Why the CBN may need to revisit ban on crypto to remedy Nigeria’s forex crisis

Godfrey Elimian
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The central bank of Nigeria’s (CBN) official forex rate is currently N742.7 to a dollar. Last week, there were speculations in various markets that the Naira sold at N810 to a dollar in the free market, and although that might not be the case in its eventuality, there is every possibility, as there are speculations, that the Naira may eventually reach or surpass that rate.

The volatility of the exchange rate and the subsequent depreciation of the naira currently is not far from the free-floating forex monetary strategy implemented by the FG through the CBN. President Bola Ahmed Tinubu, during his inaugural speech upon assuming office, made it known that his administration intends to unify the multiple exchange rates in the market.

This was not an obvious solution to the nation’s currency’s weak performance in the forex market in the short term, but market analysts’ and experts’ expectations were that the naira would stabilize and soon gain much strength to challenge its foreign counterparts in free market trading.

Why the CBN may need to revisit ban on crypto to remedy Nigeria's forex crisis

What has become a big issue for policymakers and citizens is the period of time between the policy’s full implementation and the time when the expectations of the policy are projected to materialise. Before the country soon finds itself dealing with problems like extremely high inflation and growing poverty, a solution is now urgently needed.

This is where the need to revisit the ban or restriction on cryptocurrency trading by institutions regulated by Nigeria’s apex bank comes in.

Read also: What free-floating forex means for dollar-trading platforms and Nigerian Fintechs

Why CBN should revisit the ban on Crypto

In February 2021, the Central Bank of Nigeria released a circular directing all banks, non-bank financial institutions (NBFI) and other financial institutions in the country to identify and shut down accounts of persons or companies transacting or operating cryptocurrency exchanges within their system.

The decision at that time was based on concerns regarding the risks associated with cryptocurrencies such as money laundering, terrorism financing, and other criminal activities. The ban generated significant debate and mixed reactions within Nigeria’s crypto community and the wider public. And although P2P trading still continues today, that directive signalled the end of P2B or B2B crypto trading in Nigeria.

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However, if Nigeria is to solve the dollar crisis; the heavy reliance on the US dollar for international trade, import and other necessities that satisfy Nigerians’ demand for foreign currency, then the regulating body might need to revisit the ban.

Although reversing the ban on cryptocurrencies alone may not directly remedy the depreciation of the Naira or stabilize its volatility, cryptocurrencies can potentially offer certain benefits in terms of financial inclusion, cross-border transactions, access to alternative stores of value, and reducing the high demand for fiat money like the dollar.

If the CBN were to reconsider its ban on cryptocurrencies, it might give people and companies a way to diversify their financial holdings and lessen their reliance on the US dollar. It might lessen the demand for dollars in some transactions if people and companies have it as an option for cross-border transactions or as a store of value.

The apex bank can accomplish this by permitting cryptocurrency transfers that have gone via authorised exchanges and undergone KYC to enter Nigerian banks. In this manner, the apex bank continues to oversee and address the issues that prompted the initial prohibition, such as money laundering and the financing of terrorism.

By reducing the over-reliance on fiat currencies like the dollar for international transactions and creating a structured and strictly regulated trading space for cryptocurrencies, the regulator might be able to solve the dollar crisis while also helping the economy grow.

Read also: Only 15% of Nigerians use social media but the CBN demands that banks verify handles as a KYC requirement

Nigeria must now think long term

While reversing the ban might be a useful option to be considered, this might also not be an outright total solution to the forex challenge Nigeria currently faces.

This is because several factors contribute to currency volatility, including fiscal and monetary policies, economic fundamentals, market sentiment, and external factors. For one, Nigeria needs to grow its production economy in order to have sustained growth in its foreign reserve and be favourably positioned in its international trade with the rest of the world.

Allowing cryptocurrency trading may provide some diversification options for individuals and businesses, but it’s unlikely to entirely replace the need for dollars or significantly reduce its demand in the Nigerian economy.

However, if there are certain examples Nigeria should be looking at in regulating that space, then countries like Switzerland, Canada and El Salvador come to mind. Switzerland has been a pioneer in embracing cryptocurrencies and blockchain technology. The country has become a prominent global centre for blockchain startups and crypto-related businesses.

Switzerland has established a favourable regulatory environment, attracting both local and international companies to set up operations in the country. The Swiss government has recognized the potential of cryptocurrencies and blockchain technology to drive innovation and economic growth.

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