Cryptocurrency is digital money designed to be secure and sometimes anonymous. It is a virtual medium of exchange, not issued by, backed by or tied to any particular nation or government.
The “crypto” in cryptocurrency stems from the use of cryptography to encode and secure transactions. Unlike paper currencies (usually referred to as ‘Fiat’ in crypto world), cryptocurrencies do not have legal tender status, meaning that they are not required to be accepted as a form of payment.
Crypto users can make secure payments and store money without the need to use their name or go through a bank. It is also used as a form of investment. Cryptocurrency uses blockchain technology to keep record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematics problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets. Other ways of making money from crypto activities include staking, trading (day trading, swing trading and arbitrage), hedges, lending and binary trading etc.
Problems of Cryptocurrency
All cryptocurrencies have a finite supply and the speed at which they can be increased is uncertain and not controllable by anyone. These currencies have no underlying value and their prices are driven by speculators.
Cryptocurrencies are not stable. The price of cryptocurrencies is volatile; some can go bust, others could be scams, and occasionally one may increase in value and produce a return for investors.
There is a high likelihood of loss of money either due to loss of a wallet file, insecure coin offerings, hacking, operational glitches and malware. Inadequate knowledge of the crypto market and inability to analyze trends and investment can lead to losses.
The Nigerian Position
On the 5th of February 2021, the Central Bank of Nigeria (CBN) released a letter addressed to banks and other financial institutions. The letter stated that dealing in cryptocurrencies and/or facilitating payment for cryptocurrency exchanges are prohibited. The CBN further instructed all banks and other financial institutions to identify individuals or entities who transact in cryptocurrency or operate cryptocurrency exchanges and ensure those accounts are closed immediately. CBN further stated cryptocurrencies are issued by unknown and unregulated entities and the significant risks in cryptos include the loss of investment, money laundering, terrorism financing, illicit fund flows and criminal activities.
By further press releases on the 7th and 28th of February 2021, CBN clarified that it did not ban cryptocurrencies in Nigeria rather it reiterated the prohibition of transactions on cryptocurrencies in the banking sector. CBN further warned that dealers and investors in any kind of cryptocurrency in Nigeria were not protected by law thus may be unable to seek redress in event of failure of exchange or collapse of business.
The Securities and Exchange Commission (SEC), a regulator of investments and securities business including digital assets like cryptocurrency issued a press release on the 11th of February 2021 in support of the position of CBN. They stated that they have engaged with the CBN and have agreed to work together to further analyze, better understand the identified risks to ensure that appropriate and adequate mitigants are put in place, should such securities be allowed in the future. SEC had earlier issued a statement on the 11th of September 2020 recognizing crypto assets and provided classification and treatment of such assets.
In another twist, the Vice President of Nigeria at a CBN Bankers Committee Economic Summit held virtually on 26th February 2021, called for regulation of cryptocurrencies rather than prohibition.
The position of CBN is not unexpected as most Central Banks in the world do not approve of the use of cryptocurrencies or provide a legal framework for its applicability.
Considering that Nigeria has one of the biggest cryptocurrency markets in the world, the position of the CBN might not affect the volume of crypto transactions done in Nigeria. Users and exchangers may devise means of transacting in cryptocurrencies outside the banking sector including peer to peer trading.
Conclusion
Potential investors in cryptocurrency must research and acquire knowledge, have thorough understanding of the market and develop the ability to analyse trends and investment as this is not a get rich quick scheme. It is also advisable to invest when the market calms down: it always does.
The high risks inherent in cryptocurrencies must be properly managed. Investors can short-sell assets if they believe it will fall in the short term. Another option is to hedge risks using derivative products or futures. Have a strategy for entry and exit of the crypto market. Predetermine when to pull out, for example maybe when loss is at 10%. Also do not put all your eggs in one basket i.e. diversify your assets.
Finally, it might be safe not to invest more than what you are ready to lose at any moment. Think of your financial security the same way you think of securing your life and you will be fine.
By Israel Otoijamun(Commercial Marketing Executive) & Ayemidun Apara(Legal & Corporate Executive)