In August 2020, Nigeria was adjudged the highest performing nation in the world in terms of bitcoin interest. This is the result of a research carried out by Blockchain.com and showing that the highest flow of activity in its wallet app since April 2020 has been from Nigeria. The report compared activities of users around the world including countries where virtual currency is more or less regulated and policies clear-cut. Blockchain.com has over 52 million user wallets worldwide who store virtual currency in the personal wallet and use the services for different purposes, particularly peer to peer transfer.
In recent times, virtual currency companies have raised the bar with bold online and media campaigns, endorsement of celebrities/influencers, and sponsoring headline TV shows including Big Brother Nigeria1. This development is happening, despite the fact that there's little to no clarification from governments regarding virtual currency regulation in most African countries. In fact, almost 60% of African governments, are yet to clarify their stance on cryptocurrencies, which is causing a drag on the adoption of virtual currencies.2
Moreso back in 2018, Techpoint reported that irrespective of these, cryptocurrency and blockchain technologies are gaining ground in the country as Nigerian startups raised millions through initial coin offerings (ICO),3
It has been postulated that regulation can provide certainty to the market and promote positive uses of virtual currencies for the benefit of the general population, and in particular, minimize the risks associated with financial crime. Opponents to the proposition for regulation argue that it may deter start-ups and depress innovation and may simply not be necessary if there are no material volumes of virtual currency business in a particular country, which cannot be said of Nigeria.
The Central Bank of Nigeria has at different times issued warning statements against transacting in virtual currencies. At the height of the virtual currency frenzy, the CBN released a circular in January 2017 stating that the emergence of virtual currencies has attracted investments in payments infrastructure that provides new methods for transmitting value over the internet. CBN thereby warned Banks and other financial institutions not to use, hold, trade and or transact in any way in virtual currencies and to ensure that existing customers, who are virtual currency exchangers, have and effect Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) controls.
The AML and CFT controls, - for any existing customer that is a virtual currency exchanger in line with the Central Bank of Nigeria (Anti-money Laundering and Combating the Financing of Terrorism in Banks and other Financial Institutions in Nigeria) Regulations 2013- regulates the financial technology pending a substantive regulation or decision by the CBN on virtual currency. 4
More than a year later, CBN published another circular in March 2018 stating that dealers and investors in any kind of crypto currency in Nigeria are not protected by law, and that virtual currencies are traded in exchange platforms that are unregulated, all over the world. The Bank warned that Consumers may therefore lose their money without any legal redress in the event these exchangers collapse or close business. Also, the Securities and Exchange Commission (SEC) had earlier by a publication on its website warned the public to exercise extreme caution with regard to digital currencies as a vehicle of investments. 5
However, the Central Bank of Nigeria in its 'Guideline on Nigerian Payments System Risk and Information Security Management Framework' appears to have expanded the scope of the guideline to include the adoption of virtual currency. The Framework is designed to guide the operators and users of the payment systems across Nigeria. The systems may be organized, located, or operated within Nigeria (domestic payments), outside Nigeria (offshore payments), or both (cross-border payments) and may involve currencies other than the Naira. The scope of the Framework also includes any payment system based or operated in Nigeria that engages in the settlement of non-Naira transactions operating within Nigeria and those that operate across the Nigerian borders (cross border payment systems); along with their infrastructure providers and the Payment Service Providers (PSPs) that make up these systems.
In an interesting development in the same year, one arm of the Nigerian legislature called on the CBN and the Nigerian Deposit Insurance Commission (NDIC) to come up with a regulatory framework for blockchain technology in Nigeria after adopting a bill titled "Need to regulate blockchain applications and Internet technology"
In 2019, the Securities and Exchange Commission - the regulator in charge of investments and securities - set up a committee to look at the regulation of blockchain and virtual financial asset. The committee was tasked to take into cognisance effective investor protection, financial market integrity, and financial stability, and also be responsible for imbibing global best practices on regulatory taxonomisation, classification of Cryptocurrencies (either as Commodity, Securities or Currency) and recommend a suitable model for adoption in the Nigerian Capital Market.
In its report, the committee proposed that regulation should extend to person, (individual or corporate) whose activities involve any aspect of Blockchain-related and digital asset services, and who must be registered by the Commission and be subject to the regulatory guidelines. Such services include, but are not limited to reception, transmission and execution of orders on behalf of other persons, dealers on own account, portfolio management, investment advice, custodian or nominee services, and also include issuers or sponsors (start-ups or existing corporations) of digital assets. Also foreign or non-residential issuers or sponsors will be required to establish and register a branch office within Nigeria.
The Committee noted that though the present definition of securities under Section 315 of the Nigerian Investments and Securities Act does not include crypto-tokens as investment instruments and Section 26 of the Commodity Boards Act and the 2nd Schedule to the Act do not capture crypto-tokens as commodities, however, pursuant to Section 13 and Section 313(1)(a) of the Act, the SEC is empowered to regulate crypto-token or crypto-coin investments when the character of the investments qualify as securities transaction.
Upon comparing the regulatory framework in different countries, the report noted that the Securities and Exchange Commission has the primary task to set down the proper classification of these crypto assets with a view to bringing them under the regime of its regulatory remit so as to ensure sound market practices, and stated that the intended Regulation should not be defining or classifying "virtual currency" or "digital currency". Instead, the focus of definition should be "Virtual Security Assets". The, classifications of crypto assets as "currency", "payment" and "utility" would appear outside the scope of SEC's regulatory powers and the committee recommended that this should be omitted.
Global best practices tend to classify crypto assets into 3 functional models, i.e. assets that are investment tools (Security Tokens), assets that operate as a medium of exchange (Payment Tokens) and assets that give a right to participate in digital resources (Utility Tokens). In terms of SEC's statutory jurisdiction, it would appear that by virtue of Sections 13 (a) and 315 of the ISA that security tokens could fall within the definition of Collective Investment Schemes and Securities
With respect to Initial Coin Offerings and Security Token Offerings, there are no extant regulations, however the Securities and Exchange Commission (SEC) may either apply the provisions of the existing Investments and Securities Act 2007 or come up with specific regulations in this regard. In May 2020, the SEC published an exposure draft on crowdfunding which would regulate investments and securities offered through a crowdfunding platform to members of the public.
It is apparent that the virtual currency exchangers and companies are venturing into Africa, particularly Nigeria as a result of the massive potential and interest from users. These exchangers need to ensure Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) controls that enable them comply with customer identification, verification and transaction monitoring requirements, and for suspicious transactions to be reported to the Nigerian Financial Intelligence Unit. As adoption and usage of virtual currencies continue its exponential rise, particularly following the impact of the Covid 19 pandemic and weakness of the local naira, it is expected in the short term, that regulation will be enacted to govern players and services in the industry.
1. 'Patricia' is a crypto currency exchanger
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