Cryptocurrencies Under Spotlight in Ethiopia Following Central Bank Announcement

A popular news website that aggregates stories across Ethiopia’s business sector has a page where it displays the live prices of popular cryptocurrencies in birr. The Amharic search result for Bitcoin also gives a resourceful result, including tutorials on Bitcoin mining, who Satoshi Nakamoto is, and the difference between Bitcoin and other cryptocurrencies.

Ethiopia’s ever-increasing inflation rate coupled with the increasing value of cryptos, despite their volatility, are some of the main reasons for the Ethiopian’s venture into the digital currency world.

The crypto activity was mainly led by tech enthusiasts, followed by brokers and traders in the capital. Over the years, proponents of cryptocurrencies, specifically Bitcoin, have been active on social media, advocating for its mass adoption, while some groups held crypto discussion groups in hotels. Besides its few public faces, Ethiopia’s crypto community world was confined to circles.

But with a retweet from Jack Dorsey, co-founder of Twitter, on a Tweet about the adoption of Bitcoin in Ethiopia and some Ethiopians representing their country on global crypto initiatives, the circle, as small as it is, was able to make a big noise.

In addition, at the beginning of this year, one of the largest cryptocurrency trading platforms in the world activated a new service in Ethiopia, allowing Ethiopians to trade digital currency peer to peer using birr, adding to the frenzy.

And then, finally, the regulator heard. This week the National Bank of Ethiopia (NBE) publicized its first stance on cryptocurrency stating its illegality.

The statement that was shared on Monday stated that birr is the only legal currency in Ethiopia, and all financial transactions shall be effected through it. The Bank added that it would take “legal measures” against anyone found to be using cryptocurrencies for transactions in the country.

Some perceived the announcement as a new declaration outlawing cryptocurrencies in Ethiopia. But the regulator did not issue a new law and merely shared a press release citing laws that have been in place for years.

However, the statement did not only fail to clear up the water but resulted in more confusion while the crypto community remained at ease.

Why is the Bank worried?

The central bank warned that digital currencies are being used to conduct informal financial transactions and money laundering schemes in Ethiopia. There is no official data available for crypto use in Ethiopia, but the Bank says it’s made its own study and found that people are widely using Bitcoin and other cryptocurrencies.

Besides mining and getting paid for products and services via crypto, like the booming local NFT artists attracting crypto inflow in the country, Ethiopians acquire cryptocurrencies by buying them.

But to buy cryptocurrencies, one must have foreign currency and global payment options unless in the case of peer-to-peer trading using birr. Since there is no legal way for birr to be exchanged for dollars to purchase cryptocurrency at commercial banks, the action of buying crypto with birr could involve moving money through illicit channels, another issue that worries the state.

The case of local crypto-traders

Binance, among Local Bitcoin and Paxful, is a cryptocurrency exchange platform that allows users in Ethiopia to buy and sell crypto peer-to-peer.

While every cryptocurrency is ultimately acquired using foreign currency, Binance and similar peer-to-peer trading platforms allow Ethiopians who have already acquired cryptocurrencies to sell them to others in birr.

Besides these platforms, crypto holders have been trading in person; after meeting in telegram channels.

What does the law say?

The relevant Ethiopian laws fail to directly address the existence of cryptocurrencies and their use in Ethiopia.

However, the regulator argues that the use of cryptocurrencies in Ethiopia intersects with matters whose proper way of practice has been determined by the law.

For NBE, the most apparent violation comes from it recognizing birr as the only legal tender in the country, prohibiting all monetary transactions in other currencies.

In addition, those who say it’s illegal add that more legal risk comes into the picture when cryptocurrency is used to pay for goods and services. From consumer protection to electronic transaction and taxation requirements, the very nature of cryptocurrencies goes against several specific procedures.

Counter Arguments

On the other hand, those who state that cryptocurrency is out of the reach of NBE cite another law.

When the nation’s security agency, Information Network Security Agency (INSA), was reestablished last year, it was given new powers to secure information and critical computer-based infrastructure to ensure the national interest and its citizens’ rights. With this goal, INSA was given the right to regulate cryptographic products and their transaction.

Cryptocurrencies use cryptography, a secure communications technique, to allow transactions to be anonymous, secure, and “trustless.” Accordingly, this makes cryptocurrencies fall under the eyes of INSA, and the NBE has no jurisdiction over them, argue others.

Though this seems like the closest time Ethiopian laws got near to addressing cryptocurrencies, there are no follow-up specific regulations that address this power INSA to regulate cryptographic transactions.

However, an industry observer close to the case and who wants to remain anonymous states that an argument that claims that the central bank has no power to regulate cryptocurrencies is absurd.

“NBE has all the jurisdiction regarding currency, whether its paper or virtual,” he adds.

Mixed Signals

Though the Ethiopian government does not recognize cryptocurrencies as legal tender, the underlying technology for cryptocurrencies, blockchain, seems to be favored by the Ethiopian government.

Cardano, in partnership with Ethiopia’s Ministry of Education, is underway to develop a blockchain project in Ethiopia to create a digital identity for Ethiopian teachers and students.

The National Bank of Ethiopia is also planning to deploy a hybrid model of traditional digital exchange technology and blockchain technology for the Ethiopian Securities Exchange.

The Bank aims to use a blockchain system to enable small businesses, including SMEs, to issue securities at any scale. SMEs that cannot float shares or securities in the traditional exchange platform can use the technology to float shares at any scale.

Moreover, crypto proponents in Ethiopia thought the government’s stance on the issue was clear when Prime Minister Abiy Ahmed (Ph.D.) mentioned the advancement of “cryptocurrency” during the opening ceremony for the new Commercial Bank of Ethiopia Headquarters in Addis Ababa in February 2022.

But since the Monday announcement, there seems to be a change of tone from the regulator, who has given follow-up explanations.

Solomon Desta, Vice governor at the National Bank of Ethiopia, who spoke to a local TV channel Hagere TV, stated that it’s possible for Ethiopian laws to adopt cryptocurrencies in the future. But for now, he argued, their use is not backed by the law, and the consumer should be wary of the risks of trading cryptocurrencies.

So far, around 103 countries have given their financial regulatory agencies the green light to develop cryptocurrency priorities and regulations for financial institutions to abide by. Several African countries have also taken bold steps to legalize digital currencies, with the Central African Republic being the latest.