The attention of the Central Bank of Nigeria (CBN) has been drawn to various comments and
reactions following our recent reminder to Deposit Money Banks (DMBs) to desist from
transacting in / and with entities dealing in cryptocurrencies.
Most of these reactions reveal
that there appears to be a need to provide further justifications about our position, especially
to the general public.
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 portendrisk 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
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.