Central Bank of Nigeria policy on cryptocurrency is a drawback to financial inclusion

Nigerians remain one of the largest adopters of cryptocurrency in the world ranking third on bitcoin trading volumes. However, cryptocurrency traders and exchanges have faced the stern test of hostile regulations affecting their businesses and livelihood. 

Recently, the Central Bank of Nigeria (CBN), vide two leaked circulars to banks, ordered the closure and restriction of the accounts of some named entities. This comes on the heels of a months-long suit against some fintech companies whose accounts had been frozen by the CBN for reasons including alleged dealings in cryptocurrency. 

The legal bases for these actions have been keenly contested lately. However, the policy implications do not get as much attention. Given the current drive of the CBN to meet its financial inclusion objectives, dropping the hammer on cryptocurrency traders may drawback any recent achievement that may have been recorded.  

A fairly long history of cryptocurrency proscription

Nigeria’s foremost financial regulator, the Central Bank of Nigeria (CBN) has towed a hostile approach to cryptocurrency with a history of proscriptions dating back to 2017. In a directive to banks and financial institutions, the CBN had warned about the risks of crypto trading on the financial banks. Other regulators mirrored this apprehensive stance issuing public notices and warnings shortly after the CBN’s.

However, other regulators reviewed their stance and considered a progressive approach where crypto trading is regulated rather than proscribed. The CBN nonetheless maintained the proscription issuing two different public circulars in 2021. The latest of those circulars directed to banks and other financial institutions mandated the closure of all accounts suspected of trading in Cryptocurrency.

There is yet no official figure of the number of persons tacitly excluded from the financial system through this policy. However, there has been outrage on social media with testimonials of persons who have been contacted by their banks for potential closure and flagged transactions. 

Financial Inclusion

In 2012, the CBN launched the National Financial Inclusion Strategy (NFIS) in a bid to gradually bank the unbanked and underbanked Nigerian adult population. At the time of the NFIS launch, about 44% of the Nigerian adult population was unbanked. Key Performance Indicators were set with a threshold of 20% set for 2020. However, as of 2021, about 38,000,000 Nigerian adults which constitute nearly 37% of the Nigerian adult population still remain unbanked and financially excluded. 

While it is admittedly difficult to quantify the underbanked, the Nigerian social media space is awash with daily complaints about banking channels. In the midst of all these setbacks and failure to meet KPI, the CBN recently took action to deliberately exclude citizens from the financial system for cryptocurrency trading. But this is not nearly sudden as the CBN had been brewing such hostile action since 2017.

Drastic actions like the CBN’s could yield cobra effects – a situation where the proposed solution heightens the problem. Closing and putting restrictions on accounts of crypto peer-to-peer traders can encourage them to increase their trading activity through offshore accounts and other arbitrage mechanisms. 

But more importantly, exclusion from the financial system should be a measure of last resort after there has been a full attempt to understand and regulate. There is also a range of human rights issues that may follow given the fact there is no law that actively criminalizes cryptocurrency in Nigeria.

Pursuing interoperability as a potential solution

At the core of the CBN and other reserve banks’ resistance to cryptocurrency is the need to retain control of the financial ecosystem. Although the CBN’s skepticism is shared by a majority of international institutions, most recommend a pragmatic approach to regulation for risk mitigation. The rise in cryptocurrency usage over the years especially points to the fact that an abolitionist approach almost never works.

Dread it, run from it, the best-case scenario for financial inclusion is to interoperate with it. Cryptocurrency rides on the back of user freedom and decentralized finance but some regulation is still needed to prevent crimes among other reasons. Some advanced crypto exchanges already run impressive Know-Your-Customer protocols i.e. identification and verification, while onboarding customers. Regulators, including the CBN, can latch on to this for law enforcement, monitoring, and prevention of money laundering/terrorism finance.

While cryptocurrency may help improve the efficiency of payments in Nigeria, an interoperable financial system also benefits cryptocurrency adoption. This is evident in the continuing adoption of stablecoins which are cryptocurrencies pegged against the fiat to reduce volatility. 

A financial system where persons are free to choose whichever currency signals better service delivery and inclusiveness.

Theophilus Oladipo, an alumnus of the African Liberty Writing Fellowship, is a Fintech attorney in Nigeria and a contributor to a wide range of technology and financial issues. He can be reached on Twitter @Theoladipo