The Central Bank of Nigeria (CBN) has reacted to criticism regarding the directive to Deposit Money Banks to ban transactions that make use of cryptocurrency.
In a statement on Sunday, Osita Nwanisobi, Acting Director, Corporate Communications, clarified that the CBN circular of February 5, 2021, did not place any new restrictions on cryptocurrencies.
He recalled that all banks in the country had earlier been forbidden, through an earlier CBN circular dated January 12, 2017, not to use, hold, trade, and/or transact in cryptocurrencies.
Nwanisobi noted that the CBN’s position on cryptocurrencies is not strange or unique as many countries, central banks, international financial institutions, and investors and economists have also warned against its use.
He said countries like China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabia, Jordan, Iran, Bangladesh, Nepal, and Cambodia have all placed certain restrictions on financial institutions facilitating cryptocurrency transactions.
CBN said in China, cryptocurrencies are completely banned and all exchanges closed as well.
Nwanisobi also quoted famed investor Warren Buffet’s critical view of cryptocurrencies. Warren Buffett is known to be “anti-crypto”, and has called the digital currency “rat poison squared,” a “mirage,” and a “gambling device.”
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Mr. Buffett believes it is a “gambling device” given that they are only valuable because the person buying it does so, not as a means of payment; but in the hope that they can sell it for a profit on what they previously paid for it.
During an online forum hosted by the Davos-based World Economic Forum 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 of the currency. He then explained that. this flaw makes it impossible for them to be used as a lasting means of payment.
“It is not surprising he would take that position because, Bitcoin, the best-known cryptocurrency, 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.”
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Nwanisobi said that in light of the fact that they 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 is a direct contravention of existing law.
He highlighted that cryptocurrencies are issued by unknown and unregulated entities.
“The very name and nature of ‘cryptocurrencies’ suggests that its patrons and users value anonymity, obscurity, and concealment. The question that one may need to ask therefore is, why any entity would disguise its transactions if they were legal. 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.”, he said.
“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. In fact, the role of cryptocurrencies 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 cryptocurrencies have been used to finance terror plots, further damaging its image as a legitimate means of exchange.
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“More also, repeated and recent evidence now suggests that some cryptocurrencies have become more widely used as speculative assets rather than as means of payment, thus explaining the significant volatility and variability in their prices. Because the total number of Bitcoins that would ever be issued is fixed (only 21 million will ever be created), new issuances are predetermined at a gradually decelerating pace.
“This limited supply 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. In fact, the price of ether, one of the largest cryptocurrencies in the world, fell from US$320 to US$0.10 in June 2017. The price of Bitcoins has also suffered similar volatilities.
“Given that unlike Fiat money, which is accompanied by full faith and comfort of a country or Central Bank, cryptocurrencies do not have any intrinsic value and do not generate returns by themselves. When one buys a stock, say of a conglomerate in the Nigeria Stock Exchange, its price reflects the activity and production of that conglomerate and the value people place on their goods and/or services. This price may rise as the conglomerate produces better goods/services and probably gains greater market share.
“The reverse would be true if the conglomerate does not innovate to improve the quality of its goods/services. In other words, the price of that stock reflects market fundamentals. In contrast, cryptocurrencies do not have fundamentals and would never have fundamentals. Investors only buy in the hope that its use and acceptability will rise, thereby pushing up its demand and price. But since new versions of cryptocurrencies come on stream with new mathematical models, an infinite supply may someday crash the price to zero.
CBN stressed that its actions are not in any way, shape, or form inimical to the development of FinTech or a technology-driven payment system. The apex bank said to the contrary, the Nigerian payment system has evolved significantly over the last decade, leapfrogging many of its counterparts in advanced economies due to the sector being propelled by reforms driven by the CBN.
CBN has also said the current system is validated by the astronomical growth of volume/value of transactions and the fact that Nigeria is an investment destination of choice for international financial technology companies.
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