Why Nigeria’s blockchain industry is so ‘shocked’ by the central bank’s new crypto policy move

The cryptocurrency industry in Nigeria has been taking off recently, but a new policy from the nation’s central bank threatens to ground it.

On February 5, the Central Bank of Nigeria (CBN), which controls and administers the country’s financial policies, issued a directive instructing Nigerian financial institutions to close any account associated with cryptocurrency.  

The ordinance builds on a previous directive, published in 2017, that instructed financial institutions not to transact with crypto or those dealing with it.

While the 2017 policy has gone largely unenforced, the underlying message behind both circulars is clear: keep crypto out of Nigeria’s financial institutions. And there’s reason to think this time the crypto ban will have teeth.

Now, supporters of Nigeria’s blockchain industry are warning that the central bank is setting a “dangerous precedent” that, if not reversed, will not only set back the nation’s fledgling crypto industry but also harm its broader economy.

The background

The use of cryptocurrency in Nigeria has ballooned in the years since the last time the central bank weighed in on the matter. At the time, Nigerians who were familiar with the technology largely associated it with crime. 

Indeed, what introduced most Nigerians to Bitcoin was a scam, according to Chimezie Chuta, founder of Blockchain Nigeria User Group (BNUG), an organization that supports the blockchain and cryptocurrency community in Nigeria. 

Called the Mavrodi Mundial Moneybox (MMM), the scam was first developed by Russian fraudster Sergei Mavrodi in 1989. More recently, MMM rebranded itself as a Bitcoin-powered financial mutual aid fund. In fact, it is a Ponzi scheme, and it ripped through Nigeria in 2016, preying upon the unemployed by promising profits of 30% every month. 

The Nigerian Deposit Insurance Corporation estimates three million Nigerians lost 18 million nairas (about $42,200 at current rates) to the MMM scam. Some victims even committed suicide after losing their investments, according to the Nigerian Tribune. 

Chuta founded BNUG in 2016, around the same time the CBN created its own committee to study digital currencies and cryptocurrency as an alternative form of payment. 

That year, the CBN’s committee toured Nigeria and engaged with people who wanted to expand the presence of cryptocurrency in Nigeria. Chuta says that he and others who spoke with the central bank’s committee tried to educate them on how innovative cryptocurrency and blockchain technology could be. 

According to Chuta, many Nigerian crypto enthusiasts felt that these conversations would inevitably lead to crypto regulations either “for or against cryptocurrency.”  

The regulations did not materialize, however. Instead, the CBN issued its first call on financial institutions to avoid crypto and crypto users. The bank noted at the time that cryptocurrencies are “untraceable and anonymous, making them susceptible to abuse by criminals.”

While many banks adhered to the directive, others kept opening accounts with crypto companies like exchanges and brokers, Chuta says. “You know how the rule of law is,” he says. “When things are not enforced, people begin to do the wrong things.”

Cryptocurrency use in the country began to proliferate. Many Nigerians began using Bitcoin for international remittances or as an alternative store of value to Nigeria’s currency, the naira, which suffers from relatively high inflation.  

Chuta says that after a few years, enough banks were servicing crypto companies that it became “too visible to ignore in terms of the volume that they were doing.” That’s what prompted the new directive from the central bank, he says.

The backlash

Naturally, supporters of Nigeria’s crypto industry are not happy.

“Nigeria's blockchain and crypto industry is shocked and disappointed by the directive in the CBN circular,” Senator Ihenyen, general secretary of Blockchain Industry Coordinating Committee of Nigeria, a trade group composed of Nigeria’s top crypto and blockchain organizations, said in a statement on February 13. 

There are currently 34 blockchain startups in Lagos, the largest city of Nigeria, according to startup tracker Tracxn. David Ajala, CEO of the Bitcoin exchange NairaEx, told CoinTelegraph that there are at least 100 Nigerian startups connected to crypto. Now, crypto companies based in Nigeria will likely need to move to more crypto-friendly jurisdictions, Chuta says.

Exchanges based in other places must also adjust their services to the country. On the same day the CBN issued the new circular, Binance announced that it paused deposits involving naira. Luno, a London-based exchange prominent in Nigeria, said in a statement on February 11 that it disabled naira withdrawals and deposits.

Prohibiting banks from interacting with crypto could push remittances and other legitimate crypto business to the “informal economy,” said Ihenyen. Without access to exchanges willing to swap naira for crypto, people will be forced to buy crypto in different ways — likely peer-to-peer markets like Paxful or LocalBitcoins, which are like Craigslist but for crypto trading. 

In fact, Nigeria is already the world’s second-largest peer-to-peer (P2P) Bitcoin market on Paxful, behind the United States. But P2P trading is riskier and more expensive than using a centralized exchange, says Chuta.

Ihenyen and others have also warned that the new policy will also drive away foreign investment in the country’s blockchain startups. “This is definitely the wrong time to introduce policies that will restrict the inflow of capital into Nigeria, and I urge that the policy to prohibit the dealing and transaction of cryptocurrencies be revisited,” the country’s former vice president, Atiku Abubakar, said of the new policy on Twitter.

According to Inhenyen, the CBN might not even have the legal authority to close accounts associated with crypto since Nigeria’s National Assembly, the country’s legislative body, hasn’t outlawed cryptocurrency. He called on the government to review the new policy. “If the CBN’s circular is not reviewed, it will set a dangerous precedent in the country.” 

Chuta, meanwhile, maintains that the CBN hasn’t completely turned away from the industry. He has been speaking with members of the CBN and remains optimistic that they’ll relax or overturn these crypto-banning guidelines one day, he says. 

The CBN did not respond to requests for further comment.