By Africa Links 24
Published on 2024-01-16 12:14:13
The Central Bank of Nigeria (CBN) has made the decision to drop its restrictions on banks and financial institutions facilitating cryptocurrency transactions, marking a shift towards a more liberal approach to digital assets in Africa’s largest economy. In a note distributed to financial institutions in the past month, Haruna Mustafa, the CBN’s director of financial policy and regulation, provided an explanation for reversing the ban imposed in February 2021, which prohibited banks from engaging in crypto-related activities. Mustafa cited the need for regulations of virtual assets services providers (VASPs), including cryptocurrencies and crypto assets, based on global trends and the changing attitude of regulators.
The new regulations outlined by the CBN provide guidance for banks and financial institutions on opening cryptocurrency accounts, settling transactions, and facilitating foreign exchange inflows for firms transacting in crypto. The decision to reverse the ban may be a recognition on the part of the central bank that its previous attempts to stifle the use of cryptocurrencies have not been effective, with adoption levels steadily increasing in the West African country. In 2023, a study from the crypto exchange KuCoin found that 35% of Nigerians aged between 18 and 60 are investing or trading in cryptocurrencies. Additionally, Nigeria’s volume of crypto transactions grew 9% year-over-year to $56.7bn between July 2022 and June 2023.
The increased adoption of cryptocurrencies in Nigeria can be attributed to high levels of inflation, a depreciating naira, and foreign exchange shortages, which have incentivized Nigerians to seek alternative stores of value. Furthermore, large volumes of crypto trading in Nigeria are conducted on informal peer-to-peer (P2P) networks rather than formal crypto exchanges. The move to liberalize the regulation of crypto transactions may lead to further adoption of digital assets and bring more P2P trading under the purview of formal regulators.
The CBN’s more accommodative stance could encourage a shift among crypto traders and users in Nigeria, directing more activity to regulated crypto exchanges that can be formally overseen by regulators. Furthermore, these regulatory changes could facilitate tracking bad actors in the industry, address past incidents of scams, and mitigate the impact of illicit transactions and financial crimes. The commitment to reform regulations to make them more crypto-friendly reflects the potential benefits associated with cryptocurrencies, including addressing limited access to formal banking systems and facilitating quicker and cheaper cross-border capital transfers.
While the recent move by the central bank is a step in the right direction for the crypto industry, obstacles remain that could potentially impede growth, such as the upfront capital requirement mandated by the Nigerian SEC. However, with the right approach to regulation from the CBN and SEC, the crypto industry in Nigeria has the potential for significant growth in the years ahead, boosting foreign direct investment and creating economic opportunities in the country.
