A former Deputy Governor of the Central Bank of Nigeria (CBN), Prof Kingsley Moghalu, yesterday faulted the Central Bank of Nigeria (CBN) over its blanket ban on trading on cryptocurrency.
According to him, instead of the kneejerk “reactionary’ step of the apex bank, it ought to have engaged in deep thinking and be more innovative to be at the front of the curve.
Moghalu, who was in charge of Financial System Stability, at the CBN, told Arise TV in an interview, that during his time at the apex bank, there were a lot of innovations about how to ensure the stability of the financial system.
According to The Nation, he said: “Cryptocurrencies are one more facet of a process that continues throughout history which is innovation. Let me remind you that paper money or what we call fiat money which is legal tender as ordered by governments has not always been in existence through creation.
“The first paper money or fiat money came about in the 11th century. It was issued in China by the Yuan dynasty and that is why the Chinese currency is called the Yuan. Starting from the 17th or 18th century, paper money became more prevalent across the world and has had its up and down but still remains the currency in the world today.’’
He explained that cryptocurrencies are virtual currencies that people use online to purchase goods and services, adding that one cannot obtain a crypto currency without legal tender but that crypto currency value is not aligned to the normal legal tender.
“It has a value on its own and some people will say it is not backed by any fundamental but there are many reasons. One of them is that many people just want the freedom to exchange value without having to go through the restrictions of fiat money that is issued by the central banks.
“Also, there’s a political dimension, that is why it is called freedom money. Many people around the world who are protesting for human rights or when regimes try to restrict their rights because crypto currencies do not go through the central bank. They find that they are able to still communicate with themselves and do transactions that bypass sovereign authorities,” he said, adding that central banks have never been comfortable with cryptocurrency.
On the ban, Prof Mrghalu said: “I would have preferred some deep thinking about how to come up with a regulatory framework that restricts the use of cryptocurrency or subject it to some sort of surveillance that alerts the CBN if there are serious abuses that can affect financial system stability.
The CBN has to be concerned about the financial system stability and that is what it should be concerned about. So you have to be able to monitor and see if there signs of coming..but to ban a financial institution from having an account associated with cryptocurrwency exchange or cryptocurrency trading seems to me a bit …it was not necessarily the best approach to the problem that is what I think even though I understand why they (did what they did).
He said the ban is symptomatic of regulatory dysfunction because the Security and Exchange Commission (SEC) sees cryptocurrency as financial asset while the CBN does not.
“The SEC recognises cryptocurrency as financial asset and in September last year, the SEC said it would be issuing a refgulatory framework. So it does look like the right hand doesn’t know what the left hand is doing. Then there’s another issue. That is the fact that we a are in a depressed economy.
“A lot of Nigerians are making a living from trading in cryptocurrency. Many of them, young people, and so there’s an impression created that people in Nigeria make progress, young people especially, they find avenues to be creative and innovative and make progress not because of the government but in in spite of it. And that is really unfortunate,” he said.
Moghalu said the country is one of the 10 countries in the world where trading in bitcoin is popular, stressing that the global value of bitcoin, which is the most popular crytopcurrency is about $560 billion.
Why Nigeria Banned Cryptocurrency – CBN
As reported by The Radiance on Monday under the above headline, while reacting to condemnations trailing its directive to Deposit Money Banks, DMBs, to desist from transacting in Cryptocurrencies, Nigeria’s apex bank, the Central Bank of Nigeria, CBN, had explained reasons for the ban.
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 CBN’s 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 an outlier as many countries, central banks, international financial institutions, and distinguished investors and economists have also warned against its use.
He said 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.
CBN said in China, cryptocurrencies are completely banned and all exchanges closed as well.
Nwanisobi said even famed investor Warren Buffett has called cryptocurrencies “rat poison squared,” a “mirage,” and a “gambling device.”
“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.
During an online forum hosted by the Davos-based World Economic Forum 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 and 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.”
Nwanisobi said 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 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 the critical between a Central Bank issued Digital Currency and cryptocurrencies, adding that as the names imply, 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 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 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.
“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 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.
“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 emerging, frontier and advanced economies propelled by reforms driven by the CBN.
The statement said this was evident from the variety of participants, products, channels, cutting-edge technology in the payments system.
CBN said the system was 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 because of CBN’s policies that have created an enabling investment environment in the payments system.
