Cryptocurrency Ban and its Economic Implications


Sunday, March 14, 2021 / 04:10 AM / by FDC / Header Image Credit:

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In the last four years, cryptocurrencies, especially Bitcoin have become ubiquitous, prompting both global and domestic monetary authorities to devise a means to regulate and accept their usage. In 2017, the price of Bitcoin jumped from $900 in January to about $20,000 by the year-end. Digital currencies have proved to be highly volatile and risky, forcing several regulatory bodies, including the Central Bank of Nigeria, to warn against huge investments in the crypto market, especially after the crash of Bitcoin in 2018.


Fast forward to 2021, the global economy is now embracing the digital currency as not only a medium of exchange but also a source of risk and store of value. Elon Musk, recently purchased $1.5bn worth of Bitcoin, and MasterCard will begin to facilitate cryptocurrency transactions in 2021.


The price of Bitcoin recently skyrocketed to a record high of $51,000, up 5566.67% from its value four years ago before falling to $46,000. In Nigeria, the crypto market expanded so much that the volume of Bitcoin traded monthly is estimated at $200mn according to Buy Coins, one of Nigeria's largest cryptocurrency exchanges.


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CBN's Ban on Cryptocurrency

The CBN prohibited the facilitation of cryptocurrency transactions by commercial banks and other financial institutions in the country. This prompted the Securities Exchange Commission to pause its plans to formalize cryptocurrencies as securities under its remit. The CBN is particu-larly concerned about the high risk of the digital asset class and the use of the currency for mon-ey laundering, terrorism financing and tax evasion. However, these financial crime concerns ex-isted in the country long before the crypto market rose in popularity. In addition, only 1.1% of the total $1 trillion global crypto transactions in 2019 were illicit.


As Quartz explains, laundering money using cryptocurrency is like stealing from a jewelry store but leaving the map to your house at the crime scene.4 This is because all cryptocurrency transac-tions may not carry your real name but there is an ID reference and the details of all transactions made with that ID can be traced. The pseudonymous nature of cryptocurrency somewhat vali-dates the CBN's concerns. But the truth remains that cryptocurrency is an emerging market with a huge potential for job creation and investment which is being undermined by arbitrary policy regulations.


Economic Implications



The recent ban on cryptocurrency transactions could taper investment flows into the country as global investors are beginning to heavily eye the cryptocurrency space. Just recently, Jay Z and Jack Dorsey announced a $23.6mn investment to fund Bitcoin development in Africa. In addition, there is a fast growing interest from Wall Street and the big players in the financial industry, such as JP Morgan and Morgan Stanley. This signals a huge potential for the crypto market in the coming years. There are high expectations of reduced volatility as investors could begin to increase cryptocurrency investments in emerging markets. This is good news but with the largest consuming market in Africa banning cryptocurrency transactions, this could limit potential investment in-flows that would boost economic growth.


Shadow Economy

Bitcoin was created for the sole purpose of reducing bottlenecks in financial transactions, particularly across borders. The ban is unlikely to completely stop all transactions. What is more likely is the rise of a crypto shadow economy in Nigeria, which could now increase the chances of money laundering and illicit financial flows. There would be no more advertisements by popular exchanges on social media platforms and no transactions using financial institutions.


Capital Flight

The move by the CBN may fuel the pessimism of existing and potential investors (domestic and foreign) who were already skeptical about the uncertain policy environment. The attendant effect could be an increase in capital outflows, which is risky for the naira and infrastructure development.


Poverty and Unemployment

The fast expansion of the Nigerian crypto market has created numerous jobs especially for the youths. The ban will affect individual home-based traders and these traders often have employees of their own. Stopping the operations of the emerging crypto market means more job loss, and this could trigger a faster increase in the rate of unemployment which is already at 27.1% (Q2'20).



From all indications, the crypto market is not going anywhere soon. Therefore, it is vital for the CBN to invest in understanding the market and utilizing it to attract much-needed investment in-flows. The CBN could also regulate the cryptocurrency exchanges and issue guidelines to encourage forex inflows through these platforms, similar to its recent guidelines on diaspora remittances. The macroeconomic picture is still not inviting, and an uncertain policy environment coupled with multiple exchange rates will keep investors skeptical. Nigeria is already high risk for investors and with the rising total debt stock ($84.57mn as of September 2020), a widening fiscal deficit (estimated at N5.6trn) and an infrastructure gap estimated at $100bn annually, there is need for fiscal and monetary policy consolidation to attract investment. An increase in capital inflows will boost productivity and output levels.

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