December 28, 2023/CSL Research
Recently, the Central Bank of Nigeria (CBN) softened its restriction on cryptocurrency transactions, two years after the former Governor of CBN, Godwin Emefiele, directed banks in the country to stop transacting in and with entities dealing in cryptocurrencies. Banks and other financial institutions can now domicile client accounts for cryptocurrency transactions but can still not hold, trade, and/or transact virtual currencies on their account. Despite the previous ban, there has been an increasing number of Nigerians patronizing cryptocurrencies and the country records a high volume of crypto transactions. Nigeria ranks second on the 2023 Global Crypto Adoption Index for Sub-Saharan Africa.
Despite the many benefits associated with the use of cryptocurrencies such as speed, anonymity and accessibility, the opacity of cryptocurrencies that have made them well-suited for conducting many illegal activities such as money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion makes them unacceptable by many monetary authorities. Unlike Fiat Money, which is accompanied by the full faith and comfort of a country or Central Bank, cryptocurrencies do not have any intrinsic value and do not generate returns by themselves and are highly volatile. These reasons informed the decision of the CBN in February 2021, to stop financial institutions in Nigeria from allowing their platforms to be used for cryptocurrency transactions.
Following this new development, the CBN issued operating guidelines for Virtual Assets Service Providers (VASPs) for cryptocurrency. This indicates a shift towards regulation rather than outright prohibition. The CBN guidelines specify how financial institutions, including banks, should create accounts, offer services related to designated settlement accounts and settlements, and serve as conduits for trade and FX inflows for businesses that deal in cryptocurrencies. The increasing adoption of cryptocurrencies by Nigerians reflects the dearth of high yielding investment options amidst a significant decline in the purchasing power of households caused by multiple devaluations and high inflation. Investments in potentially high yielding ventures such as cryptocurrencies, despite associated risks are seen as a hedge against inflation.
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