Regulation
Nigeria embraces cryptocurrency regulation | Traffic lights
The new CBN rules reflect the public and cryptocurrency industry’s demand for clarity and consumer protection. This change also appears to mark the regulator’s acceptance that a prohibitive approach towards cryptocurrencies would be costly both in terms of financial benefits for banks and effective regulation. This happens when the bank moves expand licensing and anti-fraud measures in fintech in general, trying not to stifle innovation.
The initial ban relied heavily on the idea that cryptocurrencies were a tool “to facilitate the scams we all call 419 transactions,” as Emefiele, the former CBN chief, described it. But rather than dissuading users, the ban appears to have resulted in an increase in awareness and usage of cryptocurrencies over the period. Rising inflation and the continued devaluation of the local currency naira against the dollar have made cryptocurrencies, especially bitcoin and stablecoins, an attractive hedge. Crypto transactions in Nigeria in the 12 months to June 2023 were only worth 57 billion dollarsaccording to Chainalysis.
And so, while the lifting of the ban suggests an updated ability to manage crypto-related risks, “it appears that the CBN and the government as a whole want to cut even the lucrative cryptocurrency business that is being done,” emerges David Omojomolo. The markets economist at the London-based Capital Economics told me this.
Nigeria’s new tone “is also an attempt to be removed from the FATF gray list,” says Gwera Kiwana, who heads cryptocurrencies at Onafriq, the pan-African payments company formerly called MFS Africa. The Financial Action Task Force evaluates governments’ compliance measures against money laundering and terrorist financing. The Paris-based body requires countries to do so licensing and supervision virtual resource providers. Its “grey list” tracks countries with deficiencies in their anti-fraud frameworks.
After being added last February, Nigeria remains on the FATF gray list. Gray list countries tend to receive skeptical treatment from global banks who consider FATF guidelines part of their due diligence processes. Being graylisted is related to decrease in capital inflows of 7.6% of GDP, suggests a 2021 IMF working paper, and reduction in development financing received, said another study last year. South Africa, Senegal and eight other African countries are also on the gray list.
But beyond fraud prevention, Kiwana expects Nigeria’s new rules to produce “a wave of partnerships” between crypto-native companies and other institutions to increase cryptocurrency use cases. The CBN could then adapt what it sees in increased adoption to improve the eNaira, a Nigerian central bank digital currency issued in 2021, Kiwana said.