Nigeria’s crypto banking ban: One year later, By Olaoluwa Samuel-Biyi

It has been a year since the crypto banking ban, and the outcome is now clear to all. First, the ban has extracted liquidity from sane, formalised exchanges, and pushed it into the black market where there is anonymity. While terrorists and kidnappers might have struggled to move large volumes via crypto in the past due to concentration of liquidity on formal exchanges, they will now struggle less as liquidity pours into the black market where they can freely transact outside the radar of law enforcement.

The Nigerian authorities are very efficient at taking drastic measures that could be considered very expedient initially. However, they frequently fail at the critical next steps: Taking lessons, recalibrating and reversing-course where necessary to advance their primary objectives. We have seen this happen repeatedly at all levels of government. Many will remember a curfew imposed for security reasons that is just simply forgotten about months later, despite the economic consequences, even when it’s evident that the population have also forgotten. There is also the case of a ban on technology-enabled mobility businesses, purportedly for safety reasons, despite the economic consequences, only to allow the proliferation of informal operators who are synonymous with traffic hazards.

We have seen extended import bans, border closures, the Twitter ban, chief executives appointed to critical agencies in acting capacities, stop-gap social intervention programmes, and COVID prevention measures that are intended to be temporary drastic measures, all just lasting for far longer than they serve thier purposes. It appears that the courage to honestly assess the consequences of an action and correct course when necessary is considered a weakness or an admittance of an earlier fault, rather than a sign of wisdom and progressiveness. One can blame toxic political opposition that will frame any government action negatively, or the ego in cultures like ours with an extreme power-distance that prevents people in positions of power from apologising, admitting wrong or just learning and changing; nonetheless, when it comes to matters that have significant economic implications in a country where the economic circumstance is in a precarious state, it is important to relegate these in favour of fact and logic.

It is now exactly one year since the Central Bank of Nigeria (CBN) imposed a ban on individual and business users of cryptocurrencies from accessing the formal banking system. Overnight, banks were restricted from serving customers who have or appear to have dealings in cryptocurrencies. With the looming threat of massive fines, the banks enthusiastically complied and closed the accounts of cryptocurrency exchange businesses and private users. At the time, the move by the CBN could not be considered to have been ill-thought. In fact, it has been a common line of action for central banks across the world. The reasons stated for the ban were very emotive, and they were enough to receive mainstream and non-partisan political backing, while the facts were still fuzzy. Industry stakeholders were also not shocked at the development, as they were used to the narrative that cryptocurrencies finance terrorism, enable kidnapping and money-laundering, and promote obscurity. There was also an association with foreign exchange (FX) pressures that bothered the CBN. These were significant allegations and the Bank was right to take drastic actions initially. Although key industry stakeholders knew that they were not founded on fact, they were hopeful of subsequent engagements to broker alignment between the industry and the authorities. Afterall, the government had been full of pride for the rapid development of the technology ecosystem in Nigeria, and operators in blockchain are some of the brightest stars.

While cryptocurrencies are marketed as tools of rebellion against the legacy financial system and the authorities, it is important to separate the utility for users in the developed world from those in markets like Nigeria. The average cryptocurrency user in the global north is otherwise well-served by a financial system that allows global mobility. Just as their passports are not considered high-risk for international travel, they are also not deemed high-risk for international trade, and they are served by a suite of tools that enable them to pay and receive payments all over the world without friction. With the base of their financial hierarchy of needs satisfied, cryptocurrencies serve a higher purpose for them, primarily financial sovereignty, privacy and investment via speculation. These users remain the drivers of the largest cryptocurrency volumes, in tens of billions of dollars daily.

The authorities in the developed world are not exactly excited about these ‘higher-order’ uses of cryptocurrencies either. Concepts like privately-issued stablecoins challenge the government-issued fiat currencies, and the secondary trading of cryptocurrencies provide fragile returns outside of the traditionally-sanctioned investment markets. Nonetheless, despite concerns around money laundering, fraud and the likes, the developed world will not compromise positive economic activity for perceived or manageable risk, and they will therefore not prevent a fast-growing cryptocurrency exchange business like Coinbase in the U.S. from becoming a billion dollar venture that can go public on a stock exchange. It is understood that just as good actors derive value from a new technology, so will bad actors, and it is only important to ensure the advancement of the technology while ensuring that bad actors do not become the primary stakeholders in the system. This has not been easy to achieve as the industry is evolving at an incredible speed, but that is the general philosophy. Advanced and progressive nations will never throw away the proverbial wealth-excreting baby with the bathwater, and that is why over 1 in 10 households in the U.S. is worth at least a million dollars.

The extremely advanced blockchain monitoring technology that these exchanges implement also makes it easy to track every transaction’s history and future journey, such that it is nearly impossible to get away with crime facilitated through exchanges, if you’re a person of interest. There is probably more traceability on those venues than is obtainable even in the regulated banking system.

The problems that cryptocurrencies solve for the average user in the developing world is a lot more rudimentary. Just as our passports prevent people from physical mobility, they also restrict access to the global financial system and they are considered high-risk by default. Nigerian IPs and IDs are often blocked from access entirely to some financial systems (e.g, Paypal), or subjected to very discriminatory and unfair practices that lock them out of international commerce (e.g., friction with bank wires, or remittance costs). As people climb up the economic ladder, they would quickly find that freedom and capacity to transfer and receive money is so fundamental to upward financial mobility, that it should almost be a human right. It must be a constant in the economic inequality equation.

As Nigerians are some of the most aggressive people in terms of personal advancement (and also one of the most restricted) they have naturally become some of the most prolific users of cryptocurrencies. The average Nigerian does not have the luxury of staging an anti-fiat currency campaign, nor does he have the philosophical need for privacy; most are just trying to either create wealth or preserve the little they have first. That is exactly why they are happy to forfeit the anonymity and privacy that is inherent in cryptocurrencies by transacting on centralised exchanges (local versions of Coinbase in the U.S.). This fact is important because it defeats most of the CBN’s rationale for imposing the ban. The largest and most reputable local centralised exchanges have pre-empted regulation and they onboard users only on the condition that they complete rigorous and sometimes excessive know-your-customer and anti-money laundry requirements. Users are made to volunteer detailed personal information that makes every transaction associable with them directly, especially at the point of entry and exit into the banking system. The extremely advanced blockchain monitoring technology that these exchanges implement also makes it easy to track every transaction’s history and future journey, such that it is nearly impossible to get away with crime facilitated through exchanges, if you’re a person of interest. There is probably more traceability on those venues than is obtainable even in the regulated banking system.

It would be foolish for a terrorist or kidnapper to volunteer and verify all their personal details to an exchange, buy and sell crypto there and withdraw money in and out of their personal bank accounts, while trying to hide from authorities. Exchanges frequently work with global law enforcement and only need tangential information about a transaction to identify a criminal using their platform and hand them over. The fact, however, is that cryptocurrencies were originally designed to also function in a decentralised manner; that is, outside of these types of centralised platforms, which means that the only way to have any visibility on it or sanitise it is by actively encouraging users to deal with friendly intermediary platforms. By restricting exchange businesses from accessing the banking system, the CBN shut their only window to the market, and encouraged crypto activity to go back to where it was originally designed to thrive: Underground.

If exchange data is further queried, the authorities will find that a bulk of Nigerians are neither speculating on cryptocurrencies nor making high-value transactions that could interest those in the terrorism and kidnapping circles. They are receiving and making small-value payments frequently and across the world. While the government would prefer these payments to happen through traditional channels, the fact is that they are not fit for purpose, and as long as there is global liquidity (active buyers and sellers) for an instrument, either crypto, gift cards or tulips, people will use it as a means of exchange if there are no useful alternatives. They will do this either with a trusted broker, or transact in a peer-to-peer manner. Just as with FX transactions, the only way the authorities can see and extract value from these transactions is where they are not done peer-to-peer (i.e., in a black market).

Nigerians are not often global leaders in new-age technology development, but as with music and movies, we have been lucky enough to take the lead on the continent and the developing world when it comes to crypto expertise, adoption and utilisation, mostly through activities that contribute positively to economic growth and net positive capital formation. There are only a few regions in the world where massive billion-dollar crypto businesses can be built, and Nigeria is well-positioned to be that market for the region.

There is also the over-marketed use case for crypto, which is its use for speculation and as an inflation hedge; however, only a few people in the developing world have the excess capital to participate in these markets, and they are also largely educated on the risks of doing so, many thanks to the efforts of cryptocurrency exchanges.

It has been a year since the crypto banking ban, and the outcome is now clear to all. First, the ban has extracted liquidity from sane, formalised exchanges, and pushed it into the black market where there is anonymity. While terrorists and kidnappers might have struggled to move large volumes via crypto in the past due to concentration of liquidity on formal exchanges, they will now struggle less as liquidity pours into the black market where they can freely transact outside the radar of law enforcement. On-chain data shows that the crypto transaction volume in the market has not dried up, but has continued to grow, only now more so in the grey and disaggregated black market where users are exposed to unscrupulous third-parties daily. Local exchanges now function to provide some security for peer-to-peer fiat-to-crypto transactions with tools like escrow services, or operate exclusively to facilitate crypto-to-crypto transactions. Indeed, the crypto banking ban has only succeeded at squeezing out good actors from safe transacting environments and made them counterparties with (and market-makers for) bad actors. Since the transaction volumes in the market will continue to grow, taking the outcome of other central bank bans across the world as examples, whatever FX impact the ban was also intended to influence will not be verifiable. As it is already evident, the FX pressure in the market has not yet eased one year later.

The Central Bank in India recently restricted access to the banking system for similar concerns, but the stakeholders there were progressive enough to see the matter quickly heard at the Supreme Court level and the system was mature enough for fact-based arguments to matter. The highest courts reversed the ban in India on the basis of the doctrine of proportionality. They judged the ban to be disproportionate to the perceived risk of crypto, and following detailed and intelligent market-based arguments, they determined that there was no empirical evidence to justify the banking ban. They also noted that the constitution guarantees freedom of profession. Today, exchanges like CoinDCX in India have built significant businesses, attracted massive international capital, and they work more closely with the authorities to ensure a sane environment for users of cryptocurrencies. They control the risks in conjunction with the government without prejudice, and help them to extract the economic benefits via remittances, taxation, market education, research, law enforcement and more. Any Central Bank’s digital currency effort will also be with the buy-in of the right stakeholders for real and maximum impact.

Nigerians are not often global leaders in new-age technology development, but as with music and movies, we have been lucky enough to take the lead on the continent and the developing world when it comes to crypto expertise, adoption and utilisation, mostly through activities that contribute positively to economic growth and net positive capital formation. There are only a few regions in the world where massive billion-dollar crypto businesses can be built, and Nigeria is well-positioned to be that market for the region. The Nigerian crypto industry, although nascent and fragile, has since adjusted to the banking system ban and built resilience, as Nigerians always do. Nonetheless, the one thing that remains unquantifiable is the opportunity cost of constantly building around and in spite of the government, a cost that we cannot continue to incur. Even if the authorities can be forgiven for taking drastic measures out of caution, they cannot be applauded for ignoring the data one year later.

Olaoluwa Samuel-Biyi is a Partner at Hacked Ventures, Venture Partner at Greenhouse Capital and Doctoral Candidate in Cryptoeconomics at IE Business School, Madrid.