She warned that restricting naira transactions on cryptocurrency exchanges could drive Nigerians to US dollar-denominated assets, worsening the naira’s decline.
In an era marked by digital transformation, the concept of cryptocurrency has gained significant traction. Iwa Salami, a researcher specialising in regulatory frameworks for crypto-assets and associate professor at the University of East London, explained that cryptocurrency is “a digital representation of a value or of a right,” which can be transferred and stored electronically using distributed ledger technology.
This technology, more commonly known as blockchain, allows multiple parties to share and update a common ledger without relying on a central authority. Transactions are recorded in blocks, forming a blockchain.
The origins of cryptocurrency trace back to 1989 when DigiCash launched “eCash” in the Netherlands. Although eCash eventually failed, it laid the groundwork for the development of blockchain technology.
The first and most well-known cryptocurrency, Bitcoin, was introduced in 2009 by an anonymous entity known as Satoshi Nakamoto.
Another major cryptocurrency is Ether, which operates on the Ethereum network. Collectively, all other cryptocurrencies aside from Bitcoin are referred to as Altcoins, each boasting unique features.
The Appeal of Cryptocurrencies
Salami, in an opinion piece in The Conversation, highlighted several factors contributing to the rise of cryptocurrencies, particularly in regions facing economic challenges like Nigeria.
She noted that cryptocurrencies offer ease of access compared to traditional banking systems, provide a haven from weak currencies, enable swift and simple fund transfers, and ensure privacy in transactions. These attributes make cryptocurrencies particularly appealing in regions grappling with economic instability.
Nigeria’s Inconsistent Regulatory Approach
Nigeria’s management of cryptocurrency operations has been marked by inconsistency. Salami pointed out that “Nigeria’s approach to regulating crypto-asset transactions has been unclear and inconsistent.”
In February 2021, the Central Bank of Nigeria barred financial institutions from handling cryptocurrency transactions, only for the Nigerian Securities and Exchange Commission (SEC) to publish a regulatory framework in May 2022, suggesting an endorsement of cryptocurrency trading.
This policy was reversed again in November 2022, and the central bank further complicated matters by banning person-to-person cryptocurrency trading in naira in May 2024.
Need for Balanced Regulation
Salami advocates for a balanced regulatory approach that fosters industry growth while safeguarding financial stability.
“A balanced approach to regulation is essential if the industry is to thrive without harming financial and monetary stability,” she emphasised.
A stable financial system, capable of efficient resource allocation and risk management, is crucial. Regulation must also protect consumers and investors, the associate professor posited.
She warned that restricting naira transactions on cryptocurrency exchanges could drive Nigerians to US dollar-denominated assets, worsening the naira’s decline.
Salami also dispelled the notion that cryptocurrencies are responsible for the devaluation of national currencies, noting crypto trading could aid illegal activities like money laundering and drug trafficking instead.
Recommendations for Effective Management
To mitigate these risks, Salami recommended robust tracking and registration of digital instrument dealers.
She praised the SEC’s 2022 regulatory framework, which includes Know-Your-Customer (KYC) requirements.
“Regulators can ask exchanges to disclose the identities of cryptocurrency account holders linked with suspicious activities,” she noted, adding that blockchain analytics firms such as Chainalysis and Elliptic can aid in identifying illicit transactions.
The don also advocated for international cooperation in regulatory standards, enabling regulators to obtain information from foreign exchanges providing wallets to their citizens.
“If regulators adopt international standards for crypto-asset activities, these concerns should be addressed,” she stated, pointing to recommendations from the Financial Stability Board for global regulatory information sharing.
Salami emphasised the importance of consistent and transparent regulatory policies to harness the potential of cryptocurrencies while safeguarding Nigeria’s financial stability.
By adopting a balanced approach and collaborating internationally, Nigeria can address the challenges posed by digital assets and potentially benefit from their growth, she noted.
“A clear and stable regulatory framework is crucial for the healthy development of the cryptocurrency market in Nigeria,” Salami concluded, urging policymakers to align their strategies for a more prosperous future.
