ON February 5, the Central Bank of Nigeria (CBN) sent a circular to financial institutions, instructing them to immediately close the accounts of persons or entities transacting in or operating cryptocurrency exchanges.

The CBN said breaches to the directive would attract severe sanctions. The CBN’s action has since sparked reactions from many Nigerians, with some agreeing with the apex bank and others attacking it for stifling a thriving market. Most of the criticisms of the CBN’s policy have come from young Nigerians participating in the cryptocurrency market who leverage the bulging market.  Nigeria is the world’s second-biggest crypto market after the United States.

Cryptocurrency and How It Works

Cryptocurrency is believed to have been founded by Satoshi Nakamoto, an enigmatic character, in 1998. Up till today, nobody knows whether Nakamoto is a real name or pseudonym, and many players in the industry believe it belongs to a group of people, according to Investopedia, a financial and investment dictionary. Generally, cryptocurrency is a digital currency based on an asset distributed across a network of computers, according to Investopedia. Cryptocurrencies are decentralised based on blockchain technology, and central banks do not issue them. They are unregulated and use online ledgers with strong cryptography to carry out transactions, according to Nerdwallet.com, a cryptocurrency website.

There are 6,700 cryptocurrencies worldwide, but the most popular ones are bitcoin, etherum, tether, ripple and litecoin.

Crypocurrencies are very complicated because they are created through a process called mining, which involves using computers to solve complicated mathematics to generate coins, according to the Telegraph.

Like the stock market, users buy the currencies from brokers, store and spend them via wallets. The crypo market’s upsides are that it gives investors some level of anonymity and investments are mostly secure. However, they are not legal tenders, are speculative and volatile, as prices can nosedive within the shortest possible time.

Moreover, they can be used to launder funds, and carry out illegal transactions, which is why it has been banned in China, Vietnam. Russia, Ecuador, Columbia, Bolivia and now Nigeria. Hackers have also targeted the crypto market.

Why CBN Banned Cryptocurrency

The CBN on February 7 explained why it banned cryptocurrency transactions. According to the apex bank, it could be used to launder money and fund terrorism.

In a  statement, Osita Nwanisobi, acting director, corporate communications, CBN, said the ban on such transactions would not have any negative impact on fintech.

“The use of cryptocurrencies in Nigeria is a direct contravention of existing law. It is also important to highlight a critical difference between a Central Bank issued digital currency and cryptocurrencies. As the names imply, while Central Banks can issue digital currencies, cryptocurrencies are issued by unknown and unregulated entities,” Nwanisobi said.

“The question that one may need to ask therefore is, why any entity would disguise its transactions if they were legal. It is based on this opacity that cryptocurrencies have become well-suited for conducting many illegal activities, including money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion,” he noted.

Nwanisobi further said that many banks and investors who placed a high value on reputation had been turned off from cryptocurrencies because of the damaging effects of the digital currencies’ widespread use for illegal activities.

He noted that the role of cryptocurrencies in the purchase of hard and illegal drugs on the darknet website called ‘Silk Road’ was well known, stressing that there had also been recent reports that cryptocurrencies were used to finance terror plots, further damaging its image as a legitimate means of exchange.

Experts Disagree 

Financial experts have disagreed with the CBN directive, saying that it could kill an emerging industry that has created thousands of jobs for young people.

“My response as someone who is versed in risk management will be that there is a reality today that the world is going digital and there is a lot of innovation in the world and cryptocurrency are part of it,” Kingsley Moghalu, former CBN deputy governor, said on Channels TV on Sunday. He noted that the CBN’s directive was legal, but he was unsure that it was the right step.

“We have to go back to understand what cryptocurrencies actually are, which are virtual currencies that can be exchanged online to purchase goods and services, and the value of legal tender currencies does not determine the value.

“But you would have to use legal tender currencies to purchase those cryptocurrencies, the most popular which is bitcoin. Also, they don’t have an underlining value, so many people would say it is speculative because unlike a normal currency, that currency is not backed up by either foreign reserves, the productive nature of the economy of the country that owns the currency and various other elements,” he further said.

“I interpret it as a directive to financial institutions under the control and supervisory remit of the central bank not to deal with these cryptocurrencies, and the directive is targeted at exchanges of cryptocurrencies. It makes it difficult, but it does not criminalise it.”

Senator Ihenyen, president of Stakeholders in Blockchain Technology Association of Nigeria (SiBAN), said on his Twitter handle that the “total ban, unlike its January 2017 letter, is arbitrary, illegal, irresponsible, and with all due respect rather lazy.”

He said the CBN might not have the statutory or regulatory power to order banks to deny services to a set of people or an entire emerging industry.

Obiageli Ezekwesili, former World Bank vice president, said on her Twitter handle on February 6 that it was often difficult for Nigerian and African policymakers to understand disruptive technology.

“I believe in technology much. My biggest worry about disruptive technology was always how much harder it would be for regulatory authorities in our country and continent to understand, gain mastery on their value to economic growth and development to be champions for it,” she said.

Some experts believe that the CBN’s directive was in response to its policy on foreign exchange (FX) market, forcing Nigerians abroad to bypass the official route to send money to their relatives in Nigeria cryptocurrencies. Nigeria’s diaspora inflow is around 24 billion dollars in 2020.

Binance, Providus Bank, Others React

On February 8, Binance, world’s biggest cryptocurrency exchange, announced the removal of Nigerian naira from its platform-a big blow for many Nigerians trading via the exchange.

In a statement, Binance said its Nigerian naira payment partners had suspended deposit services until further notice, starting from 7 p.m. of last  Friday. It noted that it was monitoring the situation closely.

READ MORE: Cryptocurrency market spikes by $13 billion after recording poor trades in March

“Withdrawal services remain normal and will continue to be processed but might take longer time than usual slightly,” the statement said.

Similarly, following CBN’s directive, Providus Bank has deactivated virtual accounts of PiggyVest, Cowrywise and Monnify, meaning that these fintechs can no longer carry out transactions via Providus Bank. The move immediately created panic in the market, but in a swift reaction, Providus Bank released a statement saying that it was a temporary situation.

“Please be informed that the Virtual Account platform has not been permanently shut down as we are currently reviewing them in line with new regulations. Rest assured we would notify the general public via our social media platforms once this review is completed,” Providus Bank said.

Genuine Concerns on Use of Crypto for Fraud, Terrorism 

There are genuine concerns across the world that cryptocurrency transactions could fuel fraud. Imran Khan of Fraud Magazine wrote that some virtual currencies, such as eCache, were completely anonymous. “According to its operators, eCache doesn’t link a person to their transactions; it works like a Digital Bearer Certificate (DBC) that can be transferred to another party just like any other data on the internet,” she said.   Khan noted that other virtual currencies, like bitcoin, would store all transactions in a public ledger called ‘The Blockchain.’

“The Blockchain only records the transactions, not the identities, of the users,” she said. In April 2019, two Nigerians were charged in the United States for defrauding victims in an online bitcoin scheme. ThisDay newspaper reported that the federal government and the CBN were warned by the United States’ Federal Bureau of Investigation (FBI) on the activities of fraudsters using cryptocurrencies to move hundreds of millions of dollars illegally into Nigeria.

These digital  currencies can also fuel terrorism funding. In a research entitled, ‘Terrorist Use of Cryptocurrencies: Technical and Organizational Barriers and Future Threats,’ Cynthia Dion-Schwarz, David Manheim, Patrick B. Johnston noted that current cryptocurrencies were not well-matched with the totality of features that would be needed and desirable to terrorist groups but might be employed for selected financial activities.

“The authors’ research shows that should a single cryptocurrency emerge that provides widespread adoption, better anonymity, improved security, and that is subject to lax or inconsistent regulation, then the potential utility of this cryptocurrency, as well as the potential for its use by terrorist organizations, would increase,” the research-report said.

Any New Channel?

As of the time of filing this report, many Nigerians were looking for ways of circumventing CBN’s directive, saying the apex bank would not stop them from leveraging global opportunities.

Lagos-based Sandra Okums, who plays in the cryptocurrency market, told The ICIR that transactions would continue to go on as the market was unregulated and online. She noted that the CBN directive would not stop her as the bank did not declare cryptocurrency transactions illegal.

As of the time of filing this report, the Bitcoin price was high at 47,802 dollars. Elon Musk, the founder of Tesla and world’s richest man, has purchased 1.5 billion dollars in bitcoin and plans to accept it as currency.