Naira is in crisis, but cryptocurrency is not to blame: Nigeria needs a coherent policy

It is the Securities and Exchange Commission of Nigeria considering narrower controls to combat illegal trade in digital assets, including cryptocurrencies. The Conversation Africa asked Iwa Salami, a researcher in cryptocurrency regulatory frameworks, to explain how Nigeria can best manage cryptocurrency.

What is cryptocurrency and how does it work?

Cryptocurrency it is a digital representation of a value or right. They can be transferred and stored electronically using distributed ledger technology. It is a technology that allows multiple parties to share and update a common ledger (record) without relying on a central authority. Transaction records are called blocks and make up a blockchain.

The origin of cryptocurrency can be traced back to 1989 when DigiCash, a company in the Netherlands, has launched a digital currency called “eCash”. Although eCash did not survive, it influenced blockchain developments. The first and best-known cryptocurrency, Bitcoin, was launched in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto. Another is Ether, used on Ethereum network. All other cryptocurrencies except Bitcoin are called Altcoins and each has unique characteristics.

Cryptocurrencies exist outside the control of governments and central authorities. In theory, they are immune to government interference or manipulation. Encryption ensures secure online payments without intermediaries. Although intangible, cryptocurrencies maintain value based on market demand and adoption.

The rise of cryptocurrencies can be attributed to:

• ease of access (compared to cash, foreign currency and traditional financial services through a bank)

• weak currencies (due to economic stagnation, debt and political instability)

• simple and fast mechanisms for transferring funds

• privacy in transactions.

Does Nigeria handle cryptocurrency operations well?

Nigeria’s approach to regulating cryptocurrency transactions has been unclear and inconsistent. In February 2021 the Central Bank crossed out financial institutions from these transactions. But in May 2022, the Nigerian Securities and Exchange Commission – the capital markets regulator – published a framework for their regulation. This was a sign approving cryptocurrency trading. At that time backtracked in November 2022. In May 2024, the Central Bank prohibited person to person cryptocurrency exchange in naira.

To know more:
Cryptocurrencies are gaining traction across Africa. This is both good news and bad news

How can Nigeria best manage cryptocurrency?

Nigeria needs a balanced approach to regulation if the sector is to thrive without harming financial and monetary stability. A stable financial system is able to allocate resources efficiently and manage financial risks. The approach must protect consumers and investors.

If Nigerians were prevented from trading the naira on cryptocurrency exchanges, they may turn to other US dollar-denominated assets. It would be worse for the naira.

Cryptocurrencies have it had a long history to be used in illegal activities such as money laundering and drug trafficking. But they have not been linked to the devaluation of national currencies, as the Nigerian government has done presumed.

The first step would be to register anyone trading in digital instruments.

One of the main concerns raised by Nigerian authorities can be addressed by monitoring the identities and activities of users of cryptocurrency exchanges. This is provided for in the regulatory framework approved by the Securities and Exchange Commission in May 2022. It requires all regulated exchanges to comply “Know your customer” requirements.. Regulators may ask exchanges to reveal the identities of cryptocurrency account (wallet) holders linked to suspicious activity. Blockchain analytics companies like it Catenaanalysis AND Elliptical works closely with exchanges and can uncover sinister transactions.

International standards also allow regulators to obtain information from foreign exchanges that provide wallets to their citizens. So, in an ideal world, if regulators adopted international standards for cryptocurrency-related activities, these concerns would need to be addressed. For example, the Financial Stability Board did this advised that regulators share information about suspicious transactions on foreign cryptocurrency exchanges. If all regulators in the world adopted international regulation, the results would be consistent. This would address some of the key concerns raised by Nigerian regulators.

To know more:
Cryptocurrencies, NFTs and the metaverse threaten an environmental nightmare – here’s how to avoid it

Source