On Friday, February 5, the CBN issued a circular directing all banks and non-bank financial institutions to shut down accounts belonging to people or platforms engaged in trading cryptocurrencies.
The statement mandates these institutions to close these accounts immediately. It also warns that banks and other financial service providers could face stiff penalties if they fail to comply with the CBN’s instructions.
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“Accordingly, all DMBs, NBFIs, and OFIs are directed to identify persons and/or entities transacting or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately,”
the statement read.
It referred to an earlier circular issued in 2017, in which the CBN had cautioned financial institutions about what it called “the risks associated with transactions in cryptocurrency transfers.”
Why The CBN Is Banning Crypto-Linked Bank Accounts
The CBN circular from 2017 (noted above) mentions some of the reasons for the CBN’s wariness about cryptocurrencies. It says that they pose “money laundering and terrorism financing risks” to Nigeria’s financial system.
This is likely a reference to the fact that cryptocurrencies are difficult to regulate because they are decentralized; unlike ‘regular’ currency (fiat), they aren’t controlled by financial authorities. Governments worry that this characteristic makes cryptos a favourite tool for criminals to launder money without being detected.
Other reasons for the ban have been suggested, including the Nigerian government’s ire over how cryptocurrencies were used to fund last year’s #EndSARS protests. There’s also talk about authorities wanting to track foreign remittances (which fell in 2020), a task that’s become increasingly difficult due to international crypto transfers.
What These Restrictions Mean For Nigerians
The ban on cryptocurrency-linked bank accounts will affect four segments of the public: people who buy and sell cryptocurrencies, like Bitcoin, Ethereum, and Ripple; the platforms on which these trades take place; banks and other financial institutions; and, eventually, aspects of the wider economy.
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First, individuals who buy and sell cryptocurrencies will no longer be able to fund their crypto trading wallets from (and withdraw to) their bank accounts. This will make it difficult for them to trade on crypto exchange platforms, as most of them have hitherto financed their activity on such platforms via this means.
Crypto investors of this ilk may resort to alternative arrangements like Peer-to-Peer transactions to bypass this restriction (several domains offer this service). But this comes with risks, including the danger that fraudsters posing as crypto traders may take advantage of people who are desperate to obtain digital assets.
Nigerian crypto exchanges could be hit hard by the new rules. A sharp drop in trade volumes on their platforms, coupled with their inability to do business with local banks, could spell doom for their operations. Not a few may shut down permanently.
Banks, which have benefitted from the inflow of funds from crypto exchanges and traders, will have to watch another source of revenue dry up. Nigeria’s market for cryptocurrencies is worth billions of dollars; traditional financial institutions will no longer reap directly from its growth.
There’s speculation that the clampdown on naira-crypto trading could increase the demand for dollars, as more people may see it as an alternative for funding their crypto transactions. This could in turn cause a FOREX scarcity. Import-dependent merchants who can’t find dollars will seek a substitute—most likely cryptocurrencies. The net effect: the demand for cryptos will increase, and the naira will further weaken against the dollar.
Nigerian regulators seem determined to decouple the crypto space from the traditional financial system. They point to the risks inherent in the former and say that financial institutions are safer with less exposure to it.
But many Nigerians are concerned about the possible downsides to the CBN’s position on this. In time, their misgivings will either be confirmed or dispelled.
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