Nigeria’s Security and Exchange Commission Halts Plan for Crypto Regulation
CBN and SEC’s Crypto Regulatory Feud
Background
Early last month, the Central Bank of Nigeria released a reminder to financial institutions in the country that a 2017 regulation forbade them from getting involved with cryptocurrencies. This move quickly sparked outrage on social media.
Following this reaction, the CBN followed up with a statement that explained the rationale behind distributing this reminder.
According to the reminder, banning cryptocurrency activities is justified because they are used to commit crimes. The document made mention of money laundering and terrorism as crimes enabled through the use of digital currencies. It further made reference to Silk Road, the darknet site where cryptocurrency was used to buy prohibited substances.
The CBN also claimed that the ban was necessary because of the risk associated with the speculative market, saying “Nigerians must be protected.”
However, several young Nigerians disputed the above claims, saying that the ban was the result of the End SARS protests, which took place in late 2020 in response to the brutality of the Special Anti-Robbery Squad.
The #EndSARS hashtag started trending on Oct. 4, 2020, and young people started gathering in cities across Nigeria to demand the dissolution of SARS.
As part of the efforts to stop the protests, the CBN froze the accounts of individuals associated with these gatherings. It did so after obtaining an order from a federal high court judge. The rationale behind this decision was that if funding was cut, the unrest would be halted. But this move backfired, as donations were sent via bitcoin to fund the protests. Many were of the view that the reminder issued by the CBN amounted to additional government retaliation.
A statement recently released by Nigeria’s Securities and Exchange Commission spells out the different approaches these government entities are taking to decision-making. This implies an absence of cooperation between the two major regulatory bodies governing the financial sector. However the African nation’s SEC has put regulatory plans on hold following the release of the CBN ban.
We believe that there are many inaccuracies in the explanations the central bank gave for its policy directive, and we would like to address some of them.
The First Cryptocurrency
In the second paragraph of its statement, the CBN mentioned that Bitcoin was the first cryptocurrency, being introduced in 2009. This statement is not accurate, as cryptocurrencies existed long before Bitcoin, going back to the 1980s.
David Chaum, who was an American cryptographer, believed that in order to conduct e-commerce safely, people required some form of token money that would offer users privacy. More specifically, he stated that there was a need for tokens that would emulate physical money and also offer their users the ability to make transactions privately.
His revolutionary thinking led him to creating DigiCash, the blinded money. DigiCash was a big success until it ran into regulatory challenges with the central bank of the Netherlands.
After Chaum’s DigiCash failure, many similar ideas came into existence, one being e-gold. The modus operandi of this innovation was fairly simple, an individual would send their physical gold to the e-gold company, which would in turn place e-gold into that individual’s account.
Alternatively, an individual could buy e-gold by sending a wire to the company in Florida, which would in turn use the funds to purchase physical gold and then hold it on the buyer’s behalf.
We would like to conclude that bitcoin was created by leveraging many prior inventions. In other words, it is the child of many fathers.
Market Share
The CBN statement also mentioned that bitcoin “accounts for about 68 percent of all cryptocurrencies.” This statement doesn’t really make sense, seeing as there were thousands of digital currencies in existence as of January 2021.
We think that the author or authors of this statement meant to say that bitcoin makes up roughly 68% of the total market value of digital currencies. At the time of this writing, the world’s most prominent digital currency accounted for roughly 61% of the cryptocurrency market, according to TradingView.
Volatility
“During an online forum hosted by the Davos-based World Economic Forum few weeks ago, Andrew Bailey, the Governor of the Bank of England, highlighted the extreme price volatility of cryptocurrencies as one of the biggest flaws and explained that this flaw makes it impossible for them to be used as a lasting means of payment.”
The above assertion is inaccurate. There are different types of cryptocurrencies; while bitcoin (BTC), ether (ETH) and bitcoin cash (BCH) can be highly volatile, stable coins are designed to be the complete opposite. Stable coins form a group of cryptocurrencies that aim to peg their market value to a currency or other reference points to reduce volatility.
Illicit Activities
The reminder states that “the very name and nature of ‘cryptocurrencies’ suggests that its patrons and users value anonymity, obscurity, and concealment. The question that one may need to ask therefore is, why any entity would disguise its transactions if they were legal. It is on the basis of this opacity that cryptocurrencies have become well-suited for conducting many illegal activities including money laundering, terrorism financing,” and other crimes.
Some people believe that privacy is a fundamental human right. Ideally, some of us would like to have complete control over our monetary affairs, assuming we have accumulated the requisite knowledge. In other words, not everyone in the cryptocurrency industry seeks privacy because they want to conceal illicit activities.
There is no doubt that cryptocurrencies appeal to some criminals because they can in some cases provide them with private transactions and rapid transfers of funds. However, cryptocurrency related crimes continue dropping year-over-year.
According to the 2021 crime report by Chainalysis, a U.S.-based blockchain research firm, cryptocurrency crime fell drastically in 2020. We noted from the report that in 2019, illicit activity represented 2.1% of all cryptocurrency transaction volume, or $21.4 billion worth of transfers.
Then, in 2020, the illicit activity fell to 0.34 percent of all transaction volume, or $10 billion. The statistics above paint the picture that cryptocurrency-related crime has followed a downward trend. It remains a small part of all cryptocurrency-related transactions, as compared to the amount of illicit activities that take place in traditional finance.
Investment Use Cases
The statement released by the CBN repeatedly claimed that cryptocurrencies are used largely by speculators, who purchase them in hopes that their value will rise. The document claims that “recent evidence now suggests that some cryptocurrencies have become more widely used as speculative assets rather than as means of payment.”
The authors of the aforementioned statement should know that cryptocurrencies have several investment use cases. Bitcoin has repeatedly been described as a safe-haven asset, one that investors flock to in times of geopolitical turmoil.
Further, many market observers have depicted bitcoin as an inflation hedge, emphasizing that the digital currency has a hard cap of 21 million units, whereas central banks have been printing trillions of dollars’ worth of fiat currency over the last few years.
In addition, bitcoin has been lauded for its ability to help investors diversify their portfolios. In a white paper called “Bitcoin: Ringing the Bell for a New Asset Class,” ARK Invest analyst Chris Burniske and Coinbase VP & General Manager Adam White emphasized how bitcoin generally does not correlate with other asset classes, which means it can serve as an excellent tool for diversification.
Even though this assertion has been tested more recently, we still find that correlation between bitcoin and traditional markets remains very low compared to how other markets are correlated.
Considering all the ways that cryptocurrencies can benefit investors, we believe the CBN and SEC should embrace these innovative digital assets instead of describing them as tools for speculators and criminals.
Final Thought
Judging from regulators’ pragmatic approach to cryptocurrencies, we are confident that the CBN and SEC can work with industry participants to establish common ground in order to address any challenges or concerns harbored by the state.
Further, we believe that the regulatory directive published by the CBN was too severe, and using this approach could discourage interested parties from investing in the country. Many nations who have embraced this new technology have already benefited greatly, and we’re just getting started.
Nigerians, including retail investors and entrepreneurs, are more likely to lose than gain from the ban. For instance, cryptocurrency traders who have been relying on banks to carry out their activities will now have to consider alternatives which may not be that effective.
In short, we feel that the CBN’s actions against cryptocurrencies were misguided at the least, and we would be very grateful for the opportunity to set things straight. In line with that, a copy of this report will be sent directly to Nigeria’s central bank, and we at Quantum Economics would like to offer our advisory services to the financial institution free of charge, for the betterment of the African nation.
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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