The plan by the Nigerian government to earn $6 billion from the global blockchain market is now in jeopardy after the Central Bank of Nigeria (CBN) asked banks not to support crypto dealings and exchanges, as well as close accounts belonging to operators.
The National Information Technology and Development Agency (NITDA) had at a November 2020 meeting with stakeholders in Nigeria’s blockchain market said it planned to earn up to $6 billion from blockchain technology by 2030.
To kick off the plan, a Draft National Blockchain Adoption Strategy was presented by NITDA to stakeholders for review after the conference. Interestingly, the CBN and the Securities and Exchange Commission (SEC) are members of the committee. But it is important to add that while the SEC sent one of its executives to the event, the CBN did not show up at the meeting NITDA convened, according to several participants.
While the CBN letter released February 5 to the public left industry stakeholders including Stakeholders in Blockchain Association of Nigeria (SiBAN) in shock, they alleged that the financial regulator made no efforts to engage operators or give them prior notice of what they intended. A consequence of the action has been that Nigeria, considered a global leader in terms of crypto-currency transactions, has put foreign investors in panic mode.
“Nigeria is the trending topic in most international investors’ forums, because they are asking how did this happen to a country where crypto currency is thriving?” Senator Ihenyen, president of SiBN, told BusinessDay on Saturday.
Prior to the letter, Binance, a global exchange, was on the verge of kicking off a $1 million fund to developers in Africa that are building on the Binance Smart Chain. Nigerian developers are supposed to benefit from that fund. The CBN directive has since forced the company to suspend naira deposit on its platform, and it has not released further direction on the 8-week developers programme.
Kashifu Inuwa Abdullahi, director-general of NITDA, at the meeting in November, said adopting blockchain had become expedient because, “As a country, we do not want to be left behind as we want to benefit from the estimated $1.76 trillion technology, which is why the stakeholders’ engagement is necessary to brainstorm on the way forward.”
A PricewaterhouseCoopers (PwC) report in October 2020 projected blockchain applications to boost global domestic product (GDP) by $1.76 trillion, (1.4% of global GDP) by 2030.
PwC economists forecast a tipping point in 2025 if blockchain technologies are adopted at scale across the world, and expect blockchain applications to boost global gross domestic product (GDP) by $1.76 trillion, (1.4% of global GDP) by 2030.
Nigeria has the largest market in Africa for peer-to-peer transactions on the African continent, and is only second to the US in the world. Hence, it is a top destination for investors looking to invest in blockchain technology. It should be noted that blockchain certainly has more used cases than crypto currencies. However, its increasing adoption in other use cases is mostly due to its inseparable link with crypto currencies.
Blockchain is the under-laying technology that powers crypto currencies hence the association, but the technology’s transparency and security has seen growing adoption in a number of areas, much of which can be traced back to the development of the Ethereum blockchain.
However, the CBN’s move cemented its long-standing position on its non-acceptance of the digital currency.
While the policy by the CBN does not stop people from dealing in crypto currencies as clarified in a statement by Osita Nwanisobi, acting director, corporate communications, which reveals that the apex bank has no restrictions on crypto currencies, the policy, however, means that crypto traders cannot make any transactions with crypto currency through Nigeria’s banking system.
According to the CBN, its position on crypto currencies is not a peculiar one as among others, countries like China, Canada, Taiwan, Indonesia, Algeria, and Egypt have all placed a certain level of restrictions on financial institutions facilitating crypto currency transactions.
“Even famed investor Warren Buffett has called crypto currencies rat poison squared, a mirage,” and a gambling device,” the CBN said in a statement on Sunday.
According to the CBN, 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.”
The CBN explained in its ‘Response to Regulatory Directive on Cryptocurrencies’ circular that it is not surprising Andrew Bailey, the governor of the Bank of England, believes that crypto currencies are highly volatile because, Bitcoin, the best-known crypto currency, 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,” it said.
Some of the justifications provided by the central bank on its recent move to prevent financial institutions from allowing transaction that involves crypto exchanges include.
Lack of regulation
The apex bank said because crypto currencies 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 crypto currencies in Nigeria is 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 crypto currencies,” it said.
According to the apex bank, while central banks can issue digital currencies, crypto currencies are issued by unknown and unregulated entities.
The very name and nature of “crypto currencies” suggests that its patrons and users value anonymity, obscurity, and concealment, the central bank highlighted, asking why any entity would disguise its transactions if they were legal.
“It is based on this opacity that crypto currencies have become well-suited for conducting many illegal activities including money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion,” it said.
Explaining further, Nigeria’s financial industry regulator said, indeed, many banks and investors who place a high value on reputation have been turned off from crypto currencies because of the damaging effects of the widespread use of crypto currencies for illegal activities.
“The role of crypto currencies in the purchase of hard and illegal drugs on the darknet website called “Silk Road” is well known. They have also been recent reports that crypto currencies have been used to finance terror plots, further damaging its image as a legitimate means of exchange.”
One of the reasons the apex bank reiterated its position on crypto currency transaction on February 5, 2021, as the regulator had earlier forbidden financial institutions to desist from transacting in/and with entities dealing in crypto currencies is because it is more of a speculative asset than a currency.
“Repeated and recent evidence now suggests that some crypto currencies have become more widely used as speculative assets rather than as means of payment, thus explaining the significant volatility and variability in their prices,” it said.
Trying to explain its point, the apex bank said, “because the total number of Bitcoins that would ever be issued is fixed (only 21m will ever be created), new issuances are predetermined at a gradually decelerating pace.”
This limited supply, according to the CBN, has created a perverse incentive that encourages users to stockpile them in the hope that their prices rise.
“Unfortunately, with a conglomeration of desperate, disparate, and unregulated actors comes unprecedented price volatility that has threatened many sophisticated financial systems,” it noted.
There has been a few use cases by agencies of the Nigerian government to embrace blockchain technology. In 2018, a year after the CBN warned banks and other financial institutions never to have anything to do with cryptocurrencies, the Nigeria Customs Service announced it has adopted the Oracle blockchain technology.
“We used Oracle’s blockchain to build a trusted platform for the automation of Customs Excise Trade business processes and procedures,” Aber T Benjamin, Comptroller Generla Modernisation, Nigeri Customs Service said at the launch of the service. “Using this technology, we found the entire busines environment can be migrated to blockchain to automate processes and create transparency and predictability. Once the transition to blockchain is completed, NCS expects revenue growth increase of about 50 percent. This technology helps our organisation to build global trust for Nigerian businesses through irrefutable data on goods manufactured in the country.”
The proposed adoption framework by NITDA includes an initiative to create a legal framework for governing the crypto space. Thus the government is projecting that cryptocurrencies contribute to the expected $6 billion from blockchain adoption. The possibility of cryptocurrencies playing its part in the digital economy of the government now seems a fairytale should the CBN directive be allowed to stand.
“Change is always resisted. In the US, private ownership of Gold and Silver for trading and exchange was once illegal. This was to force the usage of paper currency issued by the Fed. In a world of millennials, digital currency is inevitable,” Kalu Ajah, a personal financial expert said.
A bigger concern for industry leaders like Ihenyen who is also a legal expert is that by ordering banks to not avail the cryptocurrency industry their services the CBN is indirectly denying financial services to an entire industry.
“In 2021 we expected that the CBN will review its position based on how cryptocurrency has evolved in the world and the need to expand financial inclusion and attract foreign direct investment. What do we have? The exchanges are now denied banking services,” he said. “The question is can the CBN deny a whole industry banking services. What the letter did is to deny an entire industry access to financial services. I do not think the CBN has the power to deny banking services to an industry that has not been declared illegal in any law in this country. It is the national assembly that has such powers and they are yet to come out with to say that cryptocurrencies are illegal.”
He noted further that while the CBN action is not representative of the government’s aspirations for blockchain, it will ensure investors interested in the blockchain space in Nigeria will look elsewhere. This does not bode wel for Nigeria’s foreign direct investment and pursuit of new sources of foreign exchange.
“The CBN needs to review its position on this matter. Nigeria is going to be suffering from lack of investments coming into the country and the poverty rate is already high. As an industry we are going to engage the CBN we deserve it from them. This is the time not to fight but to engage. As an industry, we ask that the CBN should review its position. It should not have a lazy approach towards innovation instead of banning. It can approach this innovation and seek to understand it,” he said.