The Central Bank of Nigeria (CBN) circulated a letter directing banks and financial institutions to close accounts of all crypto exchanges, as Nigeria's inflation rate surged to 15.7% in December.

All deals involving cryptocurrency are now “prohibited” and threatens “severe regulatory sanctions” to financial institutions that fail to comply. The CBN also asked banks to identify “persons and or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately.”

Following outcry over the strict directive, the CBN clarified (and reaffirmed) its stance in an additional five-page document insisting that their directive is intended to protect the country’s financial system from the “risks” of cryptocurrencies. In a meeting by the Senate of Nigeria, they complained that "Bitcoin has made our currency almost useless or valueless," and suggested policies to slow down its adoption.

But the damage is already being felt. Some banks and other financial service providers have began to comply with the directive. The CEO of Binance, CZ, tweeted “Naira deposits and withdrawals will be affected.” Other crypto startups like Quidax, Buycoins Africa and Bundle will also obey the directive.

While the new directive doesn’t explicitly void the legality of owning or trading virtual currencies, it sure puts a damper on exchanges that want to trade bitcoin to and from the Nigerian naira (NGN), the official currency of the Federal Republic of Nigeria. Nigeria's annual inflation rate soared for a 16th straight month to 15.7% in December. The inflation rate in Nigeria was as high as 17.5% in 2007 and other reports had it as high as 18.3%, one of the highest in the worlds.

Despire President Muhammadu Buhari’s recent order to reopen the country’s borders to trade, the surging jihadist attacks in farming areas as well as lingering disruptions from the COVID-19 pandemic continue to put pressure on the national currency. On a monthly basis, consumer prices inched up 1.61%.

The move by CBN is the harshest one imaginable, especially compared to their stance from 2017 that basically put the banks in charge of their own due diligence on crypto exchanges. At the time, they ruled that BTC, ETH, XRP and other digital currencies were not legal tender, and any bank that performs any crypto transaction does so at its own risk. Not anymore.

As a result, Nigerians have traded over $500 million in bitcoin in the last five years, making it the second largest bitcoin market after the US. Global P2P volume grew 150% in the first quarter since the coronavirus lockdowns, and Nigeria, Kenya, South Africa and Ghana representing 30% of African's entire P2P trading volume. Today, African trades about $60 million BTC per week, compared to $100 million in North America, according to Useful Tulips. Many Africans and Latin Americans prefer P2P trading because its often faster, reduces commission fees, and allows for direct relationship with customers (and optional KYC).

Some African countries like Algeria, Morocco, and Libya have laws prohibiting cryptocurrency outright. South Africa, on the other hand, is more accepting of cryptocurrencies and instead is proposing new regulations that protect its citizens from frauds using the platforms. Learn more about the regulatory climate of bitcoin in Africa on Quartz Africa.

Others like Ray Youssef, CEO of peer-to-peer exchange Paxful, had a more optimistic view of the ruling as it will likely onramp more people into bitcoin. "Let it be known that it was Black Africans that lead the whole world in this," alluding to peer-to-peer bitcoin trading volumes in Nigeria are higher than anywhere else in the world, despite its smaller size. Nigerians actually uses bitcoin as a method of exchange to replace the naira, not just as a store of value.

As you might have heard, Elon Musk bought $1.5 billion of bitcoin for the Tesla balance sheet on Monday, spiking the world's leading digital currency from $39,000 to $47,600, a remarkable rise of 22% in a single day. The move also puts new importance of peer-to-peer trading in Nigeria and other parts of the world with volatile national currencies.

Godwin Emefiele is a Nigerian economist who has been serving as the Governor of the Central Bank of Nigeria since June 4, 2014. Listen to his questions and answers at the latest MPC Press Briefing on January, 2021, which was his last public appearance before the crackdown on crypto.