The Central Bank of Nigeria (CBN) has responded to the condemnations that followed the instruction to Deposit Money Banks (DMBs) to refrain from transactions with cryptocurrencies.

Refrain from transactions with cryptocurrencies.

In a statement on Sunday, Osita Nwanisobi, Acting Director, Corporate Communications, clarified that the CBN circular dated February 5, 2021 does not impose any new restrictions on cryptocurrencies.

He recalled that all banks in the country were previously prohibited from not using, holding, trading and/or dealing in cryptocurrencies by the CBN circular dated January 12, 2017.

Nwanisobi noted that the CBN’s position on cryptocurrencies was not an outlier as many countries, central banks, international financial institutions and respected investors and economists had also warned against their use.

He said that China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabia, Jordan, Iran, Bangladesh, Nepal, and Cambodia all
have all imposed some level of restrictions on financial institutions facilitating cryptocurrency transactions.

CBN said that in China, cryptocurrencies are completely banned and all exchanges are also closed.

Nwanisobi said even famed investor Warren Buffett has called cryptocurrencies “rat poison squared,” a “mirage” and a “gambling device.”

“Mr. Buffett believes they are a “gambling device” because they are valuable primarily because the person who buys them does so not as a means of payment, but in the hope that they can eventually sell them for even more than they paid.

During an online forum hosted by the World Economic Forum in Davos a 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, stating that this flaw makes it impossible to use them as a permanent means of payment.

“It is not surprising that he takes this position, because Bitcoin, the best-known cryptocurrency, reached a record high of $42,000 per unit on Jan. 8, 2021, and fell to $28,800 about two weeks later. That’s far more volatility than normal currencies.”

CBN listed the reasons for its latest policy admonition.

Nwanisobi said firstly, given the fact that they are issued by unregulated and unlicensed entities, their use in Nigeria violates the CBN’s key mandates as enshrined in the CBN Act (2007) as an issuer of legal tender in Nigeria. In fact, the use of cryptocurrencies in Nigeria is a direct violation of the existing law.

He highlighted the critical difference between a digital currency issued by the central bank and cryptocurrencies, adding that, as the names suggest, while central banks can issue digital currencies, cryptocurrencies are issued by unknown and unregulated entities.

“Second, the very name and nature of “cryptocurrencies” suggests that their patrons and users value anonymity, obscurity, and obfuscation,” he said. The question to ask, therefore, is why any entity would obfuscate its transactions if they were legal. Because of this opacity, cryptocurrencies are well-suited for conducting many illegal activities, such as money laundering, terrorist financing, small arms and light weapons purchases, and tax evasion.

“Indeed, many banks and investors who place great importance on reputation have turned away from cryptocurrencies because of the harmful effects of the widespread use of cryptocurrencies for illegal activities. In fact, the role of cryptocurrencies in buying hard and illegal drugs is well known on the darknet website called “Silk Road.” Recently, there have also been reports that cryptocurrencies have been used to fund terrorist plots, further damaging their image as a legitimate medium of exchange.

“Moreover, repeated and more recent evidence now suggests that some cryptocurrencies are used as speculative assets rather than as a means of payment, which explains the significant volatility and variability in their prices. Because the total number of Bitcoins ever issued is fixed (only 21 million are ever created), new issuances are predetermined at a gradually slowing pace.

“This limited supply has created a perverse incentive that encourages users to hoard them in the hope that their prices will rise. Unfortunately, with a conglomerate of desperate, disparate and unregulated players comes unprecedented price volatility that has threatened many sophisticated financial systems. In fact, the price of Ether, one of the world’s largest cryptocurrencies, fell from $320 to $0.10 in June 2017. The price of Bitcoins has also suffered similar volatility.

“Because cryptocurrencies, unlike fiat money, which comes with the full trust of a country or central bank, have no intrinsic value and do not generate a return on their own. When one buys a share of, say, a conglomerate on the Nigerian Stock Exchange, its price reflects the activity and production of that conglomerate and the value people place on its goods and/or services. This price may increase if the conglomerate produces better goods/services and is likely to gain a larger market share.

“The opposite would be true if the conglomerate does not innovate to improve the quality of its goods/services. In other words, the price of this stock reflects market fundamentals. In contrast, cryptocurrencies do not have fundamentals and would never have fundamentals. Investors only buy in the hope that usage and adoption will increase, driving up demand and price, but as new versions of cryptocurrencies come to market with new mathematical models, an infinite supply may one day push the price to zero.

The CBN stressed that its actions in no way hinder the development of FinTech or a technology-driven payment system.

On the contrary, the apex bank said Nigeria’s payment system has evolved significantly over the past decade, outpacing many of its counterparts in emerging, frontier and advanced economies, driven by reforms pushed by the CBN.

The statement said this can be seen in the diversity of participants, products, channels and cutting-edge technologies in the payments system.

The CBN said the system has been validated by the astronomical growth in the volume/value of transactions and the fact that Nigeria is a preferred investment destination for international financial technology companies due to the CBN’s policies that have created a favourable investment environment in the payments system.