In the last four years, cryptocurrencies, especially Bitcoin have become ubiquitous, prompting both global and domestic monetary authorities to devise a means to regulate and accept their usage. In 2017, the price of Bitcoin jumped from $900 in January to abo…

Sunday, March 14, 2021 / 04:10 AM /
by FDC / Header Image Credit: Medium.com
 
In
the last four years, cryptocurrencies, especially Bitcoin have become
ubiquitous, prompting both global and domestic monetary authorities to devise a
means to regulate
and accept their usage. In 2017, the price of Bitcoin jumped from $900 in
January to about $20,000 by the year-end. Digital currencies have proved to be
highly volatile and risky, forcing several regulatory bodies, including the
Central Bank of Nigeria, to warn against huge investments in the crypto market,
especially after the crash of Bitcoin in 2018.
Fast forward to 2021, the
global economy is now embracing the digital currency as not only a medium of
exchange but also a source of risk and store of value. Elon Musk, recently
purchased $1.5bn worth of Bitcoin, and MasterCard will begin to facilitate
cryptocurrency transactions in 2021.
The price of Bitcoin recently skyrocketed to a
record high of $51,000, up 5566.67% from its value four years ago before
falling to $46,000. In Nigeria, the crypto market expanded so much that the
volume of Bitcoin traded monthly is estimated at $200mn according to Buy Coins,
one of Nigeria’s largest cryptocurrency exchanges.
CBN’s
Ban on Cryptocurrency
The CBN prohibited the facilitation of
cryptocurrency transactions by commercial banks and other financial
institutions in the country. This prompted the Securities Exchange Commission
to pause its plans to formalize cryptocurrencies as securities under its remit.
The CBN is particu-larly concerned about the high risk of the digital asset
class and the use of the currency for mon-ey laundering, terrorism financing
and tax evasion. However, these financial crime concerns ex-isted in the
country long before the crypto market rose in popularity. In addition, only
1.1% of the total $1 trillion global crypto transactions in 2019 were illicit.
As Quartz explains, laundering money using
cryptocurrency is like stealing from a jewelry store but leaving the map to your
house at the crime scene.4 This is because all cryptocurrency transac-tions may
not carry your real name but there is an ID reference and the details of all
transactions made with that ID can be traced. The pseudonymous nature of
cryptocurrency somewhat vali-dates the CBN’s concerns. But the truth remains
that cryptocurrency is an emerging market with a huge potential for job
creation and investment which is being undermined by arbitrary policy
regulations.
Economic Implications
Investment
The recent ban on cryptocurrency transactions could taper investment
flows into the country as global investors are beginning to heavily eye the
cryptocurrency space. Just recently, Jay Z and Jack Dorsey announced a $23.6mn
investment to fund Bitcoin development in Africa. In addition, there is a fast
growing interest from Wall Street and the big players in the financial
industry, such as JP Morgan and Morgan Stanley. This signals a huge potential
for the crypto market in the coming years. There are high expectations of
reduced volatility as investors could begin to increase cryptocurrency
investments in emerging markets. This is good news but with the largest
consuming market in Africa banning cryptocurrency transactions, this could
limit potential investment in-flows that would boost economic growth.
Shadow Economy
Bitcoin was created for the sole purpose of reducing bottlenecks in
financial transactions, particularly across borders. The ban is unlikely to
completely stop all transactions. What is more likely is the rise of a crypto
shadow economy in Nigeria, which could now increase the chances of money
laundering and illicit financial flows. There would be no more advertisements
by popular exchanges on social media platforms and no transactions using
financial institutions.
Capital Flight
The move by the CBN may fuel the pessimism of existing and potential
investors (domestic and foreign) who were already skeptical about the uncertain
policy environment. The attendant effect could be an increase in capital
outflows, which is risky for the naira and infrastructure development.
Poverty and Unemployment
The fast expansion of the Nigerian crypto market has created numerous
jobs especially for the youths. The ban will affect individual home-based
traders and these traders often have employees of their own. Stopping the
operations of the emerging crypto market means more job loss, and this could
trigger a faster increase in the rate of unemployment which is already at 27.1%
(Q2’20).
Conclusion
From all indications, the crypto market is not going anywhere soon.
Therefore, it is vital for the CBN to invest in understanding the market and
utilizing it to attract much-needed investment in-flows. The CBN could also
regulate the cryptocurrency exchanges and issue guidelines to encourage forex
inflows through these platforms, similar to its recent guidelines on diaspora
remittances. The macroeconomic picture is still not inviting, and an uncertain
policy environment coupled with multiple exchange rates will keep investors
skeptical. Nigeria is already high risk for investors and with the rising total
debt stock ($84.57mn as of September 2020), a widening fiscal deficit
(estimated at N5.6trn) and an infrastructure gap estimated at $100bn annually,
there is need for fiscal and monetary policy consolidation to attract
investment. An increase in capital inflows will boost productivity and output
levels.
1.      CIBN Hosts Discourse on Blockchain Tech in Nigeria – Feb 28, 2017
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