Monday, 8 February 2021

Crypto Dilemma: Banking Public, Regulators Differ On Cryptocurrencies


THERE seems to emerge a strong difference in opinions among stakeholders as the Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC) and the general public take positions on the acceptability of Cryptocurrencies as new, tradable assets.

This followed the instruction given by CBN to financial institutions to immediately close the accounts of persons or entities transacting in or operating cryptocurrency exchanges.

The CBN through a circular reference number BSD/DIR/GEN/LAB/14/001 on Friday, February 5, 2021, instructed financial institutions to immediately close the accounts of persons or entities transacting in or operating cryptocurrency exchanges, noting that such activities were prohibited.

The central bank also added that “breaches of this directive will attract severe regulatory sanctions.”

This has thrown up a lot of reactions with some analysts saying that the difference of opinion between the SEC, some operators of Crypto exchanges and the CBN reflects the innate dilemma that cryptocurrencies represent as a tradeable asset.

The Security and Exchange Commission of Nigeria in a recent statement officially recognized, categorized and defined crypto assets within the Nigerian jurisdiction.

It specifically, on September 14, 2020, released its Statement on Digital Assets and their Classification and Treatment pursuant to the powers conferred on it by the Investment and Securities Act 2007.

Before the release of the statement, regulators had warned citizens about the effects of dabbling into cryptocurrencies and advised that the general public should tread cautiously.

The statement went further to establish that a virtual instrument or asset will qualify as a Crypto asset if it is neither issued nor guaranteed by any jurisdiction, and fulfils certain functions if the community of users of the assets agree that the Crypto asset will serve the functions.

The Commission also highlighted the fact that Crypto assets are distinguished from fiat currency and e-money, meaning that there is a fundamental difference between Crypto assets and cryptocurrency under the Nigerian regulatory landscape.

The statement provided that Crypto assets will be treated as commodities if they are traded on a recognized investment exchange and issued as an investment pursuant to part E of the SEC Rules and Regulations 2013 and any other relevant rules that will be issued in the future.

From a monetary policy standpoint, regulators believe that cryptocurrencies make it difficult for central banks to perform their traditional functions of ensuring price stability and the promotion of economic growth. Analysts have highlighted some of the challenges involved with digital assets.

The gain in popularity of the use of cryptocurrencies largely undermines CBNs role in controlling money supply as central banks have no control over the supply of cryptocurrencies.

They argue that general acceptance of cryptocurrencies would affect the demand of existing money aggregates (M1, M2, and M3) which central banks use as instruments of monetary policy. In the same way, most Nigerians have taken to social media to express dissatisfaction with the latest development.

By this circular, the CBN is saying people can trade Bitcoin but not through government approved banks which are regulated by them and cryptocurrencies are not regulated so shouldn’t be on regulated platforms.

According to Adewale Adelodun, a public affairs analyst, Nigeria needs investment to provide jobs for millions of youths that she can’t empower.

“This kind of announcement will make innovative foreign investors run. Lagos did it with Gokada, now the CBN with Crypto. The consequences of actions like these will cripple our economy.

A commentator, Juel Konye, said the CBN has created room for people to turn attention to Paypal.

According to him, “No need to panic…simply create a PayPal account. Convert your crypto to fiat currency on your crypto exchange platform and transfer it to your PayPal account.”

Experts explain that Blockchain is not owned by any nation and Cryptocurrency is built on blockchain.

“With the ban they said, one cannot buy crypto with any Nigerian visa or debit card and you can’t withdraw crypto to any bank. If caught, your bank account will be blocked.”

“I see nothing else causing this backward CBN policy over Cryptocurrency other than obsession with control. Crypto decentralizes the ownership of money. They do not like that”.

“This nonsense has to be challenged in court because no clueless government official can just wake up one day and start making useless policies.

“Crypto currency is the modern way countries are gradually moving into digital cashless society,” the users wrote on their twitter handles.

Others believed that CBN can stop platforms from using the banking system for crypto transactions, but cannot do the same with Peer to Peer or decentralized finance (DeFi).

Some stakeholders are concerned that the banking public can decide to move their primary banking to a place like Benin Republic with the down side that Nigerian banks will lose capital base, lose credibility and they will still not hold anyone from foreign fiat transactions.

Reacting to the CBN order, Luno, a cryptocurrency trading platform, in a statement on Friday, urged investors not to panic as their funds will be safe.

The platform asked crypto traders to exercise patience, and that “there’s no need to take any action regarding your account at this time”.

In the statement, Luno noted that naira depositing methods are currently affected on its platform and that deposits via PayU and Flutterwave are unavailable until further notice.

“Luno will continue to operate as normal while we seek further clarity from the authorities. Some Naira deposit methods are currently affected, please check the status page for updates. Withdrawals are unaffected and will continue to be processed, but may take longer than usual. All customer funds are completely safe,” the statement read in part.

“There’s no need to take any action regarding your account at this time. We will update our customers on all incoming developments as soon as we receive further information, and certainly well in advance should withdrawals be affected,” the cryptocurrency platform explained.

Also, another cryptocurrency exchange platform, Binance, in a statement issued via its official Twitter page, said it is “monitoring the situation closely,” noting that funds on its platform remains safe, but that its Naira payment partners are suspending deposit services until further notice.

“Please note all your funds on remain safe and crypto services on will continue as normal. However, our NGN payment partners are suspending deposit services until further notice. From 7 PM (GMT*1) on Feb 5, 2021,” the statement reads.

“Binance will temporarily suspend NGN deposits through our fiat partner channels. Withdrawal services remain normal and will continue to be processed but might take slightly longer time than usual. We apologise for any inconvenience this may cause,” it concluded.

A financial analyst and senior banker, Olumide Balogun, said the CBN policy has been there for a while now and that the recent memo is just to reiterate its position on cryptocurrency.

He said the directive will have no effect on the financial institution since cryptocurrency had never been legally integrated into the country’s financial institutions.

“The Nigerian banking industry is one of the most resilient in the world, and it’s for a reason. The industry is regulated and every now and then, the regulators review happenings and make laws to protect the industry,” Premium Times quoted Mr Balogun as having said.

He said if Bitcoin is allowed, it will soon become a valuable asset, security, or collateral that banks can use to secure lending. He said that is when the “real manipulation” will begin.

He said Nigerians should not forget all the experiences of wonder banks, Mavrodi Mundial Money (MMM) Ponzi schemes, and the likes.

“In any case, the CBN has not prohibited trading in bitcoins in Nigeria, you can still do if you want. The CBN only prohibited the banks from facilitating the transactions,” Mr Balogun said.

“Again, the CBN is established by a sovereign nation with a recognized legal tender, the Naira. CBN is for now taking precautionary measures,” he added.

Iniobong Williams, a cryptocurrency enthusiast, said the people that will feel the brunt of the CBN policy are the cryptocurrency exchangers.

“People like Patricia, Binance, Luno, and all those big companies who are providing exchange services where you can pay naira to buy Bitcoin; so you will not have all those service providers anymore,”
 he said.

Mr Williams said a lot of people will not have the opportunity to invest in the market easily anymore, and that most of the players in the industry will have to stick to petty transactions or source their Bitcoins from other countries.

“It is going to be a bit difficult to buy cryptocurrency right now,” he said.

However, he said he does not think the CBN policy will have much effect on the cryptocurrency market.

“The cryptocurrency market is bigger than this,” he added.

Mr. Williams said “the only challenge we will have is that we will find it hard to invest more money or buy some more coins in the market at our own will. So, we may have to source for coins. But I don’t think it will have a significant effect on the market.”

Furthermore, it has been argued by central banks that cryptocurrencies are very volatile and are primarily driven by sentiments and have no fundamentals.

According to analysts from Proshare Research, most central banks globally have argued that it is their prerogative to protect consumers from exuberant speculation and asset volatility which could lead to large individual and corporate financial losses.

However, corporate finance professionals currently argue that cryptocurrencies are not ‘assets’ in the conventional sense, and accounting for them in company books would require deeper study.

A few local monetary policy analysts have noted that the CBN’s recent policy announcement would have little or no effect on crypto transactions in Nigeria. They argue that retail transactions could still be completed outside the regulated marketplace sighting the flow of peer-to-peer retail transactions involved when using digital currencies that do not need to go through official financial institutions. On the flip side, other analysts note that the policy announcement would hurt many businesses that use cryptocurrencies to transact international businesses given the scarcity of FX in the Nigerian forex market.

Although some of the fears of the Central Bank of Nigeria are valid, it has been argued that there are alternative strategies that the CBN could adopt in addressing the local cryptocurrency ecosystem rather than adopting an outright prohibition. Some analysts have suggested that the Securities and Exchange Commission (SEC) follow through with the process in regulating cryptocurrency activities. As of last year, the SEC announced its guidelines in regulating cryptocurrencies but no new information has been released since then. Both SEC and the CBN must harmonize their positions on cryptocurrencies in Nigeria.

Analysts from Pro share Research believe that there are a lot of unknowns and gaps that would need filling. According to them, everyone will have to be guided by the resolution of regulatory-operator-consumer/investor grids and rules that emerge from collective engagement.

“While the system works towards this, it is important to keep an eye on what has worked, what could go wrong, and how the domestic market should be strategically positioned in the global flow of digital/crypto transactions.

“In this process guidelines and not bans or prohibitions is always the preferred and more sustainable approach,” the analysts stated.

“The recent regulatory directive became necessary to protect the financial system and the generality of Nigerians (including the youth population) from the risks inherent in crypto assets transactions, which have escalated in recent times, with dire consequences for the integrity of the financial system and financial stability.

“Due to the fact that cryptocurrencies are largely speculative, anonymous and untraceable they are increasingly being used for money laundering, terrorism financing and other criminal activities.

“Small retail and unsophisticated investors also face high probability of loss due to the high volatility of the investments in recent times.

In light of these realities and analyses, the CBN has no comfort in cryptocurrencies at this time and will continue to do all within its regulatory powers to educate Nigerians to desist from its use and protect our financial system from activities of fraudsters and speculators” the apex bank stated in a statement signed by acting director of Corporate Communications, Osita Nwanisobi.

Cryptocurrencies it explained, are digital or virtual currencies issued by largely anonymous entities and secured by cryptography.

CBN noted that 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 transactions.

“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.”

In light of the fact that cryptocurrencies 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.”

CBN however, asserted that its actions were not in any way, shape or form inimical to the development of FinTech or a technology-driven payment system.

“To the contrary, the Nigerian payment system has evolved significantly over the last decade, leapfrogging many of its counterparts in emerging, frontier and advanced economies propelled by reforms driven by the CBN.”

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