At the London Stock Exchange: Companies to Inspire Africa event held on 31 March, CEO of BitPesa, Elizabeth Rossiello, mentioned that the firm was on a Central Bank of Nigeria (CBN) committee drafting the regulation around the use of digital currencies in Nigeria. BitPesa is attempting to solve the issue of inefficient foreign exchange markets – a TransferWise for Africa – and this is part of their strategy to penetrate the Nigerian digital currency market. Now, this comes as a surprise given this circular from the CBN and a previous announcement by the Securities and Exchange Commission (SEC) regarding digital currencies.
Reading both, the cautious approach they have taken likens digital currencies to another MMM phenomenon.
Digital currencies are usually an internet-based form of currency or medium of exchange that are used to perform similar functions to physical currencies but allows for instantaneous transactions and borderless transfer-of-ownership. Though their growing popularity has attracted the attention of many central banks, the CBN's interest could be considered premature in light of Nigeria's situation.
Building an industry through regulation
As the institution charged with “promoting monetary stability and a sound financial environment”, it is understandable that the CBN wants to pre-empt controls on the use of digital currencies in the country. Importantly, institutions built on cryptocurrencies cannot thrive without some form of regulation which sets out “the rules of the game”.
Consider a company involved in the dissemination of digital currencies. This firm's future is uncertain in the absence of precise regulation around what it can do, what it can charge or what taxes can be levied. Moreover, capital-raising would be more difficult as investors will question the viability of the business model in the face of impending regulation.
To effectively encourage the use of digital currencies, it needs to be integrated it into our financial system – and this requires certainty to incentivise its use. This is where regulation comes in, and if done well, it can create an environment where the use of digital currencies can thrive, and consumers can safely engage with it.
Are we solving a problem?
But is there a need? New technology has a tendency to look for solutions to problems that don't exist yet, and this may be the case with cryptocurrency regulation in Nigeria, at least in the medium term.
In 2014, the Bank of England concluded that while digital currencies are “interesting, they do not currently pose a material risk to monetary or financial stability in the United Kingdom.” Their view was based on the minuscule scale of Bitcoin in the UK; at the time, less than 0.1% of sterling notes and coin in circulation. It is hard to imagine that the digital currencies in circulation in Nigeria surpasses that figure. From this perspective, the size of digital currency transactions limits the threat posed to financial stability, both in developed and developing markets.
So why is the CBN concerned for Nigeria’s financial stability? Conceivably, it is the potential risk of digital currencies. Over time, if they were to achieve widespread usage, it could be an issue for central banks. This explains why the CBN is treading with caution by creating a committee to consider regulating its use. Understandably so too as reactive regulation would be significantly less efficient.
Naira for Bitcoin?
Despite the move towards a cashless society, there is no guarantee that digital currencies would thrive in Nigeria. Rather, this would depend on whether we want to use it, not just whether we can.
On the former, though tempting to abandon the naira for an “N-Coin” given the naira’s recent performance, the fluctuations in the digital currencies are still very unappealing, which for businesses means incurring additional risks when trading. Since there is no central authority governing them, no one can guarantee a minimum valuation, and the currencies become susceptible to a wider range of market shocks. An example was the 20% erosion in the value of Bitcoins earlier this year due to a disagreement between its developers over the cap on the number of Bitcoins available in the market.
As to whether we can use digital currencies, the fact is, we still lag behind on the networks that created these currencies. Internet connectivity is crucial to enabling the use of digital currencies, and Nigeria has 6th the largest offline population globally (around 58% of its population). So, while Riku in Japan can quickly trade his coins for Japanese yen in a Tokyo café, Esther in Enugu has to worry about topping up the data on her phone before she can make transfers – assuming network in her area isn’t down.
If the country can overcome these structural challenges, digital currencies may thrive, though softer issues remain. Another challenge with digital currencies is the difficulty in accepting the absence of a central governing body for the currency. Amid the constant criticism of the CBN on how it has managed the exchange rate over the years, the ability of a competent central bank to counteract financial instability is crucial to the recovery of some economies from economic shocks.
It’s a non-issue for now
Like other central banks across the globe, the CBN seems to be finding its feet in an industry few are qualified to regulate. But this shouldn’t be a priority for them. Whether they regulate digital currencies over the next few years won’t make a significant difference to the economy because of its scale. Nonetheless, the initial framework that results from this exercise by the CBN committee may determine the future direction of regulation. If anything, the proactiveness shown should ensure some degree of preparedness when the occasion arises. Though with Nigeria, nothing quite goes to plan.
Cryptocurrencies are surrounded by hype these days, and the CBN may have caught the bug, as many of us – myself included – have. I applaud the vision but precious time should not be spent reaching what will likely be the same conclusion as the Bank of England.