Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited
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Subjects of Interest
- Financial Market
- Fiscal Policy
The CBN, cryptocurrency ban, and the future of money 09 Mar 2021
The Central Bank of Nigeria (CBN), last month, re-enacted its ban on cryptocurrency in the country. This followed the futile attempts by the central bank in 2017, and a year later, to prevent deposit money banks in the country from dealing in or facilitating trades in digital currency assets. But, fundamentally, the question is not whether the latest ban would be effective. The CBN is definitely fighting a losing battle.
Instead of outright banning, many people in the commentariat have argued that the CBN should regulate the cryptocurrency market in the country. This is quite sensible. In 2019, the Financial Action Task Force (FAFT) released its recommendations on the regulation of the digital currency market. The risk-based approach recommended for local regulators addresses the risks of money laundering and financing of terrorism that are associated with the anonymity in digital asset activities and of virtual asset service providers.
In the UK, the Financial Conduct Authority banned the sale of crypto-derivative products to retail investors. Such small investors, it was reasoned, may not be able to correctly assess the risks of the assets or bear potentially heavy losses resulting from the hyper volatility of their prices. But big and institutional investors were not so restricted. Japan placed a limit on the amount that could be borrowed to trade in cryptocurrency assets.
These regulatory approaches address the gamut of issues of security, financial stability, and investor protection the CBN raised to justify its different response. The central bank named countries that are disreputable for civil repression and excessive market regulation as examples justifying its own decision. This, therefore, provides the link in the speculation that the main purpose for re-enacting its ban was to stifle the #EndSARS protest movement, whose organisers had pivoted to cryptocurrency in raising money for their popular protest against police brutality last October.
The dysfunction of the CBN's blanket ban may, however, be best highlighted by contemplating the future of money. The indications are clear, that the future of money is digital. Money, as a medium of exchange, unit of account and store of value, has been evolutionary through the ages. The reinvention of money as a digital commodity is being driven by the blockchain, a decentralised and distributed public ledger of digital transactions. Whereas central banks continue to quibble about cryptocurrencies, they recognise the monetary use cases of the blockchain technology. Therefore, many central banks are now considering issuing central bank digital currencies (CBDC).
Not only does the CBN indicate with its ban that it is not embracing the ongoing monetary innovation, it is also stifling private sector efforts in this regard. Contrariwise, the advanced free-market economies have refrained from rash regulatory actions to preserve their active participation in the innovation process.
The ban on cryptocurrency in China should be understood from the viewpoint of the country's statist capitalism. The yuan that becomes a global reserve currency is also a key part of China's farsighted economic agenda. This being the case, China is the frontrunner in developing a CBDC.
The future money is foreseen to be “invisible”, “instant”, and “inclusive”. To facilitate the future in which money would be digital, all assets are also going to become digital. The state, through its central bank, appears to have lost its exclusive preserve to issue wildly acceptable currency. The US behemoth retailer, Walmart, has applied for a patent for its Walmart Coin. JP Morgan's JPM Coin is redeemable for one US dollar. Such a stablecoin (a digital currency tied to a regular currency) would have significant acceptability, even if only on the large transaction platforms of the issuer.
The CBN ban demonstrates hubris, a trifling of regulatory function, and disregard for an inclusive market of monies. Private monies, such as bank accounts, discount vouchers, gift vouchers, airline reward points, airtime, etc., are part of the monetary ecosystem in Nigeria. As some have defined future money as “data”, some of these monies are records in computer databases.
The role of central banks in regulating and guaranteeing private money has been critical. Central banks would surely like to preserve these functions, rather than undermine them through ineffectual banning of digital currencies.
In the past few years, as CBN's monetary policymaking has become ineffective, we have also seen egregious use of its regulatory authority. To address such a slide, there is the need to restore professional independence to the central bank. The CBN needs to embrace innovation internally and allow marketplace innovation to flourish.