Cryptocurrency: Taming cannibals of the naira

The naira closed at a record low of N1,009.05 per dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM) on Friday, December 8, 2023. This marked the most disastrous week for the forex market as the local currency posted its worst daily losses in history.

Amid this tumultuous exchange rate scenario, the parallel market fought to maintain its gap-stronghold with the naira trading at N1,250 to the dollar on the same day. Yet there seemed to be no end in sight.

While this is not good news for a country battling with diverse economic headwinds, the move by mindless cryptocurrency (crypto) traders to scuttle every step by the Nigerian monetary authorities to save and stabilise the naira is indeed frightening. What played out at the NAFEM on December 8, despite the huge intervention by the CBN, attests to this.

The situation, therefore, calls for the appropriate strategic actions and the outright ban or, at the very least, the tight regulation of crypto dealing in Nigeria, as the trading of the USDT: NGN currency pair on the Binance platform is one of the main drivers of the alarming depreciation of the naira.

What is USDT?
The USDT, or Tether, is a crypto stable coin that is designed to maintain a stable value by being pegged to the U.S. dollar (US$). It is often used as a bridge between traditional fiat currency and cryptos. The key feature of the USDT is that it aims to maintain a 1-1 value with the US$ and is a steady source of converting naira to US$ without adhering to any conventional banking rules, thus making it a convenient tool for anybody to become a currency trader with little or no regulation.

Why USDT thrives
As the traders need a steady supply of the dollar, they have found a partner in the Binance trading platform which allows literally anybody to convert naira to USDT and sell it.
It should also be noted that the owner of Binance has just been charged for money laundering in the U.S. and has not only been fined $4.2 billion but is also going to be sentenced to a jail term. It is a shame that such an entity is what is controlling the currency rate of a great country like Nigeria.

It would be prudent for Nigeria’s new leadership to immediately take steps to stem the tide because without a ban or, at the worst, very strict regulations around this scenario, the government will never be able to put guardrails in place to prevent the rapid decline of the naira.

This is because the crypto phenomenon has ensured that no matter how much the government injects into the system, or what policies are put in place, demand will always outpace supply.

To crown it up, as long as you convert your naira to USDT, you are guaranteed to make a profit. This is unacceptable as it creates artificial demand by people who do not need FX for any business or settlement purposes. It is causing a strain on legitimate businesses as well as the masses and the nation as a whole. Because these dealers need to be able to replace their forex stockpiles once they sell, they have perfected a method which enables them to receive naira into a designated account at an agreed exchange rate. They use the same naira to repurchase US$ and then release the dollar they had earlier sold, thereby putting an abnormal strain on the naira.

The role USDT plays in this transaction equation is to provide them with the platform to repurchase the US$ they have sold because the cryptocurrency is stable and not prone to the volatility seen in the other cryptos. They can then withdraw the crypto which is lodged into a regular bank account and, again, put it into use to replace their stockpiles.

And since this platform is the main driver of the FX replacement by Nigerian currency traders, the price for USDT on the Binance platform has become the de facto determinant of the value of the naira.

Ways out                                      
The government should consider an immediate ban of economically harmful crypto trading, especially the USDT: NGN, through the Nigerian banking system and the introduction of stiff sanctions against engaging in it. The CBN should consider resumption of non-deliverable forwards and freezing of accounts linked to crypto trading. Initiating a policy measure that requires submission of EDD on any company moving large sums of money within or outside the country is necessary.

If the government starves the source of this bulk of crypto and frustrates the conversion process, the needed stability of the naira could be achieved. That way, the fluid source of artificial demand would be curtailed and the forex dealers left with no option but to source from the conventional banking channels.

This must be done urgently to forestall a fatalistic depreciation of the naira to N2,000/$ in the shortest possible time.

Ebomwonyi, an investment banker and financial analyst, wrote from Abuja