Nigeria’s cryptocurrency problem has rocked the central bank

When in early April, the Central Bank of Nigeria (CBN) penalized six major banks a total of 1.3 billion naira ($3.1 million) for breaching its directive against facilitating cryptocurrency transactions, it was the latest sign that the country’s crypto problem will not be easily solved. go away.

Access Bank received the largest fine of N500 million, followed by FCMB with N400 million and Stanbic IBTC with N200 million. United Bank for Africa and Wema Bank each received N100 million and Fidelity Bank N14.28 million.

With the government ban, the onus is on banks to detect accounts used to trade cryptocurrencies.

The CBN says that with the data provided, banks should be able to identify individuals suspected of trading cryptocurrencies, including unusual trading volumes for accounts that do not belong to licensed financial institutions.

By fining banks, the regulator holds them accountable when transactions turn out to be cryptocurrency trading. For example, Stanbic IBTC CEO Wole Adeniyi explained in an investor call that the bank applied the stipulated measures but failed to detect two accounts. These accounts were discovered by the regulator itself using more advanced surveillance technology, he said.

Crypto Mayhem

The roots of the controversy date back to 2016, a year after President Muhammadu Buhari was elected to his first term, when Nigeria suffered its first economic recession in 25 years. This is a contraction triggered by the fall in the price of oil, Nigeria’s main export product.

With the economy plummeting and people seeing their savings eroded by the pincer effect of inflation and devaluation, many have sought the safety of digital currencies, stocks and offshore bonds.

The tough economic climate led Tokunbo Ademoye, a 30-year-old data analyst with a day job at a Lagos-based research firm, to become an online cryptocurrency and securities trader.

“My decision to trade cryptos was born out of necessity,” he recalls. “In 2016, I lost 80% of the value of my savings due to inflation and the devaluation of the naira. I had to find ways to prevent this from happening again.

By 2019, Nigeria had become Africa’s largest cryptocurrency market and its citizens the largest holders of digital currencies outside the United States. For the country’s monetary authorities, this has become a source of concern, as the decision to acquire offshore assets has become another source of pressure on exchange rates at a time when the CBN, led by Godwin Emefiele, s strove to curb the demand for foreign currency.

Things got worse with the coronavirus pandemic in 2020, which was accompanied by another oil price shock, causing a second recession in four years. Even more Nigerians were now turning to digital currencies and other offshore investments, adding to the demand for foreign currencies and forcing the naira to fall even further.

In February last year, the CBN struck down by prohibiting banks from facilitating digital currency trading. It has also cracked down on some firms allowing offshore stock and bond trading, accusing them of manipulating the exchange rate.

Defending his decision before lawmakers, Emefiele cited security and money laundering concerns. He also dismissed cryptocurrencies as random computer codes “created out of thin air” favored as a medium of exchange by people who don’t want to leave a trace.

Threat to monetary policy

The latest slap on the wrist from banks adds to growing signs that Nigeria’s crypto problem isn’t going away anytime soon. But as much as the banks are always tempted to do crypto, the watchdog is just as determined to catch them.

“For the central bank, it’s more like a fear of losing control,” said Ebuka Obiora, a Lagos-based lawyer who has represented clients whose accounts have been stopped for digital currency transactions. “Nigerians’ holdings of bitcoin and other digital coins had become a threat to monetary policy and the regulator had to do something about it.”

Authorities also appeared alarmed when youths – who led nationwide anti-government protests in October 2020 in response to brutal and corrupt police – made bitcoin contributions to support protest marches after the CBN allegedly froze the bank accounts of the alleged organizers.

Efforts to suppress cryptocurrency trading have so far failed. What has emerged instead is a crypto divide that has mostly young blockchain technology adopters pitted against older policymakers such as 60-year-old Emefiele and 78-year-old President Buhari.

In an effort to avoid the impact of cryptocurrencies on the financial system, the CBN was among the first in the world to introduce a digital version of the local currency, eNaira, in October last year.

Like its paper variant, it offers no safe haven for savings or investments for mostly younger investors in crypto assets. To put the demographics into perspective, half of Nigeria’s current population of over 200 million is under the age of 19 and over 65% is under the age of 35.

Avoid restrictions

After an initial lull following the ban, many enthusiasts quickly found other ways to get around the restrictions. Many have embraced peer-to-peer trading, prompting many exchanges to make adjustments to accommodate them.

One strategy that became popular was the use of an escrow system to enable payments, while another was the use of gift cards or payment cards issued internationally by companies such as than Payoneer and Skrill. Traders have also set up chat rooms on platforms such as Telegram where tactics and strategies are exchanged.

Between CBN’s ban in February last year and the end of the year, Nigerians on peer-to-peer exchange Paxful traded $1.5 billion worth of cryptocurrencies, according to Useful Tulips , a data company that tracks crypto usage. On the Binance exchange, reputed to be the largest in the world, Nigerians are responsible for the biggest peer-to-peer transactions.

A report released in April by leading global cryptocurrency exchange KuCoin found that in Nigeria, at least 33.4 million citizens between the ages of 18 and 60 had invested in digital assets in the previous six months. Fifty-two percent of them were under 30 years old. The majority of all investors allocated more than 50% of their assets to the crypto world and 50% of investors were women.

“Such adoption rates can be attributed to the fact that the Nigerian currency has depreciated by more than 209% over the past six years,” the report said.

This is a situation that has aggravated the dilemma for the monetary authorities. While the CBN was inclined to raise its baton to bring people to heel, Vice President Yemi Osinbajo urged caution in a speech earlier this year, advising that “we must act with knowledge” instead of the fear.

“The cryptocurrencies of the coming years will challenge traditional banking, including the reserve bank, in ways we cannot yet imagine, so we must prepare for this seismic change,” he said. he declares.

For many cryptocurrency investors, Emefiele’s CBN has chosen to wage an unwinnable war. The trend for investors now is to diversify into crypto derivatives which can be liquidated into so-called stablecoins such as Tether. Others have plunged into new emerging asset classes such as non-fungible tokens (NFTs) and decentralized finance (DeFi), making it even more difficult for authorities to dislodge them.

Ademoye, the part-time data analyst and cryptocurrency trader, prefers to keep the majority of his savings in digital assets and only converts to local currency for specific needs. He sees no reason to use the naira as a store of value for the foreseeable future. “Only a vastly improved economy will make me do that,” Ademoye said. “And that includes low inflation as well as a stable and predictable naira.”

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