By Sir Oghenetega Adedipe
1.0 INTRODUCTION
Money remains one of man’s most remarkable creations in the course of history. Thanks to technology, there has been a significant evolution in the form of money; money now exists in forms other than commonly used physical currency[1].Cryptocurrencies, albeit non-physical currency, are now globally accepted mediums of exchange, with Nigeria inclusive. However, in Nigeria for a long period, this means of exchange assumed an a legal status. This is because of the absence of a regulatory framework governing its usage and exchange; hence, a cloud of uncertainty and ambiguity hovering over its legality in Nigeria. Regulatory bodies in Nigeria even issued warning against its use and exchange[2]. A glimmer of hope came when the Securities and Exchange Commission (SEC) of Nigeria, classified cryptocurrencies as securities, hence, suggestive of the end of a somewhat long awaited likely regulatory system[3]. Then the wind was seemingly knocked out of the sail of the exchange of cryptocurrency when the Central Bank of Nigeria(CBN), addressed a letter recently to banks and other financial institutions, stating that dealing in cryptocurrencies and facilitating payment for exchanges are prohibited. Furthermore, it instructed all banks and other financial institutions to identify and close the bank accounts of individuals and entities who transact in cryptocurrency or operate cryptocurrency exchanges[4].This work seeks to examine the directive of the CBN on cryptocurrency transactions, its likely implications, the rejoinder by SEC, what obtains in other jurisdictions and other consequential issues.
2.0 WHAT ARE CRYPTOCURRENCIES?
Cryptocurrency is a type of digital currency. Cryptos are mainly in form of token or coins. The term “crypto-currency” derives from encryption techniques which are used to secure the network. They are ‘crypto’ because of the encryption and cryptographic techniques(process of hiding information) that help safeguard them generally. Simply put, they are files created via electronic means by developers, having monetary value howbeit using cryptographical methods to secure the integrity of the currency. Generally, cryptocurrencies are decentralized in nature and function using blockchain technology. Blockchain, also known as Distributed Ledger Technology(DLT) , simply refers to a distributed ledger that stores the source of a digital asset, which is enforced by a disparate network of computers. This makes the history of cryptocurrencies unalterable or traceable[5]. Examples of cryptocurrencies include: Bitcoin, Bitcoin cash, Bitcoin Satoshi Vision(BSV),Altcoins, Etherum, Ripple (XRP), Tether, Swisscoin, Litecoin, Dogecoin, Onecoin, Namecoin, Polkadot Peercoin, Libra, Monero, Zcash, Chainlink, EOS, Binance coin etc. Owing to their decentralized and cryptographic nature, cryptocurrencies are insulated against any form of interference, control, manipulations or attack from government. Also, they are quite impossible to trace or counterfeit. The inability of governments of the world to ably regulate and control this medium of exchange is why some countries have taken step to prohibit its use and exchange.
3.0 SEC’S ATTEMPT AT REGULATING CRYPTOCURRENCY TRANSACTIONS IN NIGERIA.
Despite the statements issued by CBN[6],SEC[7] and the Nigeria Deposit Insurance Commission(NDIC)[8] calling for caution in the adoption and use of cryptocurrencies for financial transactions and further stating that cryptocurrency is not a legal tender in Nigeria, there has been a remarkable increase in the exchange of these digital assets. Reacting to this and the wide call to have a regulatory system for exchange of cryptocurrencies, pursuant to powers conferred on it by the Investment and Securities Act,(ISA) 2007[9] classified crypto assets as securities with its “Statement on Digital Assets and their Classification and Treatment” released on 14th September, 2020[10]. This was borne out of the recommendations by the Fintech Roadmap Committee established by SEC in 2018[11]. SEC stated that the general objective of the statement is to ensure that technology is not hindered or innovation stifled, but create standards that encourage ethical practices that ultimately make for fair and efficient market. By the statement, SEC will treat crypto assets as securities unless the issuer or sponsor of the digital asset proves otherwise. The issuer or sponsor will satisfy the burden of proof where same makes an ‘initial assessment filing’ with SEC. This is to help SEC to determine if the crypto assets in question is within its regulatory purview. Where SEC is satisfied that the crypto assets amount to securities, the issuer or sponsor will have to register such asset with SEC. An issuer can also register the crypto assets directly with SEC without the initial assessment filing. In summary, any individual or corporate entity whose activities involve any aspect of digital asset must be registered by SEC and as such will be subjected to SEC’s regulations. This means all Digital Assets Token Offerings(DATOs), Initial Coin Offerings (ICOs),Security Token ICOs and any offering of digital assets on a Blockchain within Nigeria; or by Nigerian issuers; or foreign issuers targeting Nigerians are now to be regulated by SEC. The decision by SEC to classify crypto assets as securities mirrors the decision of United States of America’s District Judge Raymond Dearie in United States of America v. Maskim Zaslavskiy[12] held that cryptocurrencies fall under securities and under the purview of the United States Securities and Exchange Commission law.
4.0 CBN’S LETTER TO BANKS AND OTHER FINANCIAL INSTITUIONS: THE JUSTFICATION FOR THE PROHIBITION AND EFFECT ON CRYPTOCURRENCY EXCHANGE AND the FINTECH SECTOR IN NIGERIA
On Friday, 5th February, 2021, CBN addressed a letter to all deposit money banks and other financial institutions which stated that dealing in cryptocurrencies and facilitating payment for cryptocurrency exchanges are prohibited. It further instructed all banks and other financial institutions to identify and close the bank accounts of individuals and entities who transact in cryptocurrency or operate cryptocurrency exchanges.[13].This letter generated a volley of heated reactions from Nigerians, especially on its adverse effect on the fast growing Nigerian cryptocurrency market and the fintech sector by a large stretch. In response to this, the CBN subsequently issued a press release to address issues raised in the prior letter[14].
The justifications stated by CBN in the subsequent release include the fact that there was nothing new in its prohibition, that its 2017 Circular had prior prohibited banks and other financial institutions from using, holding, trading and/or transacting in cryptocurrencies. A position it further reiterated in its 2018 Press Release on cryptocurrencies since they are not a legal tender in Nigeria and are unregulated and unlicensed, hence contravention of an existing law[15]. It also identified the anonymity of cryptocurrencies which has made them susceptible to illegal perpetuation and concealment of crimes such as tax evasion, drug dealing, terrorism financing, money laundering and illegal purchase of arms and ammunition. It also stated that the volatility of cryptocurrencies has threatened the stability of financial systems in some countries. It is essential to state that, the CBN letter does not prohibit or criminalize the use and exchange of cryptocurrencies, it only restricts banks and other financial institutions from dealing in cryptocurrencies and facilitating cryptocurrencies payment. In Omatseye v. FRN[16], the Court held that administrative circulars and notices cannot create an offence.
On the effect of the letter on cryptocurrency trading in Nigeria and the fintech sector, Nigeria has the second largest Bitcoin market in the world[17],Nigeria has in the last five years had up to $ 500 million worth of Bitcoin trade[18]. This letter would in no little way clog the wheel of progress of cryptocurrency trading in Nigeria as the use of banks to facilitate cryptocurrency transactions has now been halted. Even though dealers in cryptocurrency have found a way around the prohibition placed by CBN, platforms that provide exchange services where dealers can pay in Naira or using a Nigerian bank card to buy cryptocurrencies will encounter some teething troubles. Luno, a cryptocurrency exchange platform expressed this concern after the letter was issued; it in fact, had to diable all Naira withdrawals and deposits on its platform[19].Buying of cryptocurrency may prove a tad difficult with this restriction. Furthermore, the exchange of cryptocurrency in Nigeria has served as a means of employment and enrichment for a sizeable number of Nigerian youths, this restriction may adversely affect this status.
5.0 DOES CBN’S LETTER SUPERSEDE SEC’S STATEMENT ON CRYPTO ASSETS?
Both CBN and SEC are independent regulatory bodies, so it does not appear as though CBN’s letter would take precedence over SEC’s statement. There may however, some perceived conflicting regulatory policies between both bodies, it does not mean the latter would override the other.With respect to CBN’s letter and SEC’s statement, one is left with some questions. Taking a cursory look at the CBN Act and the Banks and Other Financial Institutions(BOFIA) Act[20] that define the extent of the powers of the CBN, nothing touches on CBN’s powers to regulate on exchange of cryptocurrencies and the fact that cryptocurrencies are not even a legal tender in the country. However, the ISA 2007[21] provides that, SEC is the apex regulator of securities in Nigeria. So was CBN’s reaction a knee-jerk one?, did the CBN jump the gun with this prohibition?. These are questions that beg for answers.
6.0 SEC’S REJOINDER TO CBN’S LETTER
On the 11th of February, 2021, SEC published a press release addressing perceived policy conflict between its prior statement on regulation on cryptocurrencies and CBN’s letter[22]. SEC maintained that crypto assets are securities which fall within its regulatory purview. However, to align with CBN’s letter, it will suspend admitting persons so affected by the CBN’s letter into the SEC Regulatory Incubation Framework until such affected persons are able to operate bank accounts within the Nigerian banking system. However, the planned implementation of the SEC Regulatory Incubation Guidelines for FinTech firms who intend to introduce innovative models for offering capital market products and services will continue. SEC added that, it has engaged the CBN and agreed to work together with it to further analyze and better understand the identified risks to ensure that appropriate and adequate mitigants are put in place, should cryptocurrency dealings be allowed subsequently.
7.0 WHAT OBTAINS IN OTHER JURISDICTIONS
This part will examine the regulatory approach of some countries in regulating cryptocurrency transactions. The countries in focus are as follows:
- The United Kingdom(UK): In the UK, cryptocurrencies are still not a legal tender and the UK has no specific laws on cryptocurrencies. In 2019, the Financial Conduct Authority(FCA) published its Guidance on Crypto assets[23],where it defines cryptocurrencies to include: e-money, security coins and unregulated coins(includes utility and exchange coins that would include prolific crypto assets like Bitcoin and Etherum). The UK has come up with Regulations on Virtual Asset Service Providers (VASPs) so as no to stifle innovation whilst maintaining the integrity of the wider financial system. To operate in the UK, cryptocurrency exchanges are required to register with the FCA, unless however, they have applied for e-money license. Furthermore, UK-based VASPs are to comply with with a number of rules. These regulations include those around Know Your Customer(KYC), Anti-Money Laundering(AML) and Combatting the Financing of Terrorism(CFT)[24]. The FCA, Bank of England and Her Majesty(HM) Treasury also, jointly established the “Cryptoassets Taskforce” in 2018 with the intent of regulating cryptocurrency exchange[25]. The UK has the largest Bitcoin automated teller machines(ATM) in the whole of Europe, where Bitcoin can be bought[26]. Bitcoin ATMs are legal in the UK insofar they are licensed and regulated by FCA. With the Her Majesty Revenue and Customs’(HMRC) Taxation Policy made in 2019[27], individuals and businesses can be made liable to paying taxes on cryptocurrency exchange. For individuals, there is tax on profits on mining, staking etc, whilst business are liable to pay one or more of capital gains tax, income tax, corporation tax, value added tax, stamp duty or national insurance contributions. The FCA in 2021 however, banned the offering of crypto derivatives products to retail users in the UK because of a host of inherent risks that the body believes could adversely affect retail customers of cryptocurrency in the UK[28]. On a conclusive note, in the wake of Brexit, the UK is currently on a consultation period to end in March, 2021 on how crypto assets should be regulated in future[29].
- The United States of America(USA): The USA is the largest crypto market in the world[30] and it maintains a positive outlook towards cryptocurrency exchange. The USA does not consider cryptocurrencies as a legal tender. The USA Securities and Exchange Commission like its sister body in Nigeria considers cryptocurrencies to be securities. On the other hand, the Commodities Futures Trading Commission (CFTC) has adopted a friendlier, “do not harm” approach, describing Bitcoin as a commodity and allowing cryptocurrency derivatives to trade publicly[31]. The Federal Government of the USA is yet to come up with any regulations on the exchange of cryptocurrency, hence leaving states to introduce their own regulations on same. New York in 2015 became the first state to regulate cryptocurrency companies through state agency rulemaking. The Conference of State Bank Supervisors(CSBS), which represents all regulators from all states in the USA has launched a regulatory framework for payment and cryptocurrency companies. Regulators in 49 states in the USA except the State of Montana have agreed to a single set of supervisory rules for money services businesses including cryptocurrency service providers[32]. The Internal Revenue Service(IRS) of the USA in 2014, declared that for the purposes of federal tax, virtual currencies will be treated as ‘property’ other than ‘currency’[33]. Bitcoin ATMs are also present and legal in the USA[34].
- Kenya: In 2015, the Central Bank of Kenya(CBK) issued a statement to the public that cryptocurrencies are not a legal tender and that members of public should desist from transacting in them[35]. In Kenya, cryptocurrencies are not regulated or backed by government or the CBK. However, there are plans to classify cryptocurrencies as securities by the Kenyan government. In fact, the High Court of Kenya in Wiseman Talent Ventures v. Capital Markets Authority[36] ruled that cryptocurrencies can be classified as securities, relying on the US Supreme Court decision in Securities and Exchange Commission(SEC) v. W.J. Howey[37]. This ruling of the Court classifying cryptocurrencies as securities may serve as a catalyst that will make all crypto assets fall under the Capital Markets Authority of Kenya as securities until an appropriate regulatory framework is drawn up[38].
8.0 CONCLUSION
While admitting that the letter by CBN did not impose any new restrictions and there are reasonable justifications for this prohibition, tightening the noose on the the situation is not entirely a progressive decision. As the world is growing, we should grow with it. Technology in its pervasive nature keeps allowing for more innovations, our regulatory bodies must try to match up with technological innovations. We can take a cue from countries of the world that have taken steps to regulate this medium of exchange. It is also important at this point, especially for the sake of clarity and certainty to reach a consensus on policies seeking to regulate use and exchange of cryptocurrencies in Nigeria.
Sir Oghenetega Adedipe writes from Lagos, Nigeria. Contacts: tadedipe@ymail.com, +234 8163001600.
Footnotes
[1] Israel Olawunmi ‘The Concept of Digital Currency in Nigeria: Legality, Concerns and Way Forward’ https://dnllegalandstyle/2020/the-concept-of-digital-currency-in-nigeria-legality-concerns-and-way-forward-israel-olawunmi/ accessed 20 Feburary, 2021
[2]https://www.cbn.gov.ng/out/2017/fprd/aml%20january%202017%20circular%20to%20fis%20on%20virtual%20currency.pdf accessed 20 Feburary, 2021
[3] https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/ accessed 20 Feburary, 2021
[4] https://www.cbn.gov.ng/Out/2021/CCD/Letter%20on%20Crypto.pdf accessed 20 Feburary, 2021
[5] Op cit Israel Olawunmi
[6]https://www.cbn.gov.ng/out/2017/fprd/aml%20january%202017%20circular%20to%20fis%20on%20virtual%20currency.pdf accessed 20 Feburary, 2021
[7] https://sec.gov.ng/public-notice-on-investments-in-cryptocurrencies-and-other-virtual-or-digital-currencies/ accessed 20 Feburary, 2021
[8] https://ndic.gov.ng/ndic-urges-caution-on-adoption-of-crypto-currencies/ accessed 20 Feburary, 2021
[9] Section 13 ISA 2007
[10] https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/ accessed 20 Feburary, 2021
[11] https://sec.gov.ng/report-of-the-fintech-roadmap-committee-of-the-nigerian-capital-market/ accessed 20 Feburary, 2021
[12]17 CR 647 (RJD)
[13] https://www.cbn.gov.ng/Out/2021/CCD/Letter%20on%20Crypto.pdf accessed 20 Feburary, 2021
[14]https://www.cbn.gov.ng/Out/2021/CCD/CBN%20Press%20Release%20Crypto%2007022021.pdf accessed 20 Feburary, 2021
[15]https://www.cbn.gov.ng/Out/2018/CCD/Press%20Release%20on%20Virtual%20Currencies.pdf accessed 20 Feburary, 2021
[16] (2017) LPELR- 42719 (CA)
[17] https://qz.com/africa/1947769/nigeria-is-the-second-largest-bitcoin-market-after-the-us/ accessed 20 Feburary, 2021
[18] https://www.channelstv.com/2021/02/07/500m-worth-of-bitcoin-traded-in-nigeria-in-last-five-years-moghalu/ accessed 20 Feburary, 2021
[19] https://www.luno.com/blog/en/post/lunos-statement-on-the-central-bank-of-nigeria-circular accessed 20 Feburary, 2021
[20] Section 2 Central Bank of Nigeria Act, 2007; Section 1 Banks and Other Financial Institutions Act, 2020.
[21] Section 13 ISA 2007
[22] https://sec.gov.ng/press-release-on-cryptocurrencies/ accessed 20 Feburary, 2021
[23]https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/950206/HM_Treasury_Cryptoasset_and_Stablecoin_consultation.pdf accessed 20 Feburary,2021
[24] https://www.coinfirm.com/blog/uk-cryptocurrency-regulations/ accessed 21Feburary, 2021
[25] https://www.linklaters.com/en/insights/blogs/fintechlinks/2018/november/crypto-assets-taskforce-proposes-tighter-uk-regulation-of-cryptos-for-investor-protection accessed 21 Feburary, 2021
[26] https://news.bitcoin.com/bitcoin-atm-locations-9000-worldwide/ accessed 21 Feburary, 2021
[27] https://www.gov.uk/government/publications/tax-on-cryptoassets accessed 21 Feburary, 2020
[28] https://coingeek.com/digital-currency-derivatives-ban-now-in-effect-in-uk/ 21 Feburary, 2021
[29]https://www.gov.uk/government/consultations/uk-regulatory-approach-to-cryptoassets-and-stablecoins-consultation-and-call-for-evidence accessed 21 Feburary, 2021
[30] https://medium.com/@biditex/7-countries-with-the-most-bitcoin-hodlers-503b205d926f accessed 21 Feburary, 2021
[31] https://complyadvantage.com/knowledgebase/crypto-regulations/cryptocurrency-regulations-united-states/ accessed 21 Feburary, 2021
[32] https://news.bitcoin.com/us-states-unified-regulation cryptocurrency/#:~:text=49%20US%20States%20Unveil%20Unified%20Regulation%20for%20Cryptocurrency%20Firms,-The%20Conference%20of accessed 21 Feburary, 2021
[33] https://www.irs.gov/pub/irs-drop/n-14-21.pdf accessed 21 Feburary, 2021
[34] https://coinatmradar.com/country/226/bitcoin-atm-united-states/ accessed 21 Feburary, 2021
[35]https://www.centralbank.go.ke/uploads/banking_circulars/2075994161_Banking%20Circular%20No%2014%20of%202015%20-%20Virtual%20Currencies%20-%20Bitcoin.pdf accessed 21 Feburary, 2021
[36] (2019) eKLR
[37] Co. 328 US 293 (1946)
[38] https://bitcoinke.io/2020/02/court-dismisses-case-against-cma-kenya-by-kenicoin/ accessed 21 Feburary, 2021