The Implications of Decentralised Money Systems on the Regulatory Powers of the Central

Banks

The introduction of cryptocurrencies and other monetary instruments embedded in the Nigerian
monetary system follows a number of implications that are in direct contradiction to the
regulatory position of the Central Bank of Nigeria. Direct effects of the policy on central banks
include monetary policy, inflation, and central bank control over base funding, which is critical
to maintaining price stability and budgeting. Indirect implications stem from the interaction
between cryptocurrencies and banking, and payment systems, raising concerns about systemic
risk and financial stability1.

It has been related that the widespread replacement of cash and bank deposits for crypto-
currencies could reduce central bank’s control over monetary conditions affecting the
effectiveness of monetary policy. Furthermore, the shrinking role of central bank money could
pose fiscal risks such as reduced seigniorage revenue and the potential need for higher taxes.
Eventually, the burst of a cryptocurrency bubble could have repercussions on financial
institutions and the real economy impacting price stability and potentially requiring central banks
to mitigate systemic risks2. These would be a repetition of events which led to the 2008 global
financial crisis when Bank deregulation policies were introduced.

One of the main objectives of Central Banks including that of Nigeria is to maintain price
stability and ensure a stable monetary policy. To achieve these goals, the central bank assumes
responsibilities to issue currencies (physical and electronic such as eNaira) and ensure the
smooth functioning of payment systems. However, the emergence of decentralised money
systems such as cryptocurrencies which are supported by distributed ledger technology and are
working outside of central banks and traditional payment systems poses challenges in
supervising the supply of money and effecting payment policies3.

The emergence of cryptocurrency has resulted in a significant rise in money laundering activities
perpetrated by deceptive individuals exploiting the system's anonymity and neutrality. As a
1
Hussein & Andre, “Central Banks and Regulation of Cryptocurrencies” (2019) University of
Luxembourg Law Working Paper No. 2019-014
2
Ezema, Igue & Yunana, “Chapter Four: Implications of Transactions in Cryptocurrencies on Monetary
Policy in Nigeria”; Economics of Digital Currencies: A Book of Readings (2023)
3
Daniel & Samuel, “Central Banks and Cryptocurrencies: Centre for Financial Regulation and
Innovation”. Centre for Financial Regulation and Innovation. (2018).
consequence, regulatory bodies like the Central Bank of Nigeria encounter challenges in tracking
fund movements and identifying those engaged in unlawful practices4.

In their role as financial watchdogs, central banks are often tasked with protecting the interests of
consumers. Policies are often established aimed at managing risks arising in the financial system.
However, with the advent of cryptocurrencies, there is a different challenge in this regard.
Cryptocurrency trading is done on speculation, where future prices and commodity prices are
unpredictable, and this inherent uncertainty complicates effective customer protection measures
by central banks.

Additionally, Cryptocurrencies derive their value primarily from users’ perceptions of future
value rather than tangible assets or public funds backing those without intrinsic value, not
challengingly tied to any central authority comes to consumer safety. Changes in user
expectations can result in significant volatility and risk, beyond what is typically experienced in
traditional foreign exchange markets5.

Summarily, the various challenges posed by the advent of cryptocurrency in the Nigerian
financial system, particularly those that run counter to the regulatory objectives of the Central
Bank of Nigeria include the disruption of monetary policy mechanisms, inflation mechanisms,
and the central bank control over base funding while also raising concerns about systemic risk
and financial stability. The cryptocurrency speculative trading further complicates efforts to
protect consumer interests and implement effective regulatory mechanisms. Addressing these
challenges requires innovative regulatory approaches to navigate the evolving economic
environment and maintain the objectives of convenience and consumer protection.

4
Oghenetega Adedipe, “Prohibition of Cryptocurrency Transactions by the Central Bank of Nigeria”
(2022).
5
Supra note 2