Cryptocurrency: Why CBN wan close accounts of Dogecoin, Bitcoin, Ethereum and oda Crypto traders and wetin e mean for dem

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Cryptocurrency: Why CBN wan close accounts of Dogecoin, Bitcoin, Ethereum and oda Crypto traders and wetin e mean for dem

Wia dis foto come from, Getty Images

Bank accounts of Nigerians wey dey involved with cryptocurrency trading dey at risk after one new order wey di Central Bank of Nigeria (CBN) release on Friday.

CBN on Friday fire reminder letter give financial institutions to immediately close accounts of dia customers wey do trade in cryptocurrency like Dogecoin, Bitcoin and Ethereum.

Di 5 February memo order say make banks “identify pipo and/or joinbodi wey dey do trading in or dey operate cryptocurrency exchanges within dia systems and make sure say those accounts close down immediately”.

Tori of dis latest CBN instruction don make “crypto” begin trend for social media as many young pipo on Twitter dey para say na support di Nigeria goment suppose dey support cryptocurrency.

Wia dis foto come from, CBN

Wetin make CBN do dis?

For early 2017, di Central Bank of Nigeria tear “warning” give financial institutions not to use, hold or trade virtual currencies (like crypto) pending when dem regulate am, as e no be legal tender like di Naira.

Di Central Bank of Nigeria give reason say dem dey worry say jaguda pipo and terrorist fit dey use cryptocurrencies to do mago-mago for Nigerian citizens.

Crypto Bitcoin na like ‘gamble’

Di oda issue wey many don raise na whether crypto na better “work” to use make money, as some feel say pipo no dey tok about di risks.

Na dis position di CBN govnor take for January 2018 when e declare say “cryptocurrency or bitcoin na like gamble…We no fit, as central bank, give support to situations” wia pipo dey risk dia savings to take “gamble”.

Yet, one report by sabi company Baker Mckenzie say Nigeria na number three in di world for countries wey dey trade in Bitcoins (wey be di most popular type of cryptocurrency).

And Paxful, wey be crypto exchange platform say for 2020 Nigeria na im do crypto trading pass for Africa wit volume of 60,215 Bitcoins wey worth $566,668,692.

Implication of CBN directive

Di meaning of dis recent CBN order na say all dat money no go dey di Nigerian economy again, as Nigerian traders go begin find alternative way to keep dia money, like one financial expert been suggest for social media.

Cryptocurrency exchanges move funds from banks on the back of new CBN regulations

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In what has come as completely left field, the Central Bank of Nigeria (CBN) has asked banks and other financial institutions to close the accounts of cryptocurrency exchanges. Details of the new regulation are contained in a CBN circular (PDF) which is now making the rounds.

The new regulations mean that you will not be able to use a card from a Nigerian bank or any other financial institution in the country to process any transactions on a crypto exchange. In a nutshell, while virtual currencies remain legal, trading them through an exchange in Nigeria is near impossible.

The new rules also asks banks to identify “persons and or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately.”

Source: Central Bank of Nigeria’s website

Cryptocurrency has become increasingly popular in Nigeria in the last few years. One factor which has driven its popularity is the CBN’s stringent rules around FX in what has been a failing effort to stabilise the Naira.

In December 2020, the Central Bank ordered switches and processors to stop all domestic currency transfers in respect of foreign remittances through International Money Transfer Operators (IMTOs). In the same month, Nigeria became the No. 2 bitcoin peer-to-peer market after the U.S with more than $566 million worth of bitcoin traded between 2015 and 2020.

Today’s circular means that while the CBN has not banned virtual currencies, it has effectively blocked the ability of the exchanges which trade them to collect payments from bank customers. Since crypto is hardly bought with cash from exchanges, this move will affect the operation of companies like BuyCoins, Patricia, Yellow Card among others.

While there have been conversations about the regulation of virtual currencies in Africa over the years, no one could have predicted these new rules.

Regulatory flip flops

The CBN has been indecisive about regulating crypto even as the asset class becomes more popular. To be sure, there are genuine concerns in the conversation about regulation, but in Africa, regulators have a penchant for banning what they don’t understand.

The Securities and Exchange Commission, whose primary function is to safeguard investors warned investors about trading virtual currency in 2017. In a turnaround, the SEC recognised the validity of cryptocurrency as investments in September 2020.

According to the SEC, “Virtual crypto assets are securities; unless proven otherwise. The burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC is placed on the issuer or sponsor of the said assets.”

The commission went further to say that, “issuers or sponsors of virtual digital assets shall be guided by the commission’s regulation. The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices.”

Despite this, the CBN’s new rules have effectively stifled innovation and technology. A source at the SEC told TechCabal that he is not at liberty to comment on the CBN’s new rules until the commission holds a meeting.

Mum’s the word from cryptocurrency exchanges

At the moment, sources at one crypto exchange have told TechCabal that there will be no official response to the new regulation. It is not surprising, given that in Nigeria, the typical reaction when regulators pass downs stringent rules is to obey first and negotiate next.

For now, the key thing for these startups will be to move their funds from their banking partners in Nigeria and to start some quick thinking about the possibility of other markets. While the CBN has not spoken publicly about the regulation, it is too early to speculate on the possibility of a reversal.

Regardless, it is a big blow to crypto exchanges in Nigeria that have moved from niche offerings offering only trading to even launching stable coins. It may mark yet another watershed moment in the history of regulators going overboard in Nigeria.

What crypto regulation looks like across Africa

Away from Nigeria, the crypto regulation conversation has been ongoing in Africa for a while. In Algeria, the 2018 Financial Law prohibits the purchase, sale, use, and possession of virtual currency.

Source: Baker Magazine

It is the same in Morocco and Libya. In South Africa, proposed regulations are aimed at protecting people from unscrupulous crypto traders.

“South Africans will be encouraged by ourselves to only deal with people that are registered with us when purchasing crypto assets. We will discourage – with warnings – why they should not use a crypto wallet based, for instance, in Cyprus.”

This is according to Brandon Topham, the Divisional Executive for Investigations and Enforcement at the regulatory Financial Sector Conduct Authority.

“Because we have got no control over them and we’ve got no assurance that they will honour what they say they’re going to do. Nothing will really change, because a South African that wants to open up a wallet using an offshore location will still be able to do it. It won’t be unlawful – just as it’s not unlawful at the moment – but they will definitely have no security that the players they are dealing with are of a reputable nature.”

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The Central Bank of Nigeria has notified Deposit Money Banks, Non-Financial Institutions, other financial institutions against doing business in Crypto and other digital assets.

In a circular dated 5th February 2021 and distributed to regulated financial firms, the apex bank of Africa’s largest economy warned and reminded local financial institutions against having any transactions in crypto or facilitating payments for crypto exchanges.

In addition, the apex bank instructed the financial institutions to immediately close the accounts of such persons or entities transacting in or operating cryptocurrency exchanges.

The Apex bank further warned the Nigerian Financial Stakeholders that any breach of this directive will attract serious regulatory sanctions.

See excerpt

“The Central of Bank of Nigeria’s (CBN) circular of January 12, 2017 ref FPR1DIR/GEN/C1R106/010 which cautioned Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NBFIs), Other Financial Institutions (OFIs) and members of the pubic on the risk associated with transactions in cryptocurrency refers.”

“Further to earlier regulatory directives on the subject, the Bank hereby wishes to remind regulated institutions that dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges is prohibited.”

“Accordingly, all DMBs, NBFIs and OFIs are directed to identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately.”

“Please note that breaches of this directive will attract severe regulatory sanctions. This letter is with immediate effect.”

Not the first time

In 2018, Nairametrics reported that the Central Bank of Nigeria had issued a statement reiterating that cryptocurrencies are not a legal tender and as such are illegal.

In a circular dated February 28th, 2018, and published on its website, the apex bank reiterated that “cryptocurrencies such as Bitcoin, Ripples, Monero, Litecoin, Dogecoin, Onecoin, etc and Exchanges such as NairaEx are not licensed or regulated by the CBN.”

This was the strongest against cryptocurrencies made by the CBN at the time. It also coincided with a bullish run for cryptocurrencies especially when bitcoins rallied to an all-time high of $17,000 at the time.

That same year, the Securities and Exchange Commission (SEC), as well as the Nigerian Stock Exchange (NSE) were all directed by the Senate to enlighten Nigerians on the risks involved in trading with Bitcoins, but this report shows the enlightenment campaign has done little or nothing to dissuade Nigerians.

Bitcoins and other cryptocurrencies have rallied since late last year as investors flock to alternative assets in pursuit of sharp gains.

Can the CBN actually stop trading?

The central bank has control over the banking sector and by a large extent can use its powers to determine how banks allow customers to use their bank accounts for transactions.

While cryptocurrencies are a digital form of currency it still relies heavily on the regular currencies for everything from pricing its value to how its ownership is being determined.

To buy cryptocurrencies, you can either pay with a cryptocurrency or pay in dollars using your bank account.

Thus, Nigerians looking to trade in cryptocurrency will now have to seek other means outside of the banking sector, assuming Nigerian banks strictly implement the new directives.

There is also the suspicion that this could be tied to the CBN’s foreign currency controls.

How Banks will stop it

Banks can use the KYC information of their customers to determine which of them are used for cryptocurrency-related transactions. Once this is determined, they can block the accounts or restrict anyone from depositing money into the accounts.

In fact, they can place a no-debit on the account, meaning that when you transfer money to a cryptocurrency trading platform, the money could be stuck as they won’t be able to access it.

This process is very easy now that banks have BVN of their customers and can easily determine how funds are being utilized.

Ironically this is the very reason why cryptocurrencies exist in the first place, to stop any regulator, third party from getting in between transfers from one person to another.

What this means

The recent directive of the CBN will have clear negative consequences for the international crypto community, taking into consideration Nigeria (Africa’s largest economy and home to over 200 million people, mostly young), has the highest interest in Bitcoin globally.