CBN’s Crypto “ban” and the search for $20 billion

“Guy, hope sey you don comot your money from bitcoin. CBN don ban am now”

“Baba, it’s like this bitcoin don cast. How I go take comot my money now?”

These messages, and a million more, I received the past few days, concerning the recent CBN policy on cryptocurrency transactions. I really appreciate people checking on me, there’s loads of love on the streets. But my funds are, to a very large extent, SAFU (crypto slang for safe).

This episode made me realize a lot of people do not have a fundamental knowledge of cryptocurrency and all that comes with it, good, bad and ugly. Crypto has gone mainstream these past months, and it seems it’s here to stay. I feel there is a strong need for more people to understand what’s going on in the crypto scene, and how it may affect them.

In this article, I’ll share my thoughts on the whole stuff that happened with the CBN policy, particularly on the real reason behind this move by Uncle Meffy (our beloved CBN governor). As a practical guy, I’ll try to go first-principles on this and paint a picture we can all understand and relate to. If you’ve got questions, you can stop me mid-way and I’ll address them.

Let’s go!!!

The CBN has stopped financial institutions from facilitating crypto transactions. Why?

Many, many people have attributed the ban to the #EndSARS campaign. When the FG was trying to clamp down on the protesters, the CBN froze the bank accounts of the Feminist Coalition (a group of strong women who handled logistics from providing food and security to sending legal support to detained comrades) and some influencers who were actively screaming the #EndSARS message. Thanks to digital innovation, financial operations continued through Bitcoin. It would be easy to say #EndSARS was the reason for the new policy, but I urge you to look beyond the sentiment.

Well, to me, and some other really smart folks I’ve had the pleasure of discussing with, the data suggests it’s purely a foreign exchange play at hand. Nothing more. How? I’ll explain a few mechanics behind foreign exchange, drop some numbers and leave you to make your conclusion. Stay with me on this, it would begin to make sense to you.

Nigeria has three major classes of foreign exchange: Exports, Investments, and Remittances. These are the channels through which dollars flow into the country. My case is that the inflow of dollars has reduced drastically, and it would make sense to examine what has happened in these channels to substantiate this case.

Exports

The whole idea behind export as a channel for incoming foreign exchange is this: we sell stuff other countries want (in our case, oil), and we get paid in foreign currency. We all know how important oil is to Nigeria’s subsistence. If nobody decides to buy our oil again, our economy is finished. No jokes. It’s so huge a deal that about 90% of our foreign exchange and half of the government’s revenue comes from crude oil. Moving on from this gory detail, what happened to crude oil sales in the past 12 months? 2020, as a year, would forever be etched in the hearts of many, transport companies particularly. With lockdowns enacted in most countries, mobility was greatly reduced, save for freight movements (e-commerce for the win!). With two-thirds of global oil consumption accounted for by transportation, oil sales dropped. Fewer people were moving around, so less demand for oil products. Remember that economic concept of supply and demand? What happens to the price of oil when demand for it drops sharply? You know. Low demand, low prices, sales end up in the gutter. With reduced purchase of our oil, there are fewer people who gave us dollars in exchange for our oil barrels. The foreign exchange inflow from this channel was relatively terrible.

Investments

As an emerging market, it would be the norm to see some foreign entities see Nigeria as an interesting place to park some money and watch that money grow. Despite the inherent riskiness, people are willing to take bets on Nigerian stuff with the hopes of making profits later on. Economists typically group such investments into two: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). FDIs normally involve direct investment in productive assets, like buying a Nigerian company or construction projects. A classic example is Chevron and its many oil-producing assets across Nigeria. FPIs are not so direct and involve investing in financial assets like T-bills, mutual funds.

In recent times, Nigeria hasn’t been so attractive to foreign investments. Insecurity, disease (they say its ease) of doing business, unfavourable regulatory actions (remember Lagos ban on Okadas?), and many more have cast lots of doubt on the Nigerian scene. The coronavirus pandemic has been the most impactful event across all spheres of life in recent times. The economic, financial, geopolitical, physical, and even spiritual states of some parties have been altered greatly. The Nigerian investment scene was not immune in this case. It became much riskier to have money invested in Nigeria, devaluation hit very bad and business interests were impaired. Let me put this into context a little bit. Baba Dangote has had his revenues grow every year, in naira. In local terms, he is living the life. But a quick google search reveals his net worth dropped from $14 billion to just about $10 billion. This situation resonates across board with every other investor, myself included (with my chicken change). Investors fled. This beautiful article by Stears Business gives more insights into this issue, but take a look at one chart from the article, focus on the past three years, and see what I mean by “Investors fled”.

Remittances

With poor crude oil activity and investors fleeing with their money to greener pastures, from whence cometh our dollars? Remittances, it must be.

Remittances are basically the stuff sent from family and friends who are abroad. There is a slight issue with the definition/calculation of this though. On one hand, we have finance and accounting guys who define it as purely cash sent from abroad. On the other hand, economists and stats folks claim it is cash, plus the value of every other thing sent as a gift like T-shirts, phones, cars, pencils. For clarity, we would go with the more popular definition (the economists/statisticians) which estimates remittance to be between $20 billion and $30 billion.

The unfortunate thing about this number is this: the $20 billion, for the most part, does not pass through the CBN. If your aunty sends you an iPhone 11 or uses WorldRemit to send you $100, Uncle Meffy would most likely not know. This is where the complications start, and things become frustrating for the CBN. FX inflow from other channels has been quite low, and the CBN doesn’t control this remittance cup overflowing with fx. Sigh.

Okay, what does the Crypto Policy have to do with anything?

Meffy and his people have tried to keep the USD/NGN exchange rate fixed. So the CBN, in theory, tries to control what fx is used for: things that can be imported (remember the list of 41 banned items), who gets how much worth of fx, etc. But with a major channel of fx inflow not being controlled by them, it gets way harder to control the exchange rate.

So what have they done?

The CBN initially thought the International Money Transfer Operators (IMTO) were the cause of the remittance thingy. Go check all the circulars the CBN released since November, they’ve been targeted at the IMTO guys. By IMTOs, I mean companies like Transferwise, WorldRemit, etc. Meffy, through these circulars, has tried to dictate how the IMTOs should operate, with the hopes that he can get a rein on the $20 billion.

After a few months, he still hasn’t seen any dollar. The hole hasn’t been plugged.

For a long time, many business people have had issues sourcing forex to take care of international business needs. Exporters, who do source, find a 20% premium on the fx rate very preposterous as it eats greatly into their margins. By 20% premium, I mean the official rate is 380/$ while the parallel market (Meffy, one time, claimed it’s an illegal market) has it at around 480/$.

Cryptocurrency, particularly bitcoin, has greatly eased this friction as it makes it way easier to fulfill these cross-border obligations. On the demand side, sourcing for fx becomes way easier and on the supply side, a formal credible system of getting parallel market prices is established. Everyone goes home smiling, except the CBN.

As usual, the CBN wants to join the party and brings with it, the only stuff they have in their toolbox: threats, bans, penalties. Who do they give these gifts to? The people they can control: banks and financial institutions facilitating crypto-to-fiat transactions.

This piece, in demystifying the reason for this season of policies, has come a long way already. I would have loved to share my thoughts on the collateral damage these policies, especially the crypto ban, have on the economy and our welfare in general. I’ll dedicate another article to that.

TL;DR — The CBN did not ban cryptocurrency, because they cannot. All they did is prohibit financial institutions from facilitating crypto-to-fiat transactions. #EndSARS was not the reason behind this move. The “protection of Nigerians from fraud” definitely is not the reason for this. It is simply a way to gain control of the foreign exchange situation.

I would appreciate comments and feedback on this piece, let’s hear what you think. And if you enjoyed reading this, please leave a comment, share and follow.

Merci!