When the governor of the Central Bank of Nigeria, Olayemi Cardoso, linked the loss of valuable tax revenue totaling $26 billion through Binance, the country’s federal government opened a new battlefront with crypto platforms.
- The prosecution of the Binance executives – Nadeem Anjarwalla and Tigran Gambaryan – started what would be called “the blitzkrieg for cryptos and fintechs”.
- The federal government in Nigeria has justified all these cuts as necessary deterrents to financial fraud and irresponsible currency speculation.
- The decline of the Naira against the dollar continues unabated and the Nigerian government is under intense pressure to save it.
Nigeria has more than 13 million cryptocurrency users, the largest in Africa. The country’s local media reports that more than $59 billion is traded on P2P crypto platforms in the country every year. However, some industry experts have claimed that the exact figures are ten times higher.
A large volume of crypto trading is not limited to popular platforms like Binance or Kucoin. And while fraudsters have infested many unregulated avenues, defrauding people through pump and dump schemes, it doesn’t make the government believe that these incidents can cripple the local currency in any meaningful way.
Government action to crack down on P2P platforms that could easily be regulated and harmonized works against their incentives. If crypto platforms do indeed have their share of fraudulent individuals and activity, the outright ban does not deter the country's citizens from going with other shady platforms that would be even more prone to cybercrime.
The multiple restrictions imposed by the Central Bank of Nigeria since last year are meant to consolidate financial transactions for easier supervision. The Binance controversy has been largely seen as an attempt to scapegoat the government's fiscal failings.
The Naira's Doom
It only makes sense for investors worldwide to use a medium of exchange that is stable and universally accepted. It also makes sense for them to abandon a medium of exchange that is prone to collapse and government hassle. By limiting traders' options, one can only expect a large outflow of valuable investments in the country's financial pipeline.
The Austrian economist FA Hayek once said that currency competition exists “to impose on the existing monetary and financial institutions a … much-needed discipline by making it impossible for any one of them … to issue a kind of money much less reliable and useful than the money of anyone else. »
The Naira debacle cannot be blamed on the existence of cryptocurrencies and exchange platforms like Binance. Monetary policies are essentially made at the Central Bank, and if the local currency depreciates, it would be unfair to blame traders for something they have no control over.
Binance and other crypto platforms, most recently Kucoin, have abandoned trading on their platforms using Naira. This does not help the local currency at all. The current financial system is not closed, but globalized. Cryptocurrencies are an accepted form of exchange for many developed currencies around the world.
As they cannot transact using the local currency, Nigerians who are known for their entrepreneurial spirit, are excluded unless they can use tradable currencies on crypto platforms. When this happens, the never-ending plunge of the Naira is exacerbated because the demand for forex increases.
For most Nigerians experiencing the pain of currency devaluation - the naira lost more than 5% of its value against the USD in May, according to official figures - cryptocurrencies represent a medium of exchange that the government cannot control. When monetary policies are made to match the state's appetite for grandeur, it doesn't take long for the public to distrust the stability of the local currency. This has happened elsewhere where hyperinflation of local currencies has resulted in clamor for dollarization.
From an international business perspective, other foreign entities will be reluctant to invest in Nigeria. Why didn't they? If one day the government were to point the finger at free enterprise, leveling charges of tax evasion and fraud when something deeper is clearly at play – that is a monumental risk that an investor cannot easily sidestep.
When cryptocurrency scapegoating and currency devaluation ghosts become the norm in continental Europe, other countries will follow suit. Nigeria is not the only country facing currency recession. Last year, the Kenyan shilling underperformed and predictably, the Central Bank of Kenya blamed it on dollar hoarding.
For many governments in Africa, it does not resonate that individual actions such as hoarding the dollar or seeking alternative currencies are only a secondary consequence of justified fear. The fear is that governments have mismanaged the supply of foreign exchange and the accompanying economic activities. This fear is shared not only by local investors, but also by foreign investors who cannot pump their money where they are not sure about the stability of the currency and politics.
What's next?
My argument follows that the popularity of cryptocurrencies essentially lies in the friction between citizens and their currency. Trying to invoke patriotism and loyalty by accusing traders of manipulating currencies that are solely controlled by the government cannot restore a currency's strength.
Looking back at the events that have transpired at Binance since last year, it is clear that the Nigerian government does not have a concrete solution to its currency crisis. When they banned cryptocurrencies, then banned them, then reconsidered their ban again – suggesting that their actions are purely for political expediency. To show the public that something was being done, when the currency's fate was sealed by Central Bank controlled exchange rates that did not reflect the reality of market supply and demand.
It is time for African governments to realize that their bloated fiscal approaches are responsible for the unattractive monetary policies set by their respective central banks. Accusing alt-currency traders of profiteering tightens the noose around our investment appeals. Speculation is what traders do. It is the lifeline of their activity. Assessing risks and rewards. Criminalizing it reduces our affinity for competitiveness, throwing us out of the international free market.
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