CBN gives reasons for ban on banks dealing with Cryptocurrencies

THE Central Bank of Nigeria has given its reasons for ordering Deposit Money Banks (DMBs) and other financial institutions to distance themselves from transactions with entities using cryptocurrencies.

In a press statement released on Sunday, February 7, the CBN said it needed to inform the general public of the reasons behind its recent directive on cryptocurrencies.

The statement began by explaining the operation of cryptocurrencies and its introduction:

“Cryptography is a method of encrypting and hiding codes that prevent oversight, accountability, and regulation. While there are a number of cryptocurrencies now in circulation, Bitcoin was the first to be introduced in 2009, and now accounts for about 68 percent of all cryptocurrencies.”

It continued, “As regards our recent policy pronouncement, it is important to clarify that the CBN circular of February 5, 2021, did not place any new restrictions on cryptocurrencies, given that all banks in the country had earlier been forbidden, through CBN’s circular dated January 12, 2017, not to use, hold, trade and/or transact in cryptocurrencies,” it stated.

The apex bank further said the ban on cryptocurrencies was not peculiar with Nigeria, as some related restrictions on financial institutions facilitating crypto transactions are existing in other parts of the world.

“They have all made similar pronouncements based on the significant risks that transacting in cryptocurrencies portend risk of loss of investments, money laundering, terrorism financing, illicit fund flows, and criminal activities. China, Canada, Taiwan, Indonesia, Algeria, Egypt, Morocco, Bolivia, Kyrgyzstan, Ecuador, Saudi Arabia, Jordan, Iran, Bangladesh, Nepal, and Cambodia have all placed a certain level of restrictions on financial institutions facilitating cryptocurrency transactions.

“This is far greater volatility than is found with normal currencies. Let us now turn to some of the justifications for CBN’s recent policy reminder. A perfunctory reflection on the definition of cryptocurrencies can already reveal several problems.

“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.”

It went on to say that: “…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 have 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.”

The CBN reiterated its commitment to protect investors from a high probability of losses which is open to dealers of cryptocurrency, stating that it would continue to educate Nigerians against its usage.

“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 a 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 their use and protect our financial system from the activities of fraudsters and speculators.”

It can be recalled that the CBN had on Friday, February 5, instructed financial institutions operating in the country to close accounts transacting with cryptocurrencies as reported by NaijaTimes.

The full statement can be accessed here.