The Central Bank of Nigeria (CBN)’s proposed digital currency may help to silence critics of the apex bank’s tough stance on cryptocurrencies, writes TONY CHUKWUNYEM
In early February this year, the Central Bank of Nigeria (CBN) ruffled feathers in some quarters when it issued a circular directing deposit money banks (DMBs), non-bank financial institutions (NBFIs) and other financial institutions (OFIs) to identify individuals and firms transacting in or operating crypto currency exchanges within their systems and ensure that the accounts are immediately closed. The move was met with swift criticism in some quarters, with several commentators saying that it could worsen unemployment and lower investor confidence. They argued that the apex bank had not considered the number of Nigerians, as well as small and medium enterprises (SMEs) that would lose substantial income and be put out of business as a result of the pronouncement. In fact, in response to the criticism, CBN had to issue a press release, in which it pointed out that it was not placing any new restrictions on cryptocurrencies, given that all DMBs in the country had earlier been forbidden, through two earlier circulars dated January 12, 2017 and February 27, 2018, not to use, hold, trade and/ or transact in cryptocurrencies.
Reiterating why it was adopting a tough stance on the issue of cryptocurrencies, the regulator stated in the press release that “first, in light of the fact that they are issued by unregulated and unlicensed entities, their use in Nigeria goes against the key mandates of 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. It is also important to highlight that there is a critical difference between a central bank issued digital currency and cryptocurrencies.
As the names imply, while central banks can issue digital currencies, cryptocurrencies are issued by unknown and unregulated entities.” It further stated: “Second, 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.
“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 actvities. In fact, the role of cryptocurrencies in the purchase of hard and illegal drugs on the darknet website called ‘Silk Road’ is well known. There have also been recent reports that cryptocurrencies have been used to finance terror plots, further damaging its image as a legitimate means of exchange. “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 $320 to $0.10 in June 2017.
The price of Bitcoins has also suffered similar volatilities.” Apart from the justifications that CBN gave for its action, analysts, who supported the apex bank on the issue, pointed out that many other countries and central banks had either restricted or banned cryptocurrencies over concerns that fraudsters, terrorists and other criminals were using them to carry out illegal transactions. Indeed, at the time, a banking industry analyst told New Telegraph that it was in order to addess the concerns over cryptocurrencies that some countries, including Sweden, China, the European Central Bank and the Bank of England, were exploring the idea of issuing digital currencies, which would allow holders to make payments via the internet and offline. Significantly, the international media reported in April this year that the Chinese government had begun to issue blockchainpowered digital currency to its citizens.
The Asian economic giant thus became only the second country and the first major economy to officially launch a blockchain version of its own currency. According to Bloomberg, the first nation to launch a digital currency was Bahamas. The news outlet stated that the sand dollar of the Bahamas Central Bank, which was launched last year, was already being accepted in stores in the capital Nassau.
Bloomberg also identified four more countries – South Africa, India, Pakistan and Thailand, with concrete plans to soon launch their own official cryptocurrencies. Although, CBN had previously hinted that it was also exploring the possibility of launching a digital currency, it was while addressing journalists at the end of the Monetary Policy Committee (MPC) last month, that Governor of the apex bank, Mr. Godwin Emefiele, first confirmed that the idea of a digital currency would soon become a reality in the country and that the regulator had already set up its committee, which was working on the concept.
Imminent launch of digital currency
Still, industry watchers must have been caught unawares by the announcement that was made at the end of the Bankers’ Committee meeting last Thursday that Nigeria would launch its own digital currency before the end of this year. The Director, Information Technology (IT) Department at the apex bank, Rakiya Mohammed, who disclosed this, said: “Officials of the CBN have been exploring the digital currency technology for over two years.
There are two types of fiat currency, the notes and coins. The CBN digital currency will be a third type of currency. It will supplement cash. Rather than carry cash about, you have the money in your phone.” Noting that the latest EFInA report showed that the nation was at about 60 per cent in terms of financial inclusion, compared with a target of 80 per cent at the end of the year, Mrs. Mohammed said that the proposed CBN digital currency would enhance the financial inclusion drive and reduce the cost of cash management, while enabling innovations in the nation’s financial market. She revealed that a central governance structure would be set up to address all associated risks with a view to ensuring that the Nigerian public gets the best technology for the digital currency which would be launched before the end of the year.
The CBN’s announcement of the imminent launch of the digital currency has been welcomed by some stakeholder groups. For instance, in a statement issued at the weekend, the African Centre for Justice and Human Right (ACJHR) commended CBN Governor, Emefiele, over the plan. The group’s deputy head of communication, Lady Jasmine Akpeh, was reported as saying that the ACJHR believes that the plan is another major move by the apex bank to further improve the nation’s economy for the benefit of all. According to the statement, ”Central Bank Digital Currencies (CBDCs) are electronic versions of fiat money issued by central banks and backed by the reserves of the issuing countries. We are aware that different apex banks have disclosed their intentions to issue digital currencies as the global system battles the disruption of cryptocurrencies. The decision of the CBN under Emefiele not to take the back seat in this regard is, therefore, highly commendable. “We are sure that history will judge the CBN governor and his team well considering the efforts they have put into initiating very laudable monetary policies for the country. We note that the move to unveil digital currency will revolutionise the economy and it should therefore be supported by all. “We also urge the CBN under Emefiele to continue with its good works of always putting Nigeria and its citizens first in its policies. We urge them to work hard to meet the deadline set for themselves so that the feat can be achieved before the end of the year as promised in order for Nigerians to start benefitting from the policy.”
Although most analysts are clearly waiting for the launch of the CBN’s digital currency before assessing its pros and cons, the consensus in industry circles at the weekend was that given the high crime rate in the country, the apex bank’s digital currency stands a good chance of quickly gaining mainstream acceptance compared with cryptocurrencies.