Crisis Engulfs the Naira: Cryptocurrency Not the Culprit – Nigeria’s Stability Hinges on Consistent Policy

The Securities and Exchange Commission of Nigeria is planning to impose stricter measures to deter unauthorized digital asset trading activities, with a specific focus on cryptocurrencies. The Conversation Africa engaged with Iwa Salami, an expert in crypto-asset regulatory frameworks, to discuss the optimal methods for Nigeria to administer cryptocurrencies.

Understanding Cryptocurrencies and Their Functionality

Cryptocurrencies are virtual assets or rights that are secured and transacted using distributed ledger technology, which enables several parties to maintain a collective registry without a central authority. This technology records transaction data in ‘blocks’ which are linked together in a ‘blockchain’.

The concept of cryptocurrency started in 1989 when the Dutch firm DigiCash introduced a digital currency called “eCash.” Despite its failure, it paved the way for further advancements in blockchain technology. In 2009, Bitcoin emerged, created by an enigmatic figure or group known as Satoshi Nakamoto. Additionally, Ethereum’s network makes use of its native currency, Ether. Other cryptocurrencies besides Bitcoin are referred to as Altcoins, each possessing distinctive characteristics.

Cryptocurrencies are decentralized and tend to be insulated from government control and manipulation. Their security is underpinned by cryptography, facilitating secure transactions online directly between parties. These digital currencies are valued based on supply, demand, and their acceptance in the market.

The popularity of cryptocurrencies has grown due to several factors:

• greater accessibility compared to cash, foreign currencies, and traditional banking services

• utilization as alternatives in economies with unstable currencies caused by economic downturns, overwhelming debt, or political turmoil

• facilitation of expedient fund transfers

• assurance of privacy during transactions

Evaluating Nigeria’s Cryptocurrency Regulation Practices

The Nigerian government has shown a vacillating stance on cryptocurrency regulation. The Central Bank notably prohibited financial bodies from cryptocurrency transactions in February 2021. Then in May 2022, the Nigerian Securities and Exchange Commission, responsible for overseeing the capital markets, introduced a regulatory framework, hinting at an endorsement for cryptocurrency trade, only to reverse its position in November 2022. Come May 2024, a Central Bank prohibition came into effect regarding person-to-person cryptocurrency trades involving the naira.

Further reading:
Cryptocurrencies are on the rise in Africa: Here’s what’s good and what’s concerning

Recommended Strategies for Nigeria in Cryptocurrency Management

For the crypto industry to flourish in Nigeria without jeopardizing financial or monetary stability, a balanced regulatory strategy is essential. A financially stable system should proficiently allocate resources and mitigate financial risks, safeguarding consumers and investors alike.

A blanket ban on naira transactions on crypto exchanges could drive Nigerians towards assets denominated in US dollars, which might bolster the devaluation of the naira rather than help it.

Despite associations with unlawful activities like money laundering and the narcotics trade, cryptocurrencies have no historic linkage to national currency devaluation, contrary to assertions from the Nigerian government. An initial measure could be the official registration of entities engaged in digital asset dealings.

Addressing concerns from Nigerian authorities might entail monitoring the identities and transactions of cryptocurrency exchange users. The regulatory framework implemented by the Securities and Exchange Commission in May 2022 caters to this by enforcing Know-Your-Customer protocols. Regulators have the prerogative to request identity disclosures for suspect crypto wallet transactions from regulated exchanges. Blockchain analysis firms such as Chainalysis and Elliptic partner with exchanges to expose dubious transactions.

Globally harmonized standards would permit regulators to collect details from foreign exchange platforms that serve their citizens. The Financial Stability Board has suggested that regulatory bodies exchange information regarding suspicious activities on foreign cryptocurrency exchanges. Universal adoption of such standards would result in consistent outcomes and address Nigerian regulators’ primary apprehensions.

Further reading:
Eco-friendly approaches to cryptocurrency, NFTs, and the metaverse