By Nkiruka Nnorom
Ronak Gadhia is the Director of Sub-Saharan Banks & Research, EFG Hermes Frontier. In this interview, he speaks on the ban on cryptocurrency trading in Nigeria, saying that volatility and lack of regulation in the cryptocurrency space could have a significant negative impact on Nigerians in case of sudden correction in the value of the assets.
The Central Bank of Nigeria, CBN, has given reasons for the ban on cryptocurrency in Nigeria. Do you have a contrary opinion?
Apart from the reasons highlighted by the CBN which include that trading in cryptocurrency is unconstitutional, not a store of value, volatility, and speculative risk, I think the CBN may have also been prompted to act due to the potential for perpetuating illegal scams and money laundering activities on the platform.
Also, it can also be argued that the ban is an extension of the CBN’s attempt to plug various sources of FX leakages in the Nigerian economy
To what extent does it constitute a threat to Nigeria’s financial system?
The inherent volatility and lack of regulation combined with the increasing popularity of cryptocurrencies among Nigerians could have a significant and negative impact on Nigerian savers if there was a sudden and significant correction in the value of these instruments (as has consistently been the case in the last few years) or, indeed, if some of these underlying instruments turn out to be Ponzi schemes.
Do you agree that it also puts the investment of participants in danger?
Yes, lack of proper regulations for any financial instrument increases the risk of loss for participants. Furthermore, the lack of basic financial education augments these risks in our opinion.
Some have argued that cryptocurrency is even an economic booster to any economy in the world…
We would ask how? What are the real assets that have been created on the back of cryptocurrencies? Can this be demonstrated?
Nigeria was said to have ranked second globally in the cryptocurrency space. Should that not have discouraged the CBN from scraping it in the country?
Perhaps, instead of completely banning the trading of cryptocurrencies, the CBN should have sought ways of regulating the industry, like in South Africa, and/or tried to determine why the asset class has become so popular and introduce alternative asset classes to meet that demand.
Can you tell us how much Nigeria has made from it in the last few years?
It is difficult to tell, but some analysts estimated that Nigerians have traded up to US$500 million of cryptocurrencies in the last five years. However, this value traded should not be understood to be a net benefit to the Nigerian economy. That is a different matter.
Daily Cryptocurrency trading is believed to worth about N2 billion, a figure that is more than the value of daily trade at the Nigerian Stock Exchange. What is your thought on this considering the recent development?
First, this shows the decreasing importance of the Nigerian Stock Exchange as a capital intermediary in the Nigerian economy as trading volumes have persistently been on a downward trend in the last 10 years, and as a result, are much lower than other economies of a similar size.
Second, the significant volume for cryptocurrencies suggests that the currency investment needs of a vast proportion of Nigerian investors are not being met by the existing product available in the country.
The CBN and other regulatory bodies such as the Pension Commission (PenCom), the Securities and Exchange Commission (SEC) among others should try to introduce new products that could satisfy this need. Having said that, one cannot ignore the possibility that the high usage of cryptocurrencies is being driven by money launderers.
What do you think those affected by the CBN policy should do?
They should lobby the CBN to reconsider their decision to either allow trading of cryptocurrencies in a regulated environment or introduce an alternative product, such as a Naira digital currency, as we have seen in other countries.
What do you think the CBN should have done differently?
As indicated above, I think the CBN could have sought to regulate the industry like in South Africa. Having said that, we are very encouraged to see the CBN take an active position on cryptocurrencies, and for this reason, we are confident that a regulatory framework will be built for the trading of these currencies.