By Olu Fasan
THE recent crackdown on cryptocurrency transactions by the Central Bank of Nigeria, CBN, follows a worrying pattern. From the exclusion of importers of 43 listed items from access to foreign exchange through the official window to wider exchange controls and now a ban on digital currency trade, the Central Bank has an irresistible impulse to ban legitimate economic activities, thus stifling free enterprise.
A Nigerian banker told the Financial Times: “It’s just par for the CBN course to stifle anything and everything it doesn’t understand or can’t fully control.” Yet, the trigger-happy, ban culture doesn’t only signal to the outside world that Nigeria is not open for business, but it also chokes off wealth-creation initiatives at home, making Nigerians poorer, not richer.
Before we come to the cryptocurrency ban: it’s useful to start with some age-old principles of prosperity. The first is that it’s private enterprise that generates prosperity. As David Hume, the 19th-century Scottish philosopher, put it in his treaties titled, Of Commerce: “The state becomes prosperous in proportion to the opulence and extensive commerce of private men.” Put simply, the prosperity of a nation is linked to the economic activities of its citizens.
The second principle, which flows from the first, is that the more interventionist and intrusive a state is, the less prosperous and happy will its citizens be. Which is why, in his seminal book, The Wealth of Nations, Adam Smith describes free enterprise as a “system of natural liberty” where governments provide sensible framing rules and good governance but leave the individuals free to pursue their economic interests. It’s not surprising that open economies are richer than closed ones, and their citizens more prosperous!
Now, the third principle is that central banks have a critical role to play in generating prosperity, both in terms of ensuring price stability, i.e., controlling inflation, and supporting free enterprise. The characteristics of free enterprise, namely: economic freedom, voluntary exchange, private property rights, the profit motive and competition, are the bedrocks of economic prosperity, and it’s unthinkable that any central bank would undermine them.
Which brings us to the cryptocurrency ban. In February, the CBN barred banks and other financial institutions from facilitating cryptocurrency trading. But why? Well, first, the CBN said cryptocurrency trading is highly volatile and, thus, Nigerian crypto investors could suffer losses. Then, the CBN cited fears of illicit financial transactions such as money laundering and the financing of terrorism and other criminal activities.
Of course, the first reason – potential loss of investments – is paternalistic: government is restricting your economic freedom in your own interest! But anyone engaging in any speculative trading, which cryptocurrency investment is, knows that it’s inherently risky; the regulator’s role is to warn people about such transactions, not to ban them.
The second set of reasons – the fear of illicit or other criminal financial transactions – is also dubious. Illicit financial transactions, such as money laundering, existed long before bitcoin was created in 2008, and there’s no evidence that its creation has led to a significant increase in such activities. What’s more, citing the financing of criminal activities as justification for banning cryptocurrencies is sinister, especially from a government with an authoritarian streak. Cryptocurrencies were reportedly used to fund the #EndSAR protests; so banning them will inevitably be seen as an attempt to stifle legitimate protests.
Truth is: whatever the reasons, banning cryptocurrency trading is not the answer. Which is why Vice President Yemi Osinbajo’s recent intervention is commendable. Urging the CBN to regulate and not ban the use of cryptocurrency, the vice president said: “We must act with knowledge and not fear”, adding that the digital currencies disruption will only make “room for efficiency and progress”.
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It is interesting – isn’t it? – that the vice president, a lawyer, is more familiar with the evolution of money than the central bank. Throughout history, money has evolved through innovations. After the cowrie shells of the Maldives, came the huge stone discs of the Pacific islands of Yap, then came coin money, then paper money, and, well, electronic money. Now, with cryptocurrencies, it’s digital money. There were concerns about electronic money, when it was first introduced, but, today, most of the money supply is electronic. Well, bitcoin looks likely to be a viable new currency platform.
Take the major economies. China has its virtual or digital renminbi. The US Federal Reserve is consulting on the digital dollar, and the EU is creating the digital euros. Even more importantly, the private sector is massively driving the digital currency trade. Tesla, the electric carmaker, led by billionaire Elon Musk, has invested billions in bitcoin. Citibank told its clients that digital currency could one day “become the currency of choice for international trade”.
But what about Nigeria? Well, the first point is that young Nigerians are investing in and making money from cryptocurrency trading. For instance, one told the Financial Times that he invested “all he had” into cryptocurrency and “within months, his savings had increased fivefold”, adding: “they have continued to rise ever since.” Of course, this can be highly volatile. However, the right government response is not to prohibit digital currency trade, but alert people to its inherent risks.
Yet, bitcoin has another potential benefit: higher remittances. Nigeria desperately needs foreign exchange, which is why the CBN insists that diaspora remittances must be in dollars not naira, and would even give N1,000 for every dollar remitted. But cryptocurrencies could significantly increase remittances because, according to one study, “transaction costs can be 50 per cent to 90 per cent lower than those of traditional methods.” With such low transaction costs diaspora remittances could rise exponentially.
Unfortunately, by banning cryptocurrencies, the CBN unwisely rejects potentially powerful tools to stimulate private enterprise, reduce poverty and generate foreign exchange. Furthermore, the cryptocurrency ban will not revive the sagging investor confidence in Nigeria. Rather, it will make it worse, and make the country poorer!