CBN’s ban on crypto currencies

Recently, the Central Bank of Nigeria (CBN) issued a directive to Deposit Money Banks (DMBs), non-bank financial institutions and other financial institutions to close accounts used for crypto transactions. In other words, banks are required to stop dealing in digital currencies and facilitating payments.

Since the announcement was made, there have been reactions from concerned stakeholders. In today’s digital world enabled by rapidly changing technologies, our personal and business lives have been severely impacted in several ways. What Covid-19 pandemic has taught us is that we can create and live in a remote world. Most organisations have their employees working remotely from home and it may remain like that for some time.

I cannot remember the last time I went to a bank to carry out a transaction. On your smart phone, there are multiple apps to make life easy and convenient. Banking transactions are remotely conducted and you can pay your bills, rates and levies from your mobile phone or any other device.

It is therefore surprising that CBN is coming up with the temporary or outright ban on transactions in crypto currencies through Nigerian banks. The motivation is unclear but it may be due to the following reasons: protect Nigerian investors from losing money; prevent money laundering activities and minimise access to those who fund terrorism. If these are the reasons, you truly cannot fault CBN. They are indeed noble intentions but the larger issues of digital currency such as its rising popularity and high market demand cannot be swept under the carpet.

I recall too that CBN clamped down on some banks in the wake of the #End SARS protests in October last year. The banks were accused of facilitating payments in crypto currencies, especially bitcoin, to the protesters. The offending banks and CBN made up in a “family settlement” and all was well thereafter.

For the uninitiated, crypto currencies are digital assets used online for making investments from your wallet. You exchange real currency like the Naira for coins or tokens of a given crypto currency – and there are several crypto currencies that are available in the market but the first and most popular in the world is bitcoin (BTC).

Investing in crypto currency is a risky venture like every other form of investment; a good investor minimises the risk tied to each investment. We have heard stories of people who bought plots of land that were sold to other persons. When the stock market crashed in Nigeria some years back, a lot of Nigerians lost tons of money. The fears of CBN may be to prevent a situation similar to the dotcom bubble that lasted for roughly two years until the bubble burst from March 2000.

During the bull market of the late 1990s, the US technology stocks valuation grew rapidly due to heavy speculative investments – venture capital funding was in abundance – in internet companies that eventually failed to deliver profits after promising to “change the world”. Those who cashed out before the crash were lucky.

The global financial crisis of 2007 – 2008 that damaged many financial institutions including the bankruptcy of Lehman Brothers on September 15 2008 is still fresh in our minds. Excessive risk taking by banks was the root cause of the crisis and it also caused the US real estate market to crash, leading millions of Americans to lose their homes through mortgage foreclosures.

The irony of the CBN directive is that crypto currencies which are distributed on a public ledger known as “blockchain” allows you to make secure payments online and store money without going through a bank. Facebook — and its other platforms, Instagram and WhatsApp – with over two billion users is also working on its own crypto currency to be called Libra.

Visa, the popular American financial services company that facilitates electronic funds transfer throughout the world, has also embraced digital currencies. According to a recent report in Forbes magazine, Visa has announced plans to help banks roll out bitcoin and crypto buying and trading services with a Visa crypto software programme that would be launched later this year.

The report further indicated that PayPal, Visa’s main rival — which enabled the latest bitcoin price bull run — has also announced plans to allow its 346 million users to buy and spend bitcoin and other crypto currencies. By October last year, the price of one bitcoin was about N4m but today’s valuation is over N18m.

So when leading global brands are becoming promoters and cheerleaders of digital currencies, why would CBN be pausing crypto currency transactions in our banks? The CBN announcement is just another way of saying that crypto currency transactions are illegal and banks have been threatened with severe consequences if they flout the directive.

It is a well-known fact that “card channels” are different from “bank channels” which means instead of bank transfers, crypto currency transactions can be enabled through card channels. In any event, why should your bank determine how and where you spend your money? What banks should worry about are illegal and fraudulent transactions, e.g. money laundering, where the onus of proof rests with the accuser.

Crypto currencies are not different from other financial instruments in the world: stocks, bonds, exchange traded funds (ETFs), gold, silver, commodity futures and others whose values are based on perception. Whatever is perceived by CBN to be wrong with crypto currencies is also wrong with all the other trade-able financial instruments.

Digital currencies allow coins and tokens to be traded in simple channels where everyone is a signatory to each transaction that occurs in the channel. Trading in crypto currencies is a willing seller/buyer scenario where the bidding takes place anonymously. It is not different from trading in the global forex exchange market with a valuation of over $5.5 trillion. Trading in forex is simply the simultaneous purchase of one currency and the sale of another and the market determines foreign exchange rate for every country.

In these global markets, you do not even know who is selling to, or buying from, you neither can you influence the process. Market forces determine the value of the currencies – it could go up or down in real time.

When companies post their annual returns, traditional financial instruments that we are used to will react before, during and after the results are announced based on the information available. This scenario leaves room for information asymmetry as we do not receive the same information at the same time. Even the quality of information varies, and these factors, to a large extent, are responsible for making a profit or loss in a market driven by perception which explains why we have “insider trading”.

But when you trade in crypto currencies, it is a different experience – the same quality of information is available to all players at the same time in real time. It has solved the problem in the global financial markets which has been the private casino of a notorious club of few but exclusive investors who have access to proprietary information and data that drives market perception and value.

This was what triggered the Robinhood/Game Stop saga recently. Robinhood is a trading app which rallied hundreds of traders using the power of social media to upturn institutional traders and sabotage their speculative profit motive. The “rogue traders” created their own version of an “alternative” casino through a massive crowd funding effort and the result was that the price of Game Stop stock soared and hit the roof in a price bull run.

Stock markets can crash when there is an unsustainable boom in share prices as it happened in 1929. Your investment in stocks earn you money through capital gains – from stock prices going up — and dividend decided by the management of a company at its annual general meeting. Institutional traders bet for or against a stock; you make money when you win the bet. In fact, these traders buy the probability that the price of the stock will go up or down.

As it turned out, the disruption in Wall Street by Robinhood was not going to last because it was stage managed but a useful lesson, I believe, was learnt by the institutional investors (Mutual and Hedge Funds) who always try to beat the market. The Robinhood trading app not only channeled demand to Game Stop stock and rallied the price up, they also managed to sustain the growth long enough for the institutional traders to lose money.

The “big boys” had to call their brokers to stop trading in the stock to slow down demand instigated by Robinhood through their casino. Eventually, market forces prevailed to normalise the price of Game Stop stock. The above scenario is highly unlikely when trading in crypto currencies. If anything, third world and developing countries with negative balance of trade payments arising from foreign exchange rate risks should embrace digital currencies. For example, each time the price of Nigeria’s crude oil suffers price shocks, the economy goes down in a spiral.

When we restrict or pause crypto currencies the way CBN has done, it will cause a direct outflow of dollars. Before now, using platforms such as Roqqu means trading in crypto currencies straight from your Naira account.

However, based on the new directive by CBN, traders will switch to foreign accounts denominated in dollars or other currencies which will further add to the devaluation pressure on the Naira.

Crypto currencies, like gold, are global financial instruments and they exhibit the same characteristics as money: they are a store of value and, over time, they become more valuable because of their intrinsic value.

Braimah is the Publisher/Editor-in-Chief of Naija Times (https://naijatimes.ng)