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The Central Bank of Nigeria has been fining banks in an attempt to prevent dealing in cryptocurrencies, but can this succeed in a country where the local currency is losing value at an alarming rate?

When early in April the Central Bank of Nigeria (CBN) fined six top banks a total of N1.3bn ($3.1m) for violating its directive against facilitating transactions in cryptocurrencies, it was the latest sign that the country’s crypto problem won’t easily go away.

Access Bank got the biggest fine of N500m, followed by FCMB with N400m and Stanbic IBTC with N200m. United Bank for Africa and Wema Bank were slapped with N100m naira each, and Fidelity Bank N14.28m.

With the government prohibition, the onus has been on the banks to detect accounts used to trade in cryptocurrencies, often ones that have unusual volumes of transactions for accounts that don’t belong to licensed financial institutions.

Stanbic IBTC CEO Wole Adeniyi said during an investor call that the bank applied the stipulated measures but still failed to detect two accounts, for which it was fined. These accounts were found by the regulator itself using a more advanced monitoring technology, he said. However, the CBN is now sharing data with banks that should help them better identify those suspected of dealing in cryptocurrencies.

Crypto chaos
The roots of the controversy go back to 2016, a year after President Muhammadu Buhari was elected for his first term, when Nigeria experienced its first economic recession in 25 years. It was a contraction triggered by the plunge in the price of oil, Nigeria’s main export.

With the economy in a tailspin and people seeing their savings being eroded by the pincer effect of inflation and devaluation, many sought the safety of digital currencies, offshore stocks and bonds.

The tough economic climate led Tokunbo Ademoye, a 30-year-old data analyst with a day job in a research company based in Lagos, to become a cryptocurrencies and online securities trader.

“My decision to trade cryptos was born out of necessity,” he recalls. “In 2016 I lost 80% of the value of my savings to inflation and naira devaluation. I had to find ways to avoid that happening again.”

By 2019, Nigeria had become Africa’s biggest cryptocurrencies market and its citizens the biggest holders of digital currencies outside the US. For the country’s monetary authorities, this became a source of concern, as the move to acquire offshore assets became another source of exchange rate pressure at a time when the CBN, led by Godwin Emefiele, was Matters became worse with the coronavirus pandemic in 2020, which came with another oil-price shock, prompting a second recession in four years. Even more Nigerians were now turning to digital currencies and other offshore investments, adding to foreign currency demand and forcing the naira to decline even more.

In February last year, the CBN struck by prohibiting banks from facilitating trading in digital currencies. It also clamped down on some firms enabling trading in offshore stocks and bonds, accusing them of manipulating the exchange rate.

Defending his decision before lawmakers, Emefiele cited security and money-laundering concerns. He also dismissed cryptocurrencies as random computer codes “created out of thin air,” favoured as a means of exchange by people who don’t want to leave a trail.

Threat to monetary policy
The latest slap on the wrist for the banks adds to growing signs that Nigeria’s crypto problem isn’t going away soon. But as much as the banks are still tempted to deal in crypto, the watchdog is equally determined to catch them.

“For the central bank it’s more like a fear of losing control,” said Ebuka Obiora, a Lagos-based lawyer who has represented clients whose accounts were stopped for trading in digital currencies. “The holdings of Nigerians in bitcoin and other digital coins had become a threat to monetary policy and the regulator had to do something.”

The authorities also appeared alarmed when young people – who led nationwide anti-government protests in October 2020 in response to brutal and corrupt policing – made contributions in bitcoin to support protest marches after the CBN froze the bank accounts of suspected organisers.

The efforts to suppress trade in cryptocurrencies have so far failed. What has emerged instead is a crypto divide that has mostly young adopters of blockchain technology pitched against older policymakers such as the 60-year-old Emefiele and the 78-year-old President Buhari.

In a bid to to head off the impact of cryptocurrencies on the financial system, the CBN was among the first worldwide to introduce a digital version of the local currency, the eNaira, in October last year.

Like its paper variant, it’s providing no safe haven for savings nor investments for the mostly younger investors in crypto assets. To put the demographics in perspective, half of Nigeria’s current population of more than 200m are under 19 years of age, and more than 65% are under 35.

It’s a situation that has deepened the dilemma of the monetary authorities. With the CBN inclined to raise its cudgel to get people into line, Vice-President Yemi Osinbajo urged for caution in a speech earlier in the year, advising that “we must act with knowledge and not fear”.

“Cryptocurrencies in the coming years will challenge traditional banking, including reserve banking, in ways that we cannot yet imagine, so we need to be prepared for that seismic shift,” he said.

For many cryptocurrency investors, Emefiele’s CBN has chosen to wage an unwinnable war. The trend among investors now is to diversify into crypto derivatives that can be liquidated to so-called stable coins such as Tether. Others have dived into newly emerging asset classes such as Non-Fungible Tokens (NFTs) and Decentralised Finance (DeFi), making the task of dislodging them even harder for the authorities.

Ademoye, the data analyst and part time cryptocurrency trader, prefers to keep the majority of his savings in digital assets and only converts to the local currency for specific needs. He can’t think of any reason to use the naira as a store of value in the foreseeable future. “Only a vastly improved economy will make me do it,” Ademoye said. “And that includes low inflation as well as a stable and predictable naira.

Nigeria’s cryptocurrency problem has central bank scrambling

Nigerians traded at least N77.75bn ($185m) worth of Bitcoin in the first three months of the year despite the Central Bank of Nigeria’s restrictions on cryptocurrency transactions in the country.

This is a 5.71 per cent increase from the N73.54bn worth of Bitcoin that was traded in the corresponding period of 2021, according to data made available to our correspondent by Paxful, one of the major peer-to-peer cryptocurrency platforms in the nation.

Trade from Nigeria accounted for 25.87 per cent of the total N300.48bn ($715m) worth of Bitcoin that was traded on the platform in the quarter under review.

Global trade on the platform showed an 8.33 per cent increase from the N277.377bn ($660m) that was traded on it in the corresponding period of 2021.

According to the firm, Nigeria was its largest trading country in 2021 with 16,000 daily trades. In the period under review, the market cap of BTC dropped by $36.90bn from $902.10bn as of January 1, 2022, to $865.20bn as of March 31, 2022.

This was despite the CBN’s restrictions on crypto currencies in the nation. In February of 2021, the CBN asked banks in the nation to stop transacting in and with entities dealing in crypto assets.

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

Since the restriction, P2P trading of crypto, especially BTC, has increased. According to a 2021 report by Chainalysis, the nation is the sixth leading nation in the world in terms of crypto adoption.

A recent report by KuCoin, a crypto exchange with over 10 million registered users, disclosed that about 33.4 million Nigerians trade or own crypto assets.

According to the Founder and Coordinator, Blockchain Nigeria User Group, Chimezie Chuta, the P2P nature of BTC is the cause of its increasing adoption in the nation.

He said, “Crypto is designed to be P2P and the only way we started talking about bank accounts is for easy offloads or what we call unwrap.

Nigerians beat CBN restrictions, trade N78bn Bitcoin in three months

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