This is an excerpt from the press release issued by the Blockchain Industry Coordinating Committee of Nigeria (BICCoN) 13 February 2021 as its response to the Central Bank of Nigeria (CBN) circular of 5 February 2021 and press statement of 7 February 2021.
BICCoN is the intercommunity working group in Nigeria’s emerging blockchain industry whose mission is “to provide an intercommunity approach to blockchain technology adoption towards achieving a more collaborative, innovative, and safer blockchain ecosystem in Nigeria”. The excerpt that follows below borders on the threats and risks which the CBN identified in its press statement.
Legitimate threats and risks of cryptocurrency adoption and the regulatory approach to mitigating them
We acknowledge the CBN’s critical role in the Nigerian financial system and the Nigerian economy. It is the CBN’s objective to ensure monetary and price stability, issue legal tender in Nigeria, maintain external reserves to safeguard the international value of the legal tender currency, promote a sound financial system in Nigeria, and act as a banker and provide economic and financial advice to the Federal Government.
As responsible industry stakeholders, we also acknowledge the risks that transacting in cryptocurrencies portend, such as illicit fund flows, money laundering, terrorism financing, and other criminal activities. However considerable the risks cryptocurrencies portend may be, these risks are not peculiar to cryptocurrencies. Fiat currencies continue to be used globally to fund the same fraudulent and illegal activities. Compared to cryptocurrency-related crimes, the latter is titanic. The problem therefore is not the cryptocurrency or the fiat currency, but the actors and users of cryptocurrency and fiat currency. And this is where a risk-based regulation comes in. We believe that the purpose of regulation is to essentially maximize the opportunities that innovations provide while minimizing the threats they portend, not stifle innovation.
Firstly, contrary to the CBN’s assertion that cryptocurrencies are completely banned in China, it is not illegal to buy, sell, or hold cryptocurrencies in China. Individuals and entities who buy, sell, and hold cryptocurrencies still have access to banking services. In fact, the People’s Bank of China (PBOC) and other government agencies continue to explore application of blockchain technology for the purpose of making China’s financial system globally competitive. Though China banned ICOs and cryptocurrency exchanges, it is developing its own Digital Yuan, a Central Bank Digital Currency (CBDC). Similarly, in Canada, it is noteworthy that neither the central bank nor any government agency restricted cryptocurrencies in Canada. The reported bans were the independent decisions of a number of banks who wished to protect themselves. In fact, Royal Bank of Canada (RBC), the largest bank in Canada by market capitalization with over 16 million customers, was reported in 2019 to be opening a cryptocurrency exchange. Also, while the Saudi Arabia Monetary Authority (SAMA) banned cryptocurrencies, the central banks of Saudi Arabia and the United Arab Emirates (UAE) have concluded a digital currency (CBDC) pilot, which found that distributed ledger technology can improve cross-border transactions and meet the demands of financial privacy in a digital economy.
Secondly, while we respect Warren Buffet’s investment principles and decision regarding bitcoin, it may be worth pointing out that bitcoin recently surpassed Buffet’s own Berkshire Hathaway’s net value when bitcoin market value hit $544 billion, $1 billion above Buffet’s multinational company’s capitalization. Earlier last year, the same “rat poison” and “gambling device” surpassed JPMorgan Chase and Mastercard Inc, and it is recently more valuable than Visa Inc. Also, note that:
- at least eight publicly-traded companies, including Grayscale Investments, MicroStrategy, CoinShares have bought billions of dollars in bitcoin and select cryptocurrencies;
- Paypal announced in late October 2020 that its over 300 million active customers will be able to buy, hold, and sell bitcoin (BTC) and other virtual assets using their Paypal accounts;
- Mastercard will allow merchants to accept select cryptocurrencies on its network later this year;
- Tesla announced in a SEC filing this week that it has bought $1.5 billion worth of bitcoin and would start accepting payments in bitcoin; and
- Many more institutional adoption of bitcoin and select cryptocurrencies.
Thirdly, the issue Andrew Bailey, the Governor of the Bank of England, has with cryptocurrencies is whether due to their price volatility they are safe to perform the function of money. Bailey prefers that cryptocurrencies be regulated. In ‘Reinventing the Wheel (with more automation)’, a speech by Bailey in a Brooking Institution virtual event on 3 September 2020, Bailey stated:
“Innovation is a good thing. As authorities and regulators it is not in our interest – the broad public interest – to stop innovation. Moreover, when supported by clear standards and expectations, innovation can support the pursuit of public interest objectives such as greater inclusivity and network resilience. Making such standards clear early is much preferred to attempting to claw back the ground later, and particularly if that comes after things go wrong.” [page 2]
We have reached the point in the cycle of innovation in payments where it is essential that we set the standards and thus the expectations for how innovation will take effect. It should not happen the other way round, with the standard setting playing catch up. The answer is not to strangle innovation, and it does therefore require a strong dialogue between the parties, which I think we have.” [page 10]
The statements above resonate with the position of the Central Bank of England under Mark Carney, former Governor, when he said: “[a] better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system.” [‘Carney calls for crackdown on crypto-currency ‘mania’’, BBC, 2 March 2018]
Fourthly, concerning the CBN’s assertion that the use of cryptocurrencies in Nigeria contravenes existing law in Nigeria, this is with due respect not very correct. While the CBN is of course statutorily empowered to issue the legal tender by virtue of section 2(b) of the CBN Act, by the very meaning of a “legal tender” cryptocurrencies are not legal tender. Consequently, the fact that a cryptocurrency is accepted by voluntary parties as a means of payment in Nigeria does not make it a legal tender. Besides, the fact of the Naira being stipulated by the CBN Act as legal tender does not exclude the adoption of other media or exchange between contracting parties. Parties may decide to exchange goods and services for cryptocurrencies or even for nonmonetary considerations without contravening the provisions of the CBN Act relating to the Naira as legal tender. This is why the proviso in section 20(5) of the CBN Act has given the CBN “the powers to prescribe the circumstances and conditions under which other currencies may be used as medium of exchange in Nigeria” [emphasis ours].
Fifthly, concerning the CBN’s assertion that the anonymous nature of cryptocurrencies is a deliberate design for illegality, this is also incorrect. Essentially, most cryptocurrencies are pseudonymous rather than anonymous. Besides, “anonymity” in cryptocurrencies essentially serves the purpose of privacy and security. Digital signatures serve as identities of the parties involved in cryptocurrency transactions. These digital signatures are essentially composed of the private key and the public key. With these keys, transactions can be signed. Because different identities are created for the same person for different transactions, a lot of people wrongly think that the real identities of users may not be linked to the transactions. Contrary to that wrong belief, real-life identities can be linked to addresses of these cryptocurrencies and transactions. In other words, wallet addresses act as a placeholder for the wallet owner’s identity. Silk Road emphasized this point when Robert Ulbricht was eventually arrested and convicted. In the FBI complaint against Ulbricht, it stated: “bitcoins are not illegal in and of themselves and have known legitimate uses”. This is a strong statement about the legality of bitcoin. Bitcoin’s immutable and transparent ledger provides a record of every transaction, enabling law enforcement to track illegal transactions. Bitcoin and most other cryptocurrencies are not untraceable. At BICCoN, we set up an industry-wide Anti-Scam Task Force in January 2021 to come up with a framework for preventing and checking crypto-related scams in Nigeria. This is an effort that supports ongoing collaboration with the SEC and industry stakeholders on addressing the risks posed by cryptocurrencies. Upon the CBN’s invitation, we will be happy to share our insight and be of any assistance towards keeping our industry and Nigeria’s financial system safe.
Sixthly, while it may be true that today a number of cryptocurrencies including bitcoins are mainly used as a speculative investment and not as an alternative currency or medium of exchange, adopters are not a “conglomeration of desperate, disparate, and unregulated actors”. In the 2017 bull run, JPMorgan’s chairman and CEO, Jamie Dimon, once dismissed bitcoin as a “fraud”. JPMorgan presently banks two of the largest United States cryptocurrency exchanges, Coinbase and Gemini. By the way, it must be a misunderstanding of fact when the CBN claimed that ether fell from US$320 to US$0.10 in June 2017. The flash crash only happened on GDAX cryptocurrency exchange and lasted a second. According to GDAX, this was due to stop-loss orders and margin-funding liquidations on the exchange. In any case, where cryptocurrencies are considered by the CBN as speculative investments and not alternative currencies, this falls under the regulatory purview of the SEC. Commendably, the SEC has been doing some work in collaboration with relevant stakeholders, leading to the SEC’s statement on the classification and treatment of digital assets in Nigeria 11 September 2020. In that statement, the SEC classified cryptocurrencies as crypto assets to be treated as commodities if traded on a Recognized Investment Exchange and/or issued as an investment. Sadly, the SEC has suspended, as one of the many consequences of the CBN circular, its Regulatory Incubation Framework and Regulatory Incubation Guidelines for fintech firms. Indeed, this is just one of the far-reaching, negative effects of shutting out an entire industry from access to banking and other financial services.
Lastly, the CBN’s position that cryptocurrencies do not have intrinsic value and therefore are unlike fiat currency which are backed by the “comfort of a country or Central Bank ” deserves a note. Fiat currency such as the Naira or Dollar has no intrinsic value either. Fiat currency is a government-issued currency that is not backed by a physical commodity, such as gold or silver. The value of such fiat currency is derived from the relationship between supply and demand and the stability of the issuing government. Similar to fiat currency, most cryptocurrencies do not have intrinsic value because they are not also backed by gold, silver, or any other commodity. The value of any currency essentially comes from the level of trust that people have in them. Cryptocurrencies, including bitcoin, run on blockchain which is essentially a trustless technology. Bitcoin, for example, may be said to derive its value from its three components: (i) database or ledger comprised of transaction records which are distributed across a peer-to-peer network without a central authority; (ii) peer-to-peer network comprising participants whose job is to validate transactions before those transactions are recorded and added to the chain; and (iii) a cryptocurrency which is a form of electronic cash that is not minted by any central bank but mined using cryptographic or mathematical algorithms. Therefore, bitcoin—to borrow the CBN’s words—is accompanied by the full faith and comfort of a community or network that trusts it.
Availability of industry stakeholders for a dialogue with the CBN in Nigeria’s best interest
While we commend the CBN for its innovations in the areas of payment systems, open banking, and regulatory sandbox for innovative financial products, we appeal to the CBN to adopt a risk-based regulation, not an outright ban on DMBs, NBFIs, and OFIs from providing its services to Africa’s no. 1 crypto industry by volume and a leading market in the world.
At a time when the Federal Government’s national policies include growing Nigeria’s digital economy and improving financial inclusion, the CBN circular has effectively denied banking services—one of the most critical services in any modern economy—to an entire set of persons and/or entities which make up Nigeria’s emerging crypto industry. The rapid growth of Nigeria’s blockchain & crypto industry is a development that should be studied and understood in line with the desire of the Federal Government to develop a digital economy and diversify the Nigerian economy.
As the blockchain & crypto industry’s intercommunity working group, we are available for a dialogue with the CBN. We will be happy to share insights that will hopefully assist the CBN in reviewing its policy on cryptocurrencies in Nigeria, helping our dear nation maximize the opportunities while minimizing threats. We are ready to work with the CBN to ensure that its management of the risks of cryptocurrencies do not affect the stability of Nigeria’s financial system.
Also, with the National Assembly’s intervention in this vital matter, we at BICCoN will be happy to appear before the Committees on Banking, Insurance and other Financial Institutions, ICT and Cybercrimes, and Capital Market set up to determine the opportunities and threats of cryptocurrency on the nation’s economy and security.
Beyond crypto, this is about the future of this country. Nigeria must not make a potential breadwinner a black sheep in the fintech family.