When early in April the Central Bank of Nigeria (CBN) fined six top banks a total of N1.3bn ($3.1m) for violating its directive against facilitating transactions in cryptocurrencies, it was the latest sign that the country’s crypto problem won’t easily go away.
Access Bank got the biggest fine of N500m, followed by FCMB with N400m and Stanbic IBTC with N200m. United Bank for Africa and Wema Bank were slapped with N100m naira each, and Fidelity Bank N14.28m.
With the government prohibition, the onus has been on the banks to detect accounts used to trade in cryptocurrencies, often ones that have unusual volumes of transactions for accounts that don’t belong to licensed financial institutions.
Stanbic IBTC CEO Wole Adeniyi said during an investor call that the bank applied the stipulated measures but still failed to detect two accounts, for which it was fined. These accounts were found by the regulator itself using a more advanced monitoring technology, he said. However, the CBN is now sharing data with banks that should help them better identify those suspected of dealing in cryptocurrencies.
The roots of the controversy go back to 2016, a year after President Muhammadu Buhari was elected for his first term, when Nigeria experienced its first economic recession in 25 years. It was a contraction triggered by the plunge in the price of oil, Nigeria’s main export.
With the economy in a tailspin and people seeing their savings being eroded by the pincer effect of inflation and devaluation, many sought the safety of digital currencies, offshore stocks and bonds.
The tough economic climate led Tokunbo Ademoye, a 30-year-old data analyst with a day job in a research company based in Lagos, to become a cryptocurrencies and online securities trader.
“My decision to trade cryptos was born out of necessity,” he recalls. “In 2016 I lost 80% of the value of my savings to inflation and naira devaluation. I had to find ways to avoid that happening again.”
By 2019, Nigeria had become Africa’s biggest cryptocurrencies market and its citizens the biggest holders of digital currencies outside the US. For the country’s monetary authorities, this became a source of concern, as the move to acquire offshore assets became another source of exchange rate pressure at a time when the CBN, led by Godwin Emefiele, was working hard to curb demand for foreign currencies.
Matters became worse with the coronavirus pandemic in 2020, which came with another oil-price shock, prompting a second recession in four years. Even more Nigerians were now turning to digital currencies and other offshore investments, adding to foreign currency demand and forcing the naira to decline even more.
In February last year, the CBN struck by prohibiting banks from facilitating trading in digital currencies. It also clamped down on some firms enabling trading in offshore stocks and bonds, accusing them of manipulating the exchange rate.
Defending his decision before lawmakers, Emefiele cited security and money-laundering concerns. He also dismissed cryptocurrencies as random computer codes “created out of thin air,” favoured as a means of exchange by people who don’t want to leave a trail.
Threat to monetary policy
The latest slap on the wrist for the banks adds to growing signs that Nigeria’s crypto problem isn’t going away soon. But as much as the banks are still tempted to deal in crypto, the watchdog is equally determined to catch them.
“For the central bank it’s more like a fear of losing control,” said Ebuka Obiora, a Lagos-based lawyer who has represented clients whose accounts were stopped for trading in digital currencies. “The holdings of Nigerians in bitcoin and other digital coins had become a threat to monetary policy and the regulator had to do something.”
The authorities also appeared alarmed when young people – who led nationwide anti-government protests in October 2020 in response to brutal and corrupt policing – made contributions in bitcoin to support protest marches after the CBN froze the bank accounts of suspected organisers.
The efforts to suppress trade in cryptocurrencies have so far failed. What has emerged instead is a crypto divide that has mostly young adopters of blockchain technology pitched against older policymakers such as the 60-year-old Emefiele and the 78-year-old President Buhari.
In a bid to to head off the impact of cryptocurrencies on the financial system, the CBN was among the first worldwide to introduce a digital version of the local currency, the eNaira, in October last year.
Like its paper variant, it’s providing no safe haven for savings nor investments for the mostly younger investors in crypto assets. To put the demographics in perspective, half of Nigeria’s current population of more than 200m are under 19 years of age, and more than 65% are under 35.
Dodging the restrictions
After an initial lull following the prohibition, many enthusiasts quickly found other ways to get around the restrictions. Many embraced peer-to-peer trading, prompting many exchanges to make adjustments to accommodate them.
One strategy that became popular was the use of an escrow system to enable payments, while another was the use of gift cards or payments cards issued internationally by companies such as Payoneer and Skrill. Traders have also set up chat rooms on platforms such as Telegram where tactics and strategies are exchanged.
Between the CBN ban in February last year and the end of the year, Nigerians on the peer-to-peer exchange Paxful traded $1.5bn worth of cryptocurrencies, according to Useful Tulips, a data company that follows crypto use. On the Binance exchange, reputed to be the world’s biggest, Nigerians are responsible for the biggest peer-to-peer transactions.
A report published in April by leading global cryptocurrency exchange KuCoin found that in Nigeria at least 33.4m citizens aged between 18 and 60 had invested in digital assets in the previous six months. Fifty-two percent of them were under 30. A majority of all the investors were allocating more than 50% of their assets to the crypto world and 50% of the investors were women.
“Such rates of adoption can be attributed to the fact that the Nigerian currency has depreciated by over 209 percent in the past six years,” says the report.
It’s a situation that has deepened the dilemma of the monetary authorities. With the CBN inclined to raise its cudgel to get people into line, Vice-President Yemi Osinbajo urged for caution in a speech earlier in the year, advising that “we must act with knowledge and not fear”.
“Cryptocurrencies in the coming years will challenge traditional banking, including reserve banking, in ways that we cannot yet imagine, so we need to be prepared for that seismic shift,” he said.
For many cryptocurrency investors, Emefiele’s CBN has chosen to wage an unwinnable war. The trend among investors now is to diversify into crypto derivatives that can be liquidated to so-called stable coins such as Tether. Others have dived into newly emerging asset classes such as Non-Fungible Tokens (NFTs) and Decentralised Finance (DeFi), making the task of dislodging them even harder for the authorities.
Ademoye, the data analyst and part time cryptocurrency trader, prefers to keep the majority of his savings in digital assets and only converts to the local currency for specific needs. He can’t think of any reason to use the naira as a store of value in the foreseeable future. “Only a vastly improved economy will make me do it,” Ademoye said. “And that includes low inflation as well as a stable and predictable naira.”