Nigeria’s central bank is warning banks against using bitcoin

The digital currency is still finding its way in the finance world.
The digital currency is still finding its way in the finance world.
Image: REUTERS/Benoit Tessier
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Virtual currencies may be the promise of the future of finance, but the Central Bank of Nigeria (CBN) seems to prefer to keep things real.

In a circular distributed on Friday, the apex bank of Africa’s largest economy warned local financial institutions against doing business in virtual currencies like bitcoin as they “are not legal tender in Nigeria.” Banks who trade and exchange digital currencies do so at their own risk, CBN said. It also included Ripples, Monero, Litecoin, Dogecoin and Onecoin in its warning.

The warning by CBN is similar to notices issued by the People’s Bank of China on Jan.5 about the risks of trading in bitcoin. As a result of the warning from China, confidence in bitcoin was rocked, resulting in a sharp dip in value.

While China appears to be worried about bitcoin being used to avoid the country’s capital controls, for its part, CBN cites the possibility of exploitation by criminals and terrorists. With transactions “largely untraceable and anonymous”, CBN claims virtual currency transactions are “susceptible to abuse by criminals, especially in money laundering and financing of terrorism.”

Given the risk of loss of money if digital currency exchange companies collapse or shutter operations, CBN says there is a “need for guidance to protect the integrity of the Nigerian financial system.” As such the apex bank has drawn up a procedural guide for local financial institutions trading in digital currencies, including ensuring effective money laundering controls and reporting suspicious transactions, ”pending substantive regulation.”

Describing the CBN’s concerns as “valid,” Nonso Obikili, research associate at Economic Research Southern Africa, says the central bank’s measures can be justified. “There are significant risks around terrorism financing and other illicit flows with virtual currencies, especially due to the anonymity,” Obikili told Quartz.

But while the CBN suggests money laundering and national security as its main concerns, just like in China, the warning is seen as a pretext for capital controls. Given a prolonged dollar shortage, Nigerians have began exploring bitcoins and other virtual currencies as a workaround to access foreign exchange. NairaEx, a digital currency trader, corroborates this reality. “Trading has increased significantly in [the past] few months as more Nigerians realized the potentials of bitcoin for remittance, investment and other types of financial instrument,” a NairaEx rep told Quartz via email.

CBN is also likely wary of the adoption of virtual currencies by the controversial money-making schemes such as MMM, a popular Russian Ponzi offer with over two million participants in Nigeria. Having caused panic after suspending operations last month, MMM has launched a comeback with participants now able to make and receive payments through bitcoin.

Obikili also agrees the apex bank’s stance on virtual currencies “might be related to a loophole which is currently being used to get around the CBN’s capital controls.” With Nigerian bank cards not working consistently outside the country, Obikili says digital currencies “have become a real alternative.”

Unlike Nigeria’s Central Bank, other African countries have been more welcoming of digital currencies. In late 2015, Tunisia digitized its national currency using blockchain technology. Closer to Nigeria, fellow West African nation Senegal has announced plans to digitize its currency this year. The eCFA, as the digital currency will be called, is expected to be used across most of Francophone West Africa.

Regardless of the CBN’s current motives though, long-term, Obikili advocates more flexibility by the apex bank to allow for exploring financial technology. ”If the future of finance is there then you want your financial industry to be there as well, not to play catch up after the fact,” he told Quartz.