The Central Bank of Nigeria is banning banks from processing remittances related to cryptocurrencies. The central bank claims it is doing so to protect Nigeria’s financial system – which, in this case, may not actually be untrue. Bitcoin has reached a force in Nigeria that is pushing the national currency, the naira, to the wall – or accelerating its decline. The Central Bank of Nigeria (CBN) wrote a public letter to all banks and other financial institutions on Feb. 5.
In the letter, it reminds institutions of a warning issued back in 2017 about the risks associated with cryptocurrencies and states that all regulated financial institutions are prohibited from trading cryptocurrencies or making payments for crypto exchanges. Each bank would be required to identify individuals and entities that instruct, operate, or act as transactions on crypto exchanges and close their accounts immediately. Failure to comply with this directive will result in serious regulatory penalties.
Exchanges operating in Nigeria will thus lose the banking account for deposits and withdrawals of the national currency, Naira, and Nigerians seeking to buy or sell Bitcoins will now find it difficult to transfer Naira electronically to an exchange or exchange with private buyers or sellers. The exchange Binance, which also operates in Nigeria, shut down the deposit of Naira and called on its customers to withdraw balances in the currency as soon as possible to avoid problems.
Nigerian exchange quidax.com commented on the CBN’s “crypto love letter.” Neither deposits nor withdrawals of naira were possible, it said. The exchange’s payment partners had no other option, so they implemented the central bank’s instructions. The last two days have been tough for exchanges, he said, “but we were born in tough circumstances and fighting through is what we’ve always done.” He added that they are already implementing the contingency plan that they designed specifically for such cases, but they cannot say anything concrete at this time.
The official statement
The CBN’s action has caused a big stir in Nigeria. “Above all, the general public” demanded, the central bank wrote shortly afterwards, that it give more precise reasons for its decision. This justification, as well as all other explanations that have since gone public, are extremely exciting. They show what happens when Bitcoin becomes bigger than an entire economy.
First, the central bank reminds us that banks in Nigeria have been prohibited from dealing with cryptocurrencies since early 2017. Further, it is not uncommon for central banks to crack down on cryptocurrencies, it said. For example, central banks in China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabie, Jordan, Iran, Bangladesh, Nepal, and Cambodia have all imposed “some level of restrictions” on financial institutions related to crypto transactions.
However, the specific reasons for the CBN are as follows: First, the issuance and therefore use of cryptocurrencies in Nigeria violates the law, which stipulates that only the central bank may issue or license the issuance of currencies or currency substitutes. Second, criminals abuse the anonymity or pseudonymity of cryptocurrencies for their activities, “including money laundering, terrorist financing, arms purchases, and tax evasion.” Third, cryptocurrencies are used less as a means of payment than as an object of speculation and, as such, are extremely volatile, which could put the financial system at risk, he said.
The order to banks was therefore necessary to “protect the financial system and Nigerians in general” from the risks posed by cryptocurrencies, “which have escalated in recent times, with dire consequences for the integrity of our financial system and financial stability.” However, the rationale provided by the central bank is only one part. After all, it basically just consists of a legal technicality, the two usual accusations, use by criminals as well as high volatility, but infers a threat to the entire financial system. Is she inflating something here to have a pretext? Or is it hiding something?
Weak finance, strong cryptos
Fundamentally, there is an extreme imbalance between cryptocurrencies and the normal financial system in Nigeria, di one of this force is perhaps unique: the country has a small, weak, ailing, ailing, over-regulated financial system – and a large, very active and dynamic crypto market. If you are considering to buy altcoins now, take a look at shitcointrading.com first.
Nigerians’ high level of interest in Bitcoin can be determined by several metrics:
In August 2020, business magazine Nairametrics reported that Nigeria showed the world’s strongest Google interest in Bitcoin. The nation of 200 million people is the most important marketplace for cryptocurrencies in Africa, and one of the fastest growing globally, it said. At wallet provider blockchain.com, Nigerians represented the fastest-growing customer group since April 2020. The number of users from Nigeria increased by 60 percent between April and August 2020.
Paxful, a P2P exchange platform, operates a very active market in Nigeria. According to a report from the platform earlier this summer, Nigeria was the world’s second most active marketplace for cryptocurrencies after the United States. In November 2020, the platform’s blog reported that the market in Nigeria had already grown by 20 percent a year before, and by as much as 30 percent since 2020 (and Corona). In 2020 alone, it said, $451 million or 20,500 bitcoins were traded, and the number of new registrations increased by 137 percent.
Figures for trading volumes in Nigeria are rather fragmentary and overall unreliable. For example, according to another source, Paxful reports that about 600,000 Bitcoins were traded in Niveria last year; BuyCoins reported a monthly trading volume of $200 million; while Stears Business magazine reported only $141 million a year. So the numbers that are available vary widely.
However, the Stock Exchange of Nigeria posts less than $200 million in the quarter. Even assuming the lowest estimates of trading volume, the share of cryptocurrencies in Nigerian financial transactions is huge.
Bitcoin exacerbates the weakness of the naira
Nigeria’s currency, the naira, is inflating. Since 2016, its exchange rate against the dollar has fallen by more than half. Over the past year, the naira has officially remained stable, but bursts in exchange rates show that this stability is very shaky.
Much of the exchange of naira for dollars and other foreign currencies takes place through black markets, where the rate fell to an all-time low last year. Official and “parallel” prices have decoupled even further in the past year, which does not bode well for the health of the currency.
The collapsing price of crude oil last year, and the Corona crisis in general, have made foreign exchange scarce in Nigeria. Foreign exchange generally means foreign currencies, but usually the dollar. Foreign exchange is needed to pay for imports from abroad and to stabilize the country’s own currency, which is why a shortage of foreign exchange is extremely worrying.
To deal with the shortage, the central bank resorted to a brutal means in late 2020: it had the naira bank accounts of service providers closed that processed remittances from Nigerian guest workers sending money from abroad to their families. In doing so, she sought to force companies to send dollars instead of naira into the country.
As a result, however, Nigerian migrant workers increasingly began using cryptocurrencies. Read more about it at https://techpoint.africa/2021/02/11/nigerian-senate-lifeline-crypto/ Abiodun Keripe, the executive director of Afrinvest, tells The National that this has become a trend, which is becoming dangerous for the central bank: Financial flows from abroad are being diverted into cryptocurrencies in a completely unregulated way. They are beyond the control of the central bank.
- Official remittances from abroad, made through regulated service providers, have fallen dramatically over the past year.
- From $5 billion in the second quarter, they fell to $3 billion in the third; overall, money flows are at a four-year low. Compared to 2019, they have dropped from $24 billion to less than $10 billion.
- The decline is so dramatic, Keripe said, that it could have an impact on the country’s foreign exchange reserves, and thus the stability of the naira.
- The fact that more and more guest workers are using Bitcoin and other cryptocurrencies for remittances is now, Keripe said, further drying up the market for foreign exchange and causing rates between official and parallel markets to diverge further.
- This will make it difficult to hold the necessary reserves to support a local currency.
- That more and more guest workers are using Bitcoin and other cryptocurrencies for remittances is now, Keripe said, further drying up the market for foreign exchange and causing rates between official and parallel markets to diverge further.
- This will make it difficult to hold the necessary reserves to support a local currency.
Stears Business magazine presents a similar explanation. The National summarizes it, “As the crypto market boomed, more and more Nigerians exchanged their naira for cryptocurrencies such as Bitcoin or Dogecoin. Individuals deposit Naira on exchanges and buy the coins directly. These companies, however, buy dollars mainly on parallel markets [=black markets] to use them to buy cryptocurrencies on the international markets. So the more people buy cryptocurrencies, the more dollars are withdrawn from Nigeria.” Bitcoin is apparently becoming a catalyst: a tool that allows people to break out of an ailing financial system and thus accelerate its decline.
The crime thing
Experts like Keripe partly confirm the central bank’s argument that Bitcoin is being used by criminals. Keripe, as well as financial expert Yakub Aliyu, tell The National that hackers recently infected a Nigerian bank with ransomware and stole its customer database. To keep it from being made public, the hackers demanded a ransom in bitcoin. Read more about it at benjamindada.com.
The central bank, Aliyu says, “cannot fold its hands and watch cryptocurrencies destroy the entire banking system, with all the sickening consequences of a crisis in the banks and bailing them out.” He also said Turkey has banned Bitcoin because it has become “a channel for money laundering on an unimaginable scale.”
More soberly, Keribe emphasizes that the central bank lacks the technology to effectively monitor cryptocurrencies and exchanges to enforce fine-mesh regulation. Accordingly, the alternative would likely be to take a sledgehammer approach.
However, research by THISDAY suggests how far the scale of criminal transactions could actually go. According to the Journal, the FBI uncovered a wave of fraud, primarily related to Covid-19 economic aid, that sent hundreds of millions of dollars from the U.S. and Europe to Nigeria using cryptocurrencies.
The flow of money was so broad that it could no longer be explained by Nigeria’s normal economic strength, according to FBI analysts. According to one source, it was $200 million and $300 million per week. Both the U.S. and the Central Bank of Nigeria had feared that this amount of money would destabilize Nigeria’s financial system.