Since the issuance of the circular by the Central Bank of Nigeria (CBN) dated February 5, 2021 where the apex bank of Africa’s largest economy notified and warned and has Deposit Money Banks, Non-Financial Institutions, and other financial institutions against having any transactions in crypto or facilitating payments for crypto exchanges. In addition, the CBN instructed the financial institutions to immediately close the accounts of such persons or entities transacting in or operating cryptocurrency exchanges.
Since the issuance of the circular, I have been inundated with many calls, messages and inquiries from stakeholders on my opinion on the issue. Though I have patiently communicated my position on the issue in some quotas, I decided to do a rejoinder to a statement released by the CBN and signed by its Acting Director, Corporate Communications Sunday, Osita Nwanisobi. This is necessary in addressing some of the misconceptions the statements peddled as well as to better put things in perspective.
In the statement, Nwanisobi had noted that the CBN’s position on cryptocurrencies is not an outlier as many countries, central banks, international financial institutions, and distinguished investors and economists have also warned against the use of crypto currency. He went on to say 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. In fact, CBN said in China, cryptocurrencies are completely banned and all exchanges closed as well.
Well, this is not entirely true. What the CBN did was to choose a narrative that suits its argument. What China did was to regulate initial currency offerings (ICOs) in a manner similar to their regulation of initial public offerings (IPOs) of equities. Today, China is the undisputed world leader in Bitcoin mining. Chinese mining pools control more than 60% of the Bitcoin network’s collective ‘hashrate.’ Hashrate is a way to determine the relative safety of a crypto-asset. It is the representative of the combined power of mining computers connected to the network. I need to explain here that mining in cryptocurrency is the process where new bitcoin is issued. China doesn’t only mine, but manufacture equipment for mining. China has to highest amount of bitcoin mining farms due to its cheap cost of electricity. Not only does China manufacture most of the world’s mining equipment, but massive mining farms are located there to take advantage of extremely cheap electricity prices. This same China Nwanisobi wrote about ranks 65%, Russian 7%, Kazakhstan 6%, Malaysia 4% Iran 4% and Canada which he mentioned, 1%.
Beyond crypto currency, this China in question is also leading the way for the Central Bank of Digital Currency (CBDC), something our own CBN should be considering. Its digital yuan has stated testing in major state like Guangzhou, Shenzhen and Beijing. About last month one of the four biggest state-owned bank in Shenzhen has began the testing of digital yuan on its ATM’s. In fact, China is preparing to use its digital currency in the 2022 winter Olympics in Beijing.
The European Union (EU) through the Deutshe Bank is also in the process of stating its digital currency. Ealier before the Covid 19 first phase lockdown the U.S senate is looking at modalities on issuing its Digital dollar since china is at the verge of dominance in the space. Bank of Korea (BOK) is also planing on launching its digital currency project which took place last year October. Ukraine Reseve Bank is also not left out the it’s CBDC development. The Reserve bank of Australia is also planning on releasing its E-AUD
Nwabinoso also quoted Andrew Bailey, the Governor of the Bank of England, to have 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. This again is taken from a perspective that does not reflect the full image here. However volatile it may be, the reason bitcoin is perceived as a store of value is simple: its money supply doesn’t grow quickly and, in some cases, at all. Bitcoin money supply growth is determined by mining output. Cryptocurrencies such as bitcoin have very specific processes for expanding their money supply – mining by technology with strict limits. For bitcoin, most of the “mining” activity happens in China, as earlier stated. The strict money supply rules mean that if demand grows, as it has, the price can soar, which it has. Some observers, such as economist and Nobel laureate Robert Shiller, have suggested that the rapid rise in bitcoin prices resembled a financial bubble.
Bitcoin’s mining supply grew at an infinite pace in 2009 when the currency burst into existence. As at 2017, it slowed to around 4.2% and then dropped to below 2% per year after 2020, before its recent rise. Sometime around 2140, the last new bitcoin ever will be mined, bringing the total to 21 million. The bitcoin market anticipates this, hence the extraordinary bull market in the digital currency.
Nwanisobi even claimed that famed investor Warren Buffett has called cryptocurrencies “rat poison squared,” a “mirage,” and a “gambling device.” He added, “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.” But while Nwanisobi and his team at the corporate communication department of the CBN were busy looking for quotes from prominent people to justify CBN’s retrogressive action, Elon Musk’s Tesla (TSLA) made a purchase in value of $1.5 billion in bitcoin as a treasury reserve asset. Additionally, the company is putting modalities in place to allow people to pay for Teslas with bitcoin.
Our dear CBN opined that the very name and nature of cryptocurrencies suggests that its patrons and users value anonymity, obscurity, and concealment. It added that it is on the basis of this opacity that cryptocurrencies have become well-suited for conducting many illegal activities including money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion. “Indeed, many banks and investors who place a high value on reputation have been turned off from cryptocurrencies because of the damaging effects of the widespread use of cryptocurrencies for illegal activities,” the statement read in part.
Now, banning the use of cryptocurrencies for this reason is like killing a mosquito with a gun when other milder alternatives abound While not denying that the demand for bitcoin has a reputation of being used for money laundering, tax evasion and avoidance of regulated cross-border money flows based on the motivation is that the transactions are extremely hard to trace, yet they offer considerable security. But, the reputation of cryptocurrencies being used for criminal purposes may not be entirely fair. After all, fiat currency cash is used by criminal organizations and tax evaders the world over since time immemorial. Kidnappers have always collected fiat currencies and robbers have always done so too. The ban of cryptocurrency trading will neither reduce or stop it.
In other climes, regulators are moving to bring cryptocurrency platforms into the mainstream. For example, in July 2017, the Commodities Futures Trading Commission (CFTC)in the US approved a new Derivatives Clearing Organization (DCO) which was also granted an order of registration as a Swap Execution Facility (SEF). Under the order, the new DCO was authorized to provide clearing services for fully-collateralized digital currency swaps (i.e., Bitcoins, etc.). Several other countries are also onboard with encouraging cryptocurrencies for legal commerce, including Japan and South Korea. Some of the cryptocurrency platforms are starting to perform active user due diligence in terms of Know Your Client (KYC) and Anti-Money Laundering (AML), putting them in a position to successfully meet a variety of regulatory tests and become more mainstream with their business models.
Additionally, the use of Chainalysis, a software used to track illicit activity on an exchange is widely in use in other climes. Founded by Michael Gronager, Jonathan Levin and Jan Moller in 2014, Chainalysis provides cryptocurrency exchanges, international law enforcement agencies and other clients with blockchain transaction analysis software to help them comply with regulations, assess risk and identify illicit activity. This is to show the raised concern by the CBN is a non-issue.
Chainalysis offers both an investigation software scraping the blockchain for the movements of funds, and a know-your-transaction (KYT) kit intended for businesses to reduce regulatory risks by flagging cryptos that were used in crime or were hacked. The investigative software platform provides better compliance and enables financial institutions, law enforcement agencies and businesses to identify illicit activity and bad actors related to cryptocurrency. It is term “The International Police for the Crypto market”. Now, the main crypto exchanges in Nigeria like Luno and Binance are using this software to track the activities of criminals on their platform.
Another perpective to the issue raised by the CBN was addressed by a Twitter user @Ghenhiskhan, who lucidly captures the implication and further perspective of the action of CBN on the cryptocurrency space:
Before the Ban… Binance Corp had several accounts with the commercial banks in Nigeria. Binance was the foremost Crypto Exchange in Nigeria. The modus operandi was very similar to that of the Stock Exchange in any market to buy and sell Crypto within Nigeria, folks operating mostly Nigerian accounts would pay directly from their accounts to Binance. Binance only acts as the Central Bank of Crypto in Nigeria!
Binance would credit the wallets of the seller or buyer and the Crypto equivalent would be transferred to the beneficiary. Now this is the clincher: 1. The commercial banks were raking in over 200 billion Naira per annum just on transaction costs 2. Taxes on those takings at 25% were like 50 billion to the government. Aside the levies from the CBN. 3. Payments to Binance were trackable by the authorities and as such, transactions from fraudulent sources could easily be found. All traders were known to the government (or so it ought to be if someone was doing his job).
Immediately after the ban, the Binance Open Exchange in Nigeria was rendered inactive. And trading could no longer be done in the open! The government lost the revenues from the trading, and of course, the banks lost too…or did they? We had been wondering why the commercial banks weren’t complaining about the ban. Then a brilliant middle-age analyst presented a position! I was aghast…amused… horrified and then delighted!
Binance Exchange is well and alive…but no longer with any Operating Accounts. The Exchange and the Banks have actually INCREASED revenues in the past few days…how could that be? P2P 7/
“The Crypto transactions have gone P2P. One finds a coin of interest, sends a ‘buy’ notification, Binance Exchange finds a ‘sell’ notification, funds and coins go into a virtual Binance escrow account, verifications are automatically carried out, funds are delivered to the seller and coins to the buyer directly! And the government is kept out of this transaction!
“With this, the government has absolutely LOST controls at all levels! Binance doesn’t pay taxes any more as they have been banned out of existence, and the commercial banks don’t have to pay taxes on the transactions because the exchange didn’t take place, technically!
“And you know what? All the hidden funds waiting to be laundered are coming out now to P2P. With the silly ban, the government gave the nod for stolen finds to be laundered! The only entity that lost in this “ban” is the federal government of Nigeria! The loss of tax revenue is beyond stupid for a country in dire need of funds!
“Looking deeper into the ban and we suspect something. “The ban memo might have been instigated by some powerful forces that wanted to get their stolen funds laundered; they might have deceived the government to place the ban to momentarily lose control and launder the funds”
“So if you really looked deeper, the ban might be a play for something far more criminal…but of course, the government has never claimed to be that smart, have they? They simply fell for it…
“…and Crypto goes on unencumbered! See?”