Friday’s circular from the Central Bank of Nigeria on cryptocurrency transactions has sent shockwaves through the growing digital currency market in the country.
The CBN ordered deposit money banks and other financial institutions in the country to close all cryptocurrency accounts within their systems with immediate effect.
It noted that it had in January cautioned banks, other financial institutions and the general public on the risk associated with transactions in cryptocurrency.
The central bank said, “Further to earlier regulatory directives on the subject, the bank hereby wishes to remind regulated institutions that dealing with cryptocurrencies or facilitating payments for cryptocurrency exchanges is prohibited.
“Accordingly, all DMBs, NBFIs, and OFIs are directed to identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately.”
The CBN said breach of the directive would attract severe regulatory sanctions.
A cryptocurrency is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions, according to nerdwallet.com.
Cryptocurrencies work using a technology called blockchain, a decentralised technology spread across many computers that manages and records transactions.
Bitcoin, the first and most popular cryptocurrency, staged a sudden return to the spotlight last year as the value of the digital currency skyrocketed as investors sought to hedge their bets against the volatility of the equity markets amid the COVID-19 pandemic.
In 2017, Bitcoin also had a bull run, which saw the price soar towards the end of the year to $1,000 for the first time in three years but crashed in early 2018.
The prohibition of cryptocurrency transactions in Nigeria comes exactly one month after the United Kingdom’s ban on the sale of cryptocurrency derivatives and exchange-traded came into effect.
In October last year, the UK’s Financial Conduct Authority published new rules that outlawed the sale of cryptocurrency derivatives and exchange-traded notes to retail consumers in the country.
The British regulator said it considered the products to be ill-suited for retail consumers, arguing that they cannot be reliably valued by retail consumers due to a “prevalence of market abuse and financial crime.”
The FCA also cited the “inherent nature of the underlying assets,” which makes any accurate valuation “unreliable”, as well as the “extreme volatility” of cryptocurrency prices.
“We think these issues will cause retail consumers harm from sudden and unexpected losses if they invest in these products. We estimate a ban could reduce harm by £19m to £101m a year for retail investors,” it said.
The FCA’s ban went into effect on January 6, 2021 amid criticism by some in the cryptocurrency industry who described the new regulation as a setback.
In Nigeria, widespread outcry has greeted the CBN’s ban on cryptocurrency transactions.
The country has seen a growing demand for cryptocurrencies in recent months, making it one of the fastest-growing markets in the world.
Paxful, a global peer-to-peer crypto marketplace, said in December that it experienced a 25 per cent increase in global transactions from October 2019 to October 2020 since its five-year launch, describing Nigeria’s crypto market as thriving.
It said a large proportion of the transactions was attributed to the African market, with Nigeria leading the pack.
It noted that the crypto business had seen immense growth and investor interest since the outbreak of COVID-19.
Paxful said then that it had over 620,000 active Nigerian users on its platform, adding that Nigerians traded around $15m worth of Bitcoin in April alone, making the country the leader in the African region.
“Nigeria, Ghana, Kenya, and South Africa are our main markets in Africa. There is no question that emerging markets are the future of the crypto economy. That has been clear to us for some time, as we see on a daily basis how tech-savvy Africans are using Bitcoin to invest, trade, send money abroad and accumulate wealth,” its Chief Executive Officer and Co-founder, Ray Youssef, said.
Nigeria led Africa in peer-to-peer trading in 2020, posting monthly volumes of over $66m in 2020, followed by Ghana, Kenya, and South Africa, according to Paxful.
But today’s directive from the CBN to banks and other financial institutions looks set to put the brakes on the growth of the crypto industry in Africa’s biggest economy.
“Seeing that Nigeria is the second biggest country in cryptocurrency business, the government and CBN are just pained at the high figures running through crypto exchange platforms. They want their own share of the cake and this of course is the way to go about it,” a marketing and strategic communication experts, Wale Adetona, said.
A software and blockchain engineer, Tosin Olugbenga, said the CBN should allow a roundtable discussion on how Nigeria’s economy could benefit from the global interest in decentralised cryptocurrency.
“Let’s enlighten ourselves on how Nigeria can position herself for the global adoption of decentralised finance,” he added.
A human rights activist, Segun Awosanya, has described the CBN’s move as ill-advised.
“This is yet another developing horror story in our dying society. The government, through the CBN, is now shutting down cryptocurrency in a desperate move to block any ray of hope for the huge youth demographic they have largely failed. This won’t end well. This is ill-advised,” he said.
Reacting to the development, the founder and Chief Executive Officer of cryptocurrency exchange, Binance, Changpeng Zhao, said on his official Twitter handle that the exchange had disabled deposits to prevent more Nigerian currency, naira, coming in.
He said, “Received notice from our channel partners that NGN deposits and withdrawals will be affected.
“Still confirming details on when/how. Please withdraw your NGN as early as possible to avoid potential channel issues. Will share more details as they become available.”
As reactions continue to trail the order to close all cryptocurrency accounts, the jury is still out on whether the CBN action will ring the death knell for the country’s crypto market.