Naira is in crisis, but it’s not cryptocurrency’s fault – Nigeria needs a consistent policy

The Nigerian Securities and Exchange Commission is considering tighter controls to combat illegal trading of digital assets, including cryptocurrencies. Conversation Africa asked Iwa Salami, a researcher on regulatory frameworks for cryptoassets, to explain how Nigeria can better manage cryptocurrency.

What is cryptocurrency and how does it work?

Cryptocurrency is a digital representation of a value or a right. It can be transferred and stored electronically using distributed ledger technology. This is technology that allows multiple parties to share and update a common ledger (record) without relying on a central authority. Transaction records are called blocks and make up a blockchain.

The origin of cryptocurrency dates back to 1989, when DigiCash, a company in the Netherlands, launched a digital currency called “eCash”. Although eCash did not survive, it influenced the development of blockchain. The first and best-known cryptocurrency, Bitcoin, was launched in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto. Another is Ether, used in Ethereum Network. All other cryptocurrencies except Bitcoin are called Altcoins and each one has unique characteristics.

Cryptocurrencies exist outside the control of governments and central authorities. In theory, they are immune to government interference or manipulation. Cryptography guarantees secure online payments without intermediaries. Although intangible, cryptocurrencies maintain value based on market demand and adoption.

The rise of cryptocurrencies can be attributed to:

• ease of access (compared to cash, foreign currency and traditional financial services through a bank)

• weak currencies (due to economic stagnation, debt and political instability)

• easy and quick mechanisms to transfer funds

• privacy in transactions.

Is Nigeria Managing Cryptocurrency Operations Well?

Nigeria’s approach to regulating cryptocurrency transactions has been unclear and inconsistent. In February 2021, the Central Bank barred financial institutions of these transactions. But in May 2022, the Nigerian Securities and Exchange Commission – the capital markets regulator – Published a framework for its regulation. This was a sign that it approved cryptocurrency trading. Then this went back in November 2022. In May 2024, the Central Bank banned person to person trading of cryptocurrencies in naira.

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How can Nigeria best manage cryptocurrency?

Nigeria needs a balanced approach to regulation if the industry is to prosper without undermining financial and monetary stability. A stable financial system is able to allocate resources efficiently and manage financial risks. The approach must protect consumers and investors.

If Nigerians were prevented from trading the naira on cryptocurrency exchanges, they could turn to other US dollar-denominated assets. That would be worse for the naira.

Cryptocurrencies have had a long history from being used in illegal activities such as money laundering and drug trafficking. But they were not linked to the devaluation of national currencies, as the Nigerian government has alleged.

The first step would be to register those who trade digital instruments.

One of the main concerns raised by Nigerian authorities can be resolved by tracking the identities and activities of cryptocurrency exchange users. The regulatory framework approved by the Securities and Exchange Commission in May 2022 provides for this. Requires all regulated exchanges to comply Know Your Customer Requirements. Regulators may ask exchanges to disclose the identities of cryptocurrency account (wallet) holders linked to suspicious activity. Blockchain analytics companies like Chainanalysis It is Elliptic work closely with exchanges and can uncover sinister transactions.

International standards also allow regulators to obtain information from foreign exchanges that provide wallets to their citizens. Therefore, in an ideal world, if regulators adopt international standards for cryptoasset activities, these concerns should be addressed. For example, the Financial Stability Board recommended for regulatory authorities to share information about suspicious transactions on foreign cryptocurrency exchanges. If all regulators around the world adopted international regulation, the results would be consistent. This would address some of the key concerns raised by Nigerian regulators.

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