Nigeria is committed to building its digital economy, but the central bank’s recent cryptocurrency prohibition counteracts this goal and fuels mistrust of the government.
"Governments and businesses all over the world are realizing the powerful potential usability of blockchain. ... Nigeria, however, is lagging due to the government institutions' sore-footedness and refractory approach to this undeniably ingenious innovation."
So states the draft National Blockchain Adoption Strategy released by Nigeria's National Information Technology Development Agency (NITDA) in October. The strategy makes the case for Nigeria's adoption of blockchain technology, including digital currencies, to build a digital economy.
Yet, on Feb. 5, many Nigerians were surprised and angered when the Central Bank of Nigeria (CBN) announced a ban on the exchange of cryptocurrency by financial institutions and directed banks to close accounts trading in crypto.
Although CBN said its policy is a reiteration of a 2017 circular warning financial institutions about virtual currencies' risks, this announcement is at odds with its efforts toward digital transformation. Following the announcement, the Security and Exchange Commission (SEC) paused its regulatory review of crypto pending CBN clarification. Meanwhile, the Senate has invited the heads of CBN and the SEC to brief them on this decision.
As oil prices tumbled in 2020, taking Nigeria's forex reserves and the value of the naira with them, Nigeria entered a recession, and inflation stood at nearly 16% as of December. CBN has pursued several avenues for increasing forex liquidity in Nigeria, including requiring International Money Transfer Operators to distribute remittances in U.S. dollars instead of naira, cracking down on exporters who do not repatriate revenue, and restricting the use of forex for some imports.
CBN devalued the naira twice last year, and the high cost of moving money into Nigeria has led Nigerians to seek alternatives through cryptocurrency. Nigeria is the world's second-largest peer-to-peer (P2P) bitcoin market and the largest in Africa. Crypto trading, which totaled $566 million from 2015-2020, has increased yearly since 2015, with a jump of 30% in 2020.
Driving the crypto market's growth is users tapping into crypto as a payment, investment, and trading tool amid increasing difficulties in accessing forex and the desire to hedge the value of funds. While the COVID-19 pandemic likely plays a significant role in the remittance decline, members of the diaspora are increasingly turning to cryptocurrency to send money and avoid stiff fees and the high CBN exchange rate that reduces the value of the exchange by up to 20-30%.
Nigeria's digital transformation
In Nigeria, the government has made concerted efforts toward streamlining and developing policy frameworks and national strategies to advance its digital transformation. President Buhari redesignated the Ministry of Communications as the Ministry of Communications and Digital Economy (FMoCDE) in 2019 and moved the National Identity Management Commission to this ministry.
Last year, FMoCDE released the eight pillar Digital Economy Policy and Strategy 2020-2030 and subsequently launched a Digital Nigeria skills development platform. In support of the digital strategy, the NITDA released the draft National Adoption Blockchain Strategy, and in September 2020, the SEC released its position confirming cryptocurrency as a security. As recently as January 2021, the CBN announced its regulatory fintech sandbox framework.
In light of Nigeria's efforts to advance its digital economy agenda, the crypto decision seems counterproductive and reactive. While the crypto ban has led to an initial chill, with banks closing accounts and some owners withdrawing their funds, it is unlikely to impact crypto's growth.
Instead, users may move to P2P trading platforms that facilitate trading without an intermediary and allow non-fiat payment methods. Already, there has been an almost 16% jump in bitcoin usage for P2P lending since the announcement, and Binance, the world's largest crypto exchange platform, recently introduced a new P2P option for Nigerians. Many Nigerians have attributed the decision to the CBN's urgent need to inject and retain forex in the economy by any means. But if the goal was to increase forex or promote transparency, pushing users to P2P platforms undermines these aims.
Trust in government institutions has also taken a hit. Some view this as bureaucratic stifling of innovation or a desire to increase control and cut off a means of livelihood for many young Nigerians facing a projected unemployment rate of over 30% in 2021. The frustration expressed by Nigerians taps into a broader dissatisfaction with a government perceived as corrupt and non-responsive. The lack of public or industry consultation or policy coordination has reinforced this viewpoint, and Nigerians on Twitter launched a #WeWantOurCryptoBack campaign.
Others noted that political influence could be driving the decision after some #EndSARS protestors turned to cryptocurrency to raise funds when the government froze their bank accounts. CBN explained the decision by the need to protect consumers and counter the use of cryptocurrencies for criminal activities while emphasizing that the decision does not detract from the bank's commitment to developing the fintech sector.
Enhanced policy coordination and consultation with the industry and users will be critical for the government to build trust, instill investor confidence, gain public buy-in and push forward digital transformation.
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