Addressing The Existing Cryptocurrency Regulations In Nigeria

 ADDRESSING THE EXISTING CRYTOCURRENCY REGULATIONS IN NIGERIA

Frank Okike

University Of Nigeria

1.0 INTRODUCTION

"Bitcoin is the beginning of something great: A currency without a government, something necessary and imperative.” - Nassim Taleb

According to Bartoletti, Carta, Cimoli, & Saia, (2017) the universal financial system is absolutely embracing the current evolution from physical currency to almost virtual currencies through the medium of technology. However, there have been many attempts at producing a digital currency during the 90s tech boom (Bech, 2017). Bitcoin was introduced in early 2009 by a group of programmers under the alias Satoshi Nakamoto. 

Cryptocurrency comes under many names. You have probably read about some of the most popular types of cryptocurrencies such as Bitcoin, Litecoin, and Ethereum. Cryptocurrencies are increasingly popular alternatives for online payments. Before converting real dollars, euros, pounds, or other traditional currencies into ₿ (the symbol for Bitcoin, the most popular cryptocurrency). cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be software that is a cloud-based service or is stored on your computer or on your mobile device. The wallets are the tool through which you store your encryption keys that confirm your identity and link to your cryptocurrency.       

The global user base of cryptocurrencies increased by nearly 190 percent between 2018 and 2020, only to accelerate further in 2022. This is according to calculations from various sources, based on information from trading platforms and on-chain wallets. Increasing demographics might initially be attributed to a rise in the number of accounts and improvements in identification. In 2021, however, crypto adoption continued as companies like Tesla and Mastercard announced their interest in cryptocurrency. Consumers in Africa, Asia, and South America were most likely to be an owner of cryptocurrencies, such as Bitcosin, in 2022.

According to an April report done by Kucoin, more than a third of Nigerians aged between 18 to 60 invest in cryptocurrencies themselves. A majority of Nigerian crypto investors are below the age of 30 (52% of its investor). However, Nigeria as a country shows huge potential as these figures are gathered when only 51% of the entire population of Nigeria has access to the internet. Furthermore, Kucoin reported that cryptocurrency ownership in Nigeria showed 50% gender parity, which, unlike in other countries, demonstrates that gender demographic plays no role in the country’s adoption of the evolving monetary system.

2.0 CRYPTOCURRENCY AND THE NIGERIAN ECONOMY: THE NEXUS

The creation of cryptocurrency as a cybernetic currency has been generating reactions in the global economy such as a country like Nigeria. There has been countless advantage and disadvantage discourse on cryptocurrencies' importance on the Nigerian economy. However, the Nigeria government through its governing agencies such as the Central Bank of Nigeria and the Securities and Exchange Commission has tried to place a ban on cryptocurrency. However, its legal status remains unclear, unlike in countries like Morocco and Algeria where there is an explicit prohibition on trading in Bitcoins such that a breach attracts hefty fines (Dierks Meier & Seele, 2016). The cautions are primarily designed to educate the citizenry about the difference between genuine currencies issued and guaranteed by the state and cryptocurrencies, which are not. Following the moves taken by the Central Bank of Nigeria and the Securities and Exchange Commission, lawmakers have also advised the regulatory authorities to speed up efforts in presenting a legal framework for cryptocurrencies in Nigeria.

2.1 Effect of Cryptocurrency on Fiscal and Monetary Policy in Nigeria

Economy with an underdeveloped financial market, the activity of cryptocurrency may be challenging to regulate and, as such, may provide the platform for investors, both individuals and corporate bodies to evade tax thereby resulting in a low-income generation for government relative to the level of activities in the market which could affect the budgetary plans of the government. 

However, in an economy with a highly developed financial market, the suitable management of cryptocurrency might result in an increase in revenue generation through a tax which would enhance the budgetary plans of the government. Moreover, cryptocurrencies operate alongside official currencies. The current volumes are small and do not challenge the position of official money as the main currency. But as algorithms improve to limit the volatility of cryptocurrencies, their popularity and use tend to increase. This would lead to coexistence with other official currencies. The relations between cryptocurrencies and central bank monetary policy are treated in detail by Fernandes-Villa Verde and Sanches (2018). Their theoretical model predicts that the central bank and private money's existence hinge on the monetary policy the former follows. In specific, privately-issued currencies would be used if the official currencies do not ensure price stability but would lose their value as a medium of exchange when the central bank credibly guarantees the real value of money balances. Nonetheless, from a practical viewpoint, central banks could face certain risks from the advent of cryptocurrencies as relevant mediums of exchange with stable purchasing power due to their high volatility level.

2.2 Effect on Agriculture

Blockchain technology has immense possibility of solving significant difficulties in agriculture. The challenge for blockchain is connecting the technology to viable business models and compelling use cases. Blockchains have enormous possibility to create and increase access to finance in the agricultural sector, thereby addressing food scarcity and enhancing food security.

3.0 CRYTOCURRENCY LAWS AND REGULATIONS IN NIGERIA

The Nigerian government has approved a national blockchain policy as part of its efforts to transition to a digital economy. The policy aims to create a blockchain-powered economy that supports secure transactions, data sharing, and value exchange between people, businesses, and the government. While the policy document has not been made public, the government has directed regulators, including the Central Bank of Nigeria and the Securities and Exchange Commission (SEC), to develop regulatory instruments for the deployment of blockchain technology across various sectors of the economy.

No doubt, the Nigeria Startup Bill Act will be a major player in the legal framework for cryptocurrency. there are some of the legal frameworks that currently governs cryptocurrency:

3.1 Central Bank of Nigeria (CBN) Act

Although the CBN Act didn’t envisage financial services delivered via technology, the Central Bank has formulated policies that touch the financial services provided by the FinTech’s. Hence, it has become applicable to them. Some of these policies are Guidelines on Mobile Money Services in Nigeria (2015), Guidelines for Licensing and Regulation of Payment Service Banks in Nigeria (2008), Revised Guidelines for Finance Companies in Nigeria (2014), CBN Risk-Based Cyber-Security Framework and Guidelines for Deposit Money Banks and Payment Service Providers 2018, CBN Microfinance Policy, Regulatory and Supervisory Framework 2011, etc.

3.2 Investment and Securities Act

The ISA establishes the Securities and Exchange Commission which regulates activities in the Nigeria capital market. The Securities and Exchange Commission (SEC) introduced regulations in May 2022, necessitating licenses for crypto exchanges and clarifying digital assets' legal status. Converting cryptocurrencies to fiat currency presents challenges due to the banking sector's distance from cryptocurrencies, though alternatives exist, including crypto-to-fiat apps and brokers. 

3.3 Money Laundering (Prohibition) Act

This act provides for adequate disclosure and reporting by both financial and non-financial companies in its effort to prevent money laundering relating to financial transactions by individuals and corporate entities.

4. 0 A CRITICAL EVALUATION ON THERE SHORTCOMINGS

Cryptocurrency adoption and interest have been growing rapidly in Nigeria, driven by factors such as inadequate financial services, high inflation, the depreciation of the national currency, and a young demographic. While cryptocurrencies are not recognized as legal tender by the Central Bank of Nigeria (CBN), they are not illegal either. The CBN banned commercial banks from engaging in cryptocurrency transactions in 2021, but there are no laws or provisions criminalizing the use of cryptocurrencies. As a result, cryptocurrencies are widely traded on cryptocurrency exchanges in Nigeria, and peer-to-peer trading is popular.

Cashing out cryptocurrencies for fiat in Nigeria can be challenging due to the distance between the banking sector and cryptocurrencies. However, there are options available, such as using a crypto-to-fiat mobile application or a cryptocurrency broker. P2Pmarketplaces also facilitate the exchange of cryptocurrencies for local currency.

In terms of taxation, there is currently no specific tax law regarding cryptocurrencies in Nigeria. However, the Federal Inland Revenue Service has stated that cryptocurrency transactions are taxable as capital gains. The Nigerian government plans to tax cryptocurrencies and digital assets in the future if the proposed Finance Bill is approved.

The government’s launch of the eNaira, a central bank digital currency, further complicates the regulatory landscape. While the eNaira aims to increase financial inclusion and facilitate remittances, it also raises concerns about privacy, centralization, and the potential impact on the banking system.

5.0 POSSIBLE AMENDMENTS

While the regulation of the Nigerian Capital Market by SEC does provide basic pointers for the regulation of the Crypto Assets Market, there are numerous features of the Crypto Assets Market that do not match the Capital Market and so the framework for regulation of the latter may not be applicable to the former. Therefore, SEC must take a position as to its regulatory approach to the Crypto Assets Market. In our view it may approach this issue in any of the following ways:

5.1 Regulation Through Existing Laws and Regulations: The key consideration for SEC if it wants to apply this approach is whether the Investments and Securities Act (ISA) and the Regulations made pursuant thereto are effective to regulate the stakeholders, activities, functions and systems that comprise the Crypto Assets Market.

5.2 Regulation Through Amended Laws and Regulations: Again, SEC may decide to amend the ISA and the Regulations with a view to extending their scope to cover the regulation of the hitherto unregulated Crypto Assets Market. For example, Estonia amended its Money Laundering Act and Terrorism Financing Prevention Act, respectively, to bring Crypto Wallets and Exchanges under its regulatory regime.

5.3 Regulation through New Laws and Regulations: SEC may on the other hand, seek the enactment of bespoke legislation that will target specifically, all aspects of the Crypto Assets Market, thereby providing for a comprehensive regime of regulation able to address the peculiarities of the market. For example, Malta took this approach when it enacted the Virtual Financial Assets Act.

In my view, SEC should as a matter of urgency enact new regulations for the Crypto Assets Market under its existing powers in Sections 13 and 313 of the ISA.

6.0 RECOMMENDATIONS

The following are my recommendations:

6.1 Closed Loud Currency: The government could look at introducing or endorsing a cryptocurrency that could scale through with demand. Such a cryptocurrency would enable the government to monitor the end-to-end transaction process and manage issues related to price stability, security and reliability that other cryptocurrencies face.

6.2 Regulating Access Points: Cryptocurrency administrators and exchanges usually fall within covered entities for the purpose of anti-money laundering or combating of tourism preventive measures, which users usually do not. The law introduced should allow third parties approved by the central bank of Nigeria to carryout verifiable activities to ensure things are up to the approved standards are to avoid any conflicts.

7.0 CRYPTOCURRENCY: AN INVESTOR FRIENDLY MARKET

Amid the ever-growing inflation and continuing naira depreciation, Nigerians already see cryptocurrencies as a store of wealth and a means of preserving their investment. The naira has depreciated in value for a decade now and has failed to establish confidence in the young population. As a result, many Nigerians have turned to Bitcoin and other cryptocurrencies for investments. With regulatory bodies now in place and the proposed Finance Bill being tabled, these investments will lead to legitimacy, rendering more confidence in cryptocurrency as a medium of payment, trade and investment for the average Nigerian citizen.

8.0 CONCLUSION AND THE DIVIDEND OF CRYTOCURRENCY IN THE COMING YEARS

In conclusion, Nigeria has seen significant growth in cryptocurrency adoption, and while there are regulatory challenges, the future looks promising for the cryptocurrency industry in the country. The approval of the national blockchain policy and the SEC’s regulations for digital assets indicate the government’s commitment to embracing blockchain technology and creating a favorable regulatory environment. The launch of the eNaira, a central bank digital currency, further reflects Nigeria’s interest in digital assets and its potential to drive financial inclusion and innovation. However, there are still regulatory challenges and opportunities that need to be addressed to ensure the sustainable growth and development of the cryptocurrency and blockchain industry in Nigeria.

The future of cryptocurrency in Nigeria will be driven by trends such as cryptocurrency as a medium of payment and investment. Cryptocurrencies are expected to be used not only for retail trade but also for cross-border payments and remittances. Nigerians see cryptocurrencies as a store of wealth and a means of preserving their investments in the face of inflation and currency depreciation. With regulatory bodies in place and proposed legislation, cryptocurrency investments in Nigeria are expected to gain legitimacy and confidence.