CBDC has the potential to enhance the transmission of monetary policy. A CBDC would counter the many stable coin initiatives, like Facebook’s Libra. Above all, adopting a CBDC would provide the opportunity to enhance financial inclusion, which is part of the CBN’s objective. That means there will be no need for consumers to have a bank account to hold CBDC. Thus, it can help businesses embed financial services at a deeper level than previously.
CBDC can cause reputational risk for central banks. Technology may be exposed to glitches, cyber-attacks or human error, reflecting poorly on the central bank. For Nigeria, the risk of dollarisation will exist, given its high inflation, volatile exchange rate and dependence on imports. But an experiment will be the way to study this option, just like other countries.
Thus, the alternatives to banning crypto exist and are beneficial to the public. The CBN can regulate the crypto as well as introduce a digital currency to compete with it. Those interested in a legal tender will trust the CBN’s digital currency more than crypto. Those who consider crypto as a commodity or security will bear the risk associated with it.
Nasir Aminu teaches at Cardiff Metropolitan University, United Kingdom
