DIGITAL CURRENCY (BITCOINS) AND THE FUTURE OF NAIRA
Digitalization and globalization is one of the topmost goals the world wants to achieve. This goal is gradually becoming a reality as the world is gradually becoming a global village with each sector contributing its quota. The financial sector of the world economy is also seeking for ways to digitalize its sector with more focus on the digitalization of currencies (cryptocurrency). The concept of cryptocurrency is to provide an electronic or digital means of exchange between parties. This is a welcome development however, there are concerns about its concept and the future of the Nigerian currency, Naira.
Cryptocurrency is a digital property driven by the blockchain technology. It can be used as a means of exchange or as a legal tender; it’s often kept safe and in secret through the use of a cryptographic means and has a proper record and storage. Examples of Cryptocurrencies are Bitcoins, Etherum, Altcoins, and many others more. However, the most widely used form of cryptocurrency is Bitcoin, which is our main focus for this article.
Bitcoin was invented in 2008 by an unidentified person or group of people who disguised under the name ‘Satoshi Nakamoto’. Before 2008, there had been other online currencies that had been created before bitcoin such as B-money, Bi-gold but were not developed. In 2009, Bitcoin was made available to the public.
It was said that the first sale of bitcoins was on May 22, 2010, where 10,000 bitcoins was swapped for 2 pizzas by Laszlo Hanyenco. This day is often referred to as Bitcoin Pizza day. After five days, the price grew by 1000% from $0.008 to $0.08 for a unit of bitcoin, the price slightly increased between that same range as the months went by.
However, in 2016 it started increasing from September 2016 and got to its peak in December, 2017 before it started declining again in January 2018. It fluctuated for a while till December, 2018 where it got to its peak again in June, 2019, fluctuated again and started spiking upwards from September, 2020 and has its highest peak on the 13th of December, 2020. As of today, 15th December, 2020, a unit of bitcoin is traded for $19,309.41.
BITCOIN REGULATION IN NIGERIA
Basically, bitcoins are used for three main purposes which is quite similar to foreign currencies. It could be used to settle transactions, as an investment vehicle and also, as a trading instrument. In Nigeria, Bitcoin is mostly seen as a very lucrative investment instrument in Nigeria.
Bitcoin is an online currency but cash is used for purchase at first instance. This, therefore, brings about the movement of physical cash and therefore involves the monetary system and consequently the financial sector. With this, there should be some regulators behind the use of cryptocurrencies in the economy. The monetary system is controlled by the Central Bank of Nigeria.
On the other hand, individuals purchase the coin with the aim of selling it at a later date and at a higher price so as to realize some gains (this is quite similar to forex trading), and some purchase it to add it to their investment portfolio. Securities are often controlled by the Security Exchange Commission.
Bitcoin could serve as a store of value, a unit of account, or as a medium of exchange however, the currency does not perfectly fit into the definition of money as regards its features such as Uniformity, Acceptability, and many more.
Also, according to the CBN Act, 2007, only the central bank has the right to issue legal tenders. Bitcoins are not issued by the Central Bank of Nigeria and has no regulation over it at the moment. The apex bank revealed on 12 January, 2020 that transactions with cryptocurrencies are almost untraceable and are prone to abuse by criminals and as such and declared that cryptocurrency is not a legal tender and anyone who uses it transacts at his own risk.
In 2017, the security exchange commission said that none of the persons, companies, or entities promoting cryptocurrencies had been authorized or recognized by it to provide any investment in Nigeria and therefore, warned the general public of the risk in investing in cryptocurrencies.
Although it seems that the regulatory bodies (CBN & SEC) are not so eager to accept cryptocurrency as a currency in the country; SEC brought about a group of individuals in 2019 to analyze the impact of fintech on securities and investments in Nigeria. This team is referred to as the Fintech Roadmap Committee. The Committee recommended that cryptocurrencies be expressly classified as securities or commodities in the SEC regulations. Currently, the SEC is working to ensure that a framework for the regulation of virtual currencies is being put in place in Nigeria. However, at the moment there are no regulations of Cryptocurrency in the Country.
BITCOIN VS THE ECONOMY & THE FUTURE OF NAIRA
There are two sides to this story, is there a future for cryptocurrencies? Is it just any other type of investment that can crash at any point? However, given its growth rate, it looks like a worthwhile investment that brings about the question of what the future holds for the nation’s currency, Naira? And most importantly what is the impact of its growth on the economy?
There are five major indicators to measure macroeconomic growth which include the Gross Domestic Product (GDP) growth rate, employment rate, Balance of Payment, inflation rate, Equitable distribution of income. If bitcoin should have an impact on economic growth, it should have a positive impact on the macroeconomic variable (indicators). While statistical analysis will give a clearer view of its impact, we will be making use of apriori expectations for the sake of this article.
One question that comes to mind is if Bitcoin is an injection or a withdrawal to the economy; Is bitcoin adding up to the income (GDP) of the country or is it reducing it? This actually depends on the type of transaction (a buy/sell transaction). There is a withdrawal when an individual purchase the currency and an injection into the economy when it is sold. A report from the Chartered Institute of Bankers in 2019 showed that about 41% of new users of Bitcoin are from Nigeria, Ghana, and South Africa with a higher percentage from Nigeria. This shows that there a lot of buy transactions (withdrawals) from the economy and consequently have a negative impact on the growth rate.
However, Naira seems to benefit at some point as the end result of a bitcoin transaction is conversion (to its currency, Naira). This will improve earnings for Fintech companies especially payment fintech companies and would also favour the banking sector and government in form of charges and income from tax.
One issue regarding Bitcoin is its localization. Nigeria has a well-known informal sector and a high percentage of citizens know little or nothing about digitalization and technology; the embracement of Bitcoin or any other cryptocurrency might not be feasible especially in the short run. This could mean that Naira still has a future here in the country in the short term. However; looking at the structure of the Nigeria population; the youths and young adults who are more vast with technology and digitalization have a higher percentage of over 50% of the total population, followed by the children. This could point to the fact that Naira’s future in the long term might be shaky if nothing is done by the government and its regulators.
A nation’s currency is one of the national symbols and should be respected and sustained for generations and generations to come; it is, therefore, advisable for the government to take up the initiative to develop a robust financial system that will accommodate cryptocurrencies and should take charge of its regulation because an unregulated system could bring about mismanagement and an inequitable distribution of income Government should also make plans on developing the informal sector of the economy so as to accommodate digitalization even as the world turns a global village.
WRITTEN BY OLADELE ABIGAIL
Oladele Abigail, an economics graduate of Bowen University who applies her passion for writing to her career path.
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