By Boniface Chizea
The Central Bank of Nigeria recently harvested wide-ranging criticism following its sudden directives to deposit money banks to sever all dealings with account holders certified to have any dealings in digital currency; Cryptocurrency at the risk of severe regulatory sanctions for failure to comply.
We were made to understand that the immediate reason for this action was the fact of the discovery of tremendous inflow of funds into the economy, often of doubtful integrity which has the potential of destabilizing the country’s financial sector. It was reported that the Federal Bureau of Investigation (FBI) alerted the Central Bank to the effect that fraudulent Nigerians took control of large chunks of palliative releases in the wake of the various stimulus packages which they proceeded to send into the country leveraging on the digital currency ecosystem.
It was also reported that most illegal transactions such as proceeds from kidnapping, bunkering and payment of bribes have found digital currency difficult to track, isolate and arrest source of payment and now the preferred mode for transactions. The awareness of this development accounted for the prompt drastic action by the Central Bank to control the damage.
It would be wrong for us in undertaking this discussion to assume that we are all on the same page with regard to what digital currency really is. Cryptocurrency has been defined as digital assets designed to work as medium of exchange using cryptocurrency to secure transactions and to control the creation of additional units of the currency. Bitcoin became the first decentralized crypto currency in 2009. And since then, numerous cryptocurrencies have been created referred to as altcoins as a blend of bitcoin alternatives.
The legal status of cryptocurrencies vary substantially from country to country as its understanding is still evolving in most countries. For instance, China Central Bank banned the handling of bitcoins by financial institutions in China during an extremely fast adoption period in early 2014. In Russia, though cryptocurrencies are legal, it is however illegal to actually purchase goods with any currency other than the Russian Ruble! On March 25, 2014, the United States Internal Revenue Services ruled that bitcoin will be treated as property for tax purposes as opposed to currency. It is illegal to buy and sell Bitcoin in South Africa but there has been no specific ban. Bitcoin is accepted in Kenya as a medium of exchange like any other government issued instrument while digital currencies are not known to have arrived the shores of Ghana though it has been reported that the Government has commissioned a study to facilitate an appreciation of the use of digital currencies.
There are a number of challenges identified with the use of digital currencies; they suffer from slow speed of transactions and lack standardization. The operations of blockchains are decentralized and therefore do require any Central authority to oversee their operations. The various versions of digital currencies in existence today suffer from lack of interoperability. Bitcoins are costly to operate as they rely on intensive computer power and are heavy on the consumption of electricity power.
Since the step taken by the Central Bank, all manner of stakeholders as we must come to expect have joined the fray with raging severe criticisms of the policy thrust. First of all, let’s look carefully at the implication of this directive for the digital currency transactions which have been with us for over a decade now. This instruction if kept to the letter as should be expected would spell the death knell; kiss of death for the operators of digital currency in our economy. It is not possible to envisage how they could operate outside the banking system.
Not at all surprising there has been tremendous push back. In fact, latest word out there is that some Digital Lawyers have on February 8, 2021 approached the Federal High Court in Lagos to try and test the legality of this CBN directive. Now the argument is that the Securities and Exchange Commission in September 14, 2020 declared Cryptocurrencies as legal digital assets protected under Section 44 of the Constitution of the Federal Republic of Nigeria of 1999 (as amended).
That being the case the courts are hereby being urged to revalidate the Investments and Securities Act 2007 which gave the authority of regulating Capital Market operations to Securities and Exchange Commission. Therefore, regulatory dysfunction is being cited which if upheld could mean that the Central Bank had acted ultra vires in giving its directives. The foundation of this argument would appear to me shaky as the Central Bank’s instructions is to banks which no one could ever argue that the Central Bank is not in a position to regulate. Well, this matter is now subjudice and advisedly we should allow the courts to have their say on the matter.
Other notable reactions have come from former Vice President of Nigeria and a Presidential aspirant, Atiku Abubakar who based his criticism on the fact that the directive is against the youths who are at the receiving end of the worsening unemployment situation in the country. Well, I don’t suppose that the argument here is strong enough as it would be unrealistic to expect the Central Bank of Nigeria mindful of its core mandate of the maintenance of Financial Stability to allow a trend which is clearly destabilizing to go unchecked because we would like to protect employment. This would amount to a case of cutting one’s nose to spite his face!
Oby Ezekwesili has asked the Central Bank to step back to study to learn from the unfolding scenario so as not to mortgage the future of the country, pointing out that the world is a school and we are all here to learn. But the records are that committees have been reported to have been constituted in the past by the Central Bank to understudy development with digital currency; may be more than one committee for advice on the way forward.
Probably the only valid point to make on this score is the fact that we have been lethargic with coming up with concrete steps to sign post the way forward even if it must be admitted here that the overall profile of this entire ecosystem is still cast in hazy cloud. It is premature to assume that a consensus had been crystallized across board on how to handle digital currencies and therefore understudying the concept remains veritable work in progress.
Kingsley Moghalu, a former Deputy Governor at the Central Bank, criticism anchored on the quantum of capital importation due to digital currency lately as a basis for withholding necessary regulatory restraints is a bit surprising. If as has been argued that this channel has laid itself bare for illegal use for money laundering and all manner of illicit financial flows which are difficult to track because of the mere nature of their operations; how do we expect the CBN to aid, encourage such inflows which even makes its operations a veritable nightmare as it remains in the dark regarding the volume of liquidity being injected into the economy through such channels?
There is no doubt that the recent Central Bank reaction is expected response given the exigency of the suffocating situation of the Nigeria economy as it struggles to keep its head above water in the devastating environment of the ravaging pandemic. Witness the IMF recently raising alarm on the state of the economy asking for strategies to be evolved for the increase in revenue inflows, recommending that the Value Added Tax rate be increased in response. One expects that the position now taken regarding not having relationship with any account known to deal in digital currencies would be up for review as future developments warrant and better insight is gained into the operations of digital currencies. Meanwhile, the Central Bank has a mandate to underwrite the stability of the financial system. It must be unfettered as it attempts to keep fidelity to this historic mandate.