The naira closed at a record low of N1,009.05 to a dollar at the Nigerian Autonomous Foreign Exchange Market 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 a 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 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.

The USDT, or tether, is a crypto-stable coin designed to maintain a stable value by being pegged to the dollar. 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 dollar and is a steady source of converting naira to dollar 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.

As the traders need a steady supply of the dollar, they have found a partner in the Binance trading platform which allows anybody to convert naira to USDT and sell it. The fact that this process is unregulated, is done on the internet, and accepts monies with no questions asked, has caused it to become an attractive source of income for anybody that has some naira and an internet connection. The only caveat is that for it to continue to be profitable, the naira has to continue to depreciate. All types of traders use this platform as an opportunity to make an income at the expense of the naira, and what is most disheartening is that no other country in the world allows the cannibalisation of its currency in this manner.

It should also be noted that the owner of Binance has just been charged with money laundering in the United States and has not only been fined $4.2bn 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. The Central Bank of Nigeria, under its past leadership, identified the potential menace of crypto against the naira and subsequently placed a ban on its trading.  The action was able to, at least, stem the rapid decline of the naira, which has lost 78 per cent of its value since the present government was inaugurated in May 2023.

It would be prudent for the new leadership to immediately take steps to stem the tide because without a ban or, at worst, very strict regulations around this scenario, the government will never be able to put guard rails 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.

As it stands, everybody is now a potential FX dealer in the absence of any regulatory constraints, as long as they have access to an internet connection. 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.

As noted, the forex dealers require a steady supply of the dollar — a key issue solved by the emergence of the USDT which guarantees a steady flow of the currency without necessarily abiding by the rules of the conventional banking system. 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 dollars and then release the dollar they had earlier sold, thereby putting an abnormal strain on the naira.

The role that USDT plays in this transaction equation is to provide them with the platform to repurchase the dollars 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. This cycle goes on several times in a day, providing a fertile ground for the dollar positions to be resold over and over at the expense of the naira.  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.

It must be emphasised that, without the appropriate action from the government, the exchange rate will hit N2,000 to a dollar at the parallel market. Irrespective of the level of liquidity injected, as the government has vowed to uptake, to run speculators out of business, the crypto operators will have the upper hand. Demand will continue to outpace supply.

We recall that forex challenges are not new in Nigeria. The economy has experienced a forex shortage over the years, especially during the last six years of the immediate past government when it became acute. Yet, the naira did not suffer the rapid depreciation it has seen in the last six months. Urgent steps must be taken to address the situation.

The government should consider an immediate ban on 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 the resumption of non-deliverable forwards and freezing of accounts linked to crypto trading. Initiating a policy measure that requires submission of enhanced due diligence 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/$1 in the shortest possible time.

Fred Ebomwonyi, an investment banker, writes from Abuja