Crypto-based assets: The real reason CBN is scared

Let’s not pretend we do not know why the CBN is running mad and churning out circulars that is stifling innovations and suffocating long-term growth. These draconian policies are a spin-off of the need to stabilize the exchange rate. There is the overarching need to ensure consistent inflow of dollar which will ultimately shore up the foreign exchange reserve. As at 31st January 2021, the external reserve stood at US$36.3 billion relative to over US$40 billion two years ago.

Inflows into the external (or foreign exchange) reserve comes from various sources: foreign investment (both portfolio and direct investments), oil receipts, proceeds from non-oil exports, remittances, etc. A consistent accretion of the foreign exchange reserve puts the CBN in a good position to adequately intervene in the foreign exchange market and stabilize the value of the naira. Without these inflows, the value of the naira will be worth less than the paper in which it is printed on.

Unfortunately, this position has been threatened following the outbreak of the COVID-19 pandemic. This is because the pandemic led to an oil price crash that resulted in decline in oil receipt. The diaspora community were also badly hit hence inbound remittances declined significantly. Between January and September 2020, direct remittances into Nigeria declined by over 97% from US$2,050 million to US$54.4 million. The CBN has however attributed the significant dip to the nefarious activities of International Money Transfer Operators (IMTOs) who were profiteering from the artificial arbitrage between the dollar-naira rate.

There is also the capital flow reversal that hit the beginning part of 2020 wherein foreign portfolio investment performed far below expectations. The overall impact of this was a weak foreign exchange reserve position that could barely defend the naira. This led to the naira being devalued more than twice last year.

CBN’s woe has apparently been compounded by the speed-light adoption of cryptocurrencies not only as a vital speculative asset class but as an increasing medium of payment for Nigerian merchandise exporters and service providers. Many transactions in the country are increasingly being done outside the regulatory eye of the CBN and thus makes it difficult for the apex monetary authority to trace foreign exchange inflows and outflows.

According to Statista, nearly one-third of Nigerian respondents reported using or owning cryptocurrency in 2020.

It is true that the very nature of crypto-based assets perpetuates money laundering and terrorism financing as it difficult to trace, hack or control by a central authority. But the CBN laying hold on this as the basis for its recent directive to banks and other financial institutions in the country to block accounts of cryptocurrency exchanges is certainly not the most clever way to have addressed the situation. This makes one wonder what the real intent of the CBN is.

Well, I think the real reason is the need to have a tighter control on inflow of dollars. Sadly, no other thing matters to the CBN other than maintaining its managed pegged exchange rate even when there is glaring evidence that the system is wired to fail especially in a monocultural economy like ours. The CBN will rather choose to asphyxiate innovative ideas that will propel growth than yield to commonsensical idea. Pathetic!