New Crypto Rule by Nigeria’s Central Bank Underscores Regulatory Risk
The Central Bank of Nigeria (CBN) is attempting to block the use of cryptocurrencies in the country. Though the regulator is not acting outside of its newly-expanded powers, the move is in tandem with a familiar trend by the executive to govern by fiat, which is causing a stir.
Main Findings - Bitcoin and Fiat Nigeria
In February, CBN ordered banks to close all accounts used to process crypto payments. The CBN Governor Godwin Emefiele described users as ‘players in an electronic dark world’, and the bank said it wanted to protect the financial system from ‘the risks inherent in crypto asset transactions’.
The Securities Exchange Commission (SEC) had previously classified cryptocurrencies as securities and had been developing a template to regulate trading. The commission has now announced that it will shelve its framework and study the risks described by the central bank.
This CBN order appears to have been influenced by the #EndSARS movement that occurred in the country in October 2020. The government tried to put down that movement with help from the central bank. Banks were ordered to shut accounts belonging to #EndSARS organisers, but organisers began accepting donations in bitcoin and the uprising continued until the army was called to intervene.
The new crypto rule also seems to have been made to preserve the CBN’s existing foreign exchange restrictions, which the bank increased in 2020 to curb a dollar shortage and avoid further devaluing the naira. For instance, exporters must repatriate their profits or be blocked from using the banking system. Dollars for imports are rationed by the central bank. International money transfer companies also must process remittances to Nigeria in dollars.
People worked around those restrictions using bitcoin. Some imported goods with the cryptocurrency as intermediate payment. Others turned to local crypto exchange services such as Sendcash that let users send money to Nigeria in naira with bitcoin as an intermediary. Sendcash has now suspended its service due to the latest CBN rule.
Broadly, the new change typifies regulatory risk that we have seen in the country in recent times. In 2019, ‘okada’ ride-hailing startups such as Gokada were put out of business when the Lagos state government suddenly barred the motorcycle taxis from major roads, saying this mode of transport was not part of the city masterplan. Gokada and others had been cooperating with state authorities before then, and months before the ban, the government had mediated a dispute between the startups and a local transport union.
Outlook - Unilateral action
The Banks and Other Financial Institutions Act was enacted in 2020 despite stakeholder disapproval, to protect the central bank and its governor from litigation for actions taken ‘in good faith’. Emboldened by this and the fact that legislative and judicial institutions are compliant rather than combative, the central bank and other authorities will continue managing the business environment in a non-consultative, unilateral way. This could even manifest in the executive assuming judicial powers as in 2020 when the CBN ordered accounts for #EndSARS to be shut.
Nigeria accounts for the most bitcoin trade on the world’s leading platform Paxful, after the United States. The number of Nigerian users more than doubled in 2020 alone. The macroeconomic factors - high inflation, currency instability and foreign exchange restrictions – have been driving this large volume of crypto trade in Nigeria and both consumers and bitcoin operators will resist the government’s fiat, as they contemplate the cost of non-compliance. Yet we may witness more operators like SendCash pressing pause or even halting operations while they wait to see how government’s austere stance plays out in practice.
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