The Central Bank of Nigeria (CBN) has explained why it banned the use of cryptocurrencies in the country.
According to the apex bank, transactions in cryptocurrencies are largely speculative, volatile and must be discouraged.
The statement, by Osita Nwanisobi, Acting Director of Communications, read that the nature of cryptocurrencies creates a perverse incentive that allows for speculation and volatility
The explanation is coming on the heels of widespread reactions to the CBN’s directive prohibiting cryptocurrency transactions by Deposit Money Banks (DMBs).
“Evidence now suggests that some cryptocurrencies have become more widely used as speculative assets rather than as means of payment, thus explaining the significant volatility and variability in their prices.
“Because the total number of Bitcoins that would ever be issued is fixed (only 21 million will ever be created), new issuances are predetermined at a gradually decelerating pace.
“This limited supply has created a perverse incentive that encourages users to stockpile them in the hope that their prices rise.
“ … the price of ether, one of the largest cryptocurrencies in the world, fell from 320 dollars to 0.10 dollars in June 2017. The price of Bitcoins has also suffered similar volatilities,’’ he said.
Unlike Fiat Money which is accompanied by full faith and comfort of a country or Central Bank, cryptocurrencies do not have any intrinsic value and do not generate returns by themselves.
When one buys a stock, say of a conglomerate in the Nigeria Stock Exchange, its price reflects the activity and production of that conglomerate and the value people place on their goods and services.
This price may rise as the conglomerate produces better goods or services and probably gains greater market share.
In contrast, cryptocurrencies do not have fundamentals and would never have fundamentals. Investors only buy in the hope that its use and acceptability will rise, thereby pushing up its demand and price.
“But since new versions of cryptocurrencies come on stream with new mathematical models, an infinite supply may someday crash the price to zero,’’ Osita warned.
He, however, assured that the CBN’s actions are not meant to discourage technology-driven payment systems but to boost it.
“Nigeria remains an investment destination of choice for international financial technology companies because of CBN’s policies that have created an enabling investment environment in the payments system,’’ Osita said.
He added that innovations in Nigeria’s payment system are catalysed by CBN-driven regulatory reforms.
The recent regulatory directive became necessary to protect the financial system and the generality of Nigerians from the risks inherent in crypto assets transactions.
“The risks have escalated in recent times, with dire consequences for the integrity of the financial system and financial stability,’’ he said.
He emphasised that cryptocurrencies were largely speculative, anonymous and untuntraceable.
“They are increasingly being used for money laundering, terrorism financing and other criminal activities. Small retail and unsophisticated investors also face high probability of loss due to the high volatility of the investments in recent times.
In light of these realities and analyses, the CBN has no comfort in cryptocurrencies at this time.
The bank will continue to do all within its regulatory powers to educate Nigerians to desist from the use of cryptocurrencies and protect the financial system from activities of fraudsters and speculators.
