CBN Tough Crypto Regulation Vindicated by FTX Blow-up

The move by the Central Bank of Nigeria (CBN) to crack down on decentralized digital or Crypto currencies early last year, is being vindicated by the bankruptcy of one of the world’s largest crypto exchanges.

FTX once valued at more than $30 billion, went insolvent after the biggest fraud in crypto history, and filed for bankruptcy on November 11, with its boss Sam Bankman-Fried, resigning as CEO.

More than 1 million FTX users now have their crypto holdings all but vaporized by the breakdown of FTX.

Reports say the cryptocurrency exchange may have improperly funneled $10 billion in customer funds to hedge fund Alameda Research.

In addition to FTX, approximately 130 additional affiliated companies (together, the “FTX Group”), have commenced voluntary proceedings under Chapter 11.

The company listed between $10 billion and $50 billion in assets and liabilities spread among 100,000+ creditors.

The news sparked the latest bout of selling in crypto assets with Bitcoin trading back under $17,000 a coin.

Nigeria’s central bank governor, Godwin Emefiele, in February 2021, ordered all Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NBFIs), and Other Financial Institutions (OFIs), to identify persons and/or entities transacting in or operating crypto currency exchanges within their systems and ensure that such accounts are closed immediately.

The CBN was among the first global central banks, including the Reserve Bank of India (RBI) that banned the trading of crypto currencies like Bitcoin.

A senior official of a major exchange operating in Nigeria told MoneyCentral that while arguments for crypto currencies have merits and are perhaps reasonable in normative world of economics, they are less justified in a positive macro world.

“The current realities of FTX and some other crypto exchanges only speak to the inherent risks of unregulated capital trade points for an important asset class classified as near-cash. Humans are by nature greedy and regulation only helps to tame the irrationality of man to maintain orderliness and sanity in the society. With the first cryptocurrency launched in 2009, it’s just been 13years, and it’s collapsing like a pack of cards or castle built on sands,” the official of the exchange, a self-regulatory organization, SRO said.

“It may be argued that Central Banks felt threatened about decentralising their power and relegating their authorities, perhaps so. Whether for objective reasons of protecting the integrity of legal tenders or for subjective rationale of keeping their roles, the world needs regulation to tame market irrationalities.”

Before its unraveling, FTX.com marketed itself as a safe-for-beginner’s destination for buying and selling cryptocurrencies. But a liquidity crunch forced FTX to halt withdrawals, leaving customers and investors in limbo.

Protecting Nigerian investors and the payments ecosystem against scams like FTX was part of the reasons for the CBN’s tough stance on cryptocurrencies. Bitcoin price sold at $71,000 on many exchanges in Nigeria equivalent to a 36 percent premium post the central bank’s crypto banking ban announced in February 2021.

Today every Nigerian who bought Bitcoin at that price has lost 77% of their money.

According to Osita Nwanisobi, the Director of Corporate Communications at the CBN, a perfunctory reflection on the definition of cryptocurrencies can already reveal several problems.

“First, in light of the fact that they are issued by unregulated and unlicensed entities, their use in Nigeria goes against the key mandates of the CBN, as enshrined in the CBN Act (2007), as the issuer of legal tender in Nigeria. In effect, the use of cryptocurrencies in Nigeria are a direct contravention of existing law,” Nwanisobi said.

“The very name and nature of “cryptocurrencies” suggests that its patrons and users value anonymity, obscurity, and concealment. The question that one may need to ask
therefore is, why any entity would disguise its transactions if they were legal. It is on the basis of this opacity that cryptocurrencies have become well-suited for conducting many
illegal activities including money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion. Indeed, many banks and investors who place a high value on reputation have been turned off from cryptocurrencies because of the damaging effects of the widespread use of cryptocurrencies for illegal activities. In fact, the role of cryptocurrencies in the purchase of hard and illegal drugs on the darknet website called “Silk Road” is well known.”

Central Banks across the world are now increasingly moving against crypto for a common reason; lack of regulation.

India’s Prime Minister Narendra Modi over the weekend called for tighter regulation of digital currencies in order to prevent them from being used to finance terrorist groups.

“New kinds of technology are being used for terror funding and recruitment,” he said, explaining that “challenges from the dark net, private currencies and more are emerging” and “there is a need for a uniform understanding for new finance technologies.”

India is far from the only country that has considered cracking down on decentralized digital currencies.

The EU earlier this month announced amendments to its anti-money-laundering rules that would prohibit banks and crypto exchanges from dealing in privacy coins such as Monero, which, unlike Bitcoin, conceals its block chain data from public view.

Crypto asset providers would also be required to verify customer identities even for occasional transactions valued at under €1,000 ($1,040) and inquire about the nature of larger transactions.

Nonetheless, analysts say regulation should not stifle innovation. The CBN is also ahead of the curve on this with the introduction of one the world’s first Central Bank Digital Currency (CBDC), the e-naira.

“It’s important for regulators, especially in emerging markets, to embrace new technologies and products capable of deepening markets, without compromising fundamental risk management principles requisite for sustaining the integrity of the market,” the official from the exchange said.