Reproduced below is part 1 and 2 of the letter Nigeria’s Fintech & Blockchain Industry wrote to the CBN in March 2021 as its response to the CBN directive banning cryptocurrencies in Nigeria’s banking and financial system. The contributors to the letter are Fintech Association of Nigeria (FintechNGR); Blockchain Industry Coordinating Committee of Nigeria (BICCON), comprising Blockchain Nigeria User Group (BNUG), Cryptography Development Initiative of Nigeria (CDIN), and Stakeholders in Blockchain Technology Association of Nigeria (SiBAN); the Financial Services Innovator Association (FSI); and the Fintech1000. Compiled by Udo-Udoma & Belo-Osagie (UUBO), the letter was circulated to:
- The Presidency
- National Assembly (The Senate President, Speaker of the House of Representatives, Chairmen, Senate Committees on Banking and other Financial Institutions, and ICT and Cybercrime, House Committees on Banking & Currency, Finance, Capital Markets, Financial Crimes, and ICT)
- Federal Ministry of Communications and Digital Economy
- Federal Ministry of Finance
- Nigerian Stock Exchange, NSE
- Federal Competition and Consumer Protection Commission, FCCP
- Federal Ministry of Science and Technology
- Central Bank of Nigeria
- National Judicial Council
- National Communications Commission, NCC
- Nigeria Deposit Insurance Corporation (NDIC)
- Nigeria Inter-Bank Settlement System (NIBSS)
- Financial System Strategy (FSS2020)
- Nigeria Export Processing Zone Authority (NEPZA)
- Nigeria Investment Promotion Council (NIPC)
- Economic and Financial Crimes Commission (EFCC)
- The Nigeria Police Force
- National Security Adviser (NSA)
- Securities and Exchange Commission, SEC
- National Information Technology Development Agencynitda.gov.ng NITDA
- Nigerian Financial Intelligence Unit , NFIU
- National Insurance Commission, NAICOM
- National Pension Commission (PENCOM)
1.1 On the 5 of February 2021, the Central Bank of Nigeria (the “CBN”) issued a circular to Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NBFIs), and Other Financial Institutions (OFIs) (Regulated institutions) on transacting in cryptocurrencies. (the “Circular”).
1.2 The Circular mandates these Regulated Institutions to identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and close such accounts with immediate effect.
1.3 In January 2017 the CBN issued a circular to Banks and OFIs on Virtual Currency Operation Nigeria, directing the banks and OFIs to:
(a) ensure that banks and OFIs do not use, hold, trade and. or transact in anyway in virtual currencies;
(b) ensure that existing customers that are virtual currency /exchanges have effective Anti-Money Laundering/Combating the Financing of Terrorism (“AML/CFT”) controls that enable them to comply with customer identification, verification, and transaction monitoring requirements;
(c) discontinue relationships where banks OFIs are not satisfied with controls with the controls put in place by the virtual currency exchanges/customers; and
(d) report any suspicious transactions in these customers should immediately be reported to the Nigerian Financial Intelligence Unit (NFIU).
1.4 In March 2018 (2018 Press Release), the CBN reiterated its statement on virtual currencies warning traders against digital assets which carry the risk of losing their investments as it does not constitute a legal tender.
1.5 The Circular reiterates the position of the CBN that these Regulated Institutions are prohibited from dealing in cryptocurrencies, the Circular also: (a) prohibits the Regulated Institutions from facilitating payments for Cryptocurrency exchanges; and (b) instructs Regulated Institutions to identify persons and/or entities transacting in or operating Cryptocurrency Exchanges within their systems and close such accounts with immediate effect.
The CBN Press Release titled Response to Regulatory Directive on Cryptocurrencies stated the following reasons – (a) the volatility of cryptocurrency and the consequent inability of cryptocurrency to be used as a lasting means of payment; (b) the anonymity associated with cryptocurrency transactions; (c) that “cryptocurrencies are not backed by any real assets or fundamentals” and as a result could crash in value; and (d) promotion of illegal activities such as money laundering, terrorism financing, etc.
1.7 In view of the above, the FintechNGR informally engaged the Central Bank of Nigeria (“CBN”) as well as major stakeholders in the cryptocurrency industry to understand their perspectives on the Circular. Consequently, the Fintech NGR received an invitation from the Nigerian Senate to deliver a presentation on the issues pertaining to the Circular, on Tuesday 23 February 2020.
Prohibition of Regulated Institutions
2.1.1 The prohibition of the Regulated Institutions from facilitating payments for Cryptocurrency transactions by the CBN would redirect trade revenue to nearby African markets. This will further limit the federal governments drive to diversify revenue earning sources with the gloomy global economy. Also, the prohibition will make a lot of people involved in cryptocurrency transactions to go underground. Rather than this prohibition, the CBN should adjust/adapt its existing regulatory instruments to fit the highly innovative cryptocurrency sector. This adjustment/adaptation should strike a balance between protecting the people from the dangers of cryptocurrencies and harnessing the benefits of these cryptocurrencies.
2.1.2 The CBN or Securities and Exchange Commission (“SEC”) should reach an agreement as regards the regulatory authority that will regulate cryptocurrencies. They should also consider approving cryptocurrencies that have achieved global acceptance like Bitcoin, stablecoins, and other Altcoins.
2.1.3 Consideration should be given to the role of the National Information Technology Development Agency (“NITDA”) with respect to data protection in the cryptocurrency space.
2.1.4 NITDA is charged with the mandate to create a framework for the planning, research, development, standardization, application, monitoring, evaluation, and regulation of Information Technology practices in Nigeria, NITDA views blockchain technology as one of the emerging technologies that Nigeria should leverage for global competitiveness. Pursuant to its mandate, NITDA published the Nigerian Blockchain Adoption Strategy. The primary objective of the Nigerian Blockchain Adoption Strategy is to identify and utilize the opportunities provided by Blockchain technologies to strengthen the country’s security on cyberspace and stimulate the growth of the economy. The strategy is built on the following initiatives: (i) Establishment of the Nigerian Blockchain Consortium, (ii) strengthening of the regulatory and legal framework, (iii) focus of the provision of the national digital identity, (iv) promotion of blockchain digital literacy and awareness, (v) creation of blockchain business incentive programmes, (vi) establishment of national blockchain sandbox for proof of concepts and pilot implementation. This blockchain adoption strategy aims at and will promote Blockchain technology in Nigeria and help in mitigating the risks regarding its implementation by government agencies, and corporate organizations.
2.1.5 CBN may also consider registering and designating locally and globally renowned cryptocurrency exchanges with proven KYC and compliance capabilities as legitimate places for Nigerians to trade cryptocurrency. This way, entities dealing with cryptocurrency can be known and licensed accordingly.
2.1.6 The CBN should also communicate with stakeholders and highlight specific ways they would like their concerns to be addressed. This will enable both stakeholders to work together to regulate the cryptocurrency market effectively.
2.1.7 The CBN should consider developing and testing of a Central Bank Digital Currency (CBDC). CBDC is a digitally represented version of the country’s sovereign currency, in this case the Naira, issued and backed by the Central Bank. CBDC could impact monetary policy favorably by providing a new tool for the Bank to apply and implement monetary policy with enhanced speed and improved efficiencies. If the Bank determined that CBDC should be interest bearing, this remuneration feature would likely increase the accumulation and use of CBDC for direct payments by and between individuals and retail businesses as the wallet holders of CBDC. Some countries have started experimenting and testing CBDC’s. Please see Schedule II.
Cryptocurrencies as Speculative Assets
2.2.1 The CBN, by its response following an uproar from the public, has taken a general view that Cryptocurrencies are speculative assets. However, there are some cryptocurrencies like stablecoins that do not fall under the generalisation made by the CBN. The different types of stablecoins include (i) Fiat- backed stablecoins which are backed by a fiat currency, (ii) collaterised stablecoins which are backed by other cryptocurrencies and (iii) Algorithmic Stablecoins which are backed by algorithms.
2.2.2 We note section 13 of the Investment and Securities Act, 2007 that confers powers on the Securities and Exchange Commission (“SEC”) as the apex regulator of the Nigerian capital market to regulate investments and securities business in Nigeria. In line with these powers, the SEC released a statement where it adopted a three-pronged objective to regulate innovation, hinged on safety, market deepening and providing solution to problems. This will guide its strategy, its regulations and its interaction with innovators seeking legitimacy and relevance. Consequently, the SEC will in line with this statement regulate crypto-token or crypto-coin investments when the character of the investments qualifies as securities transactions. In line with the foregoing, the SEC should regulate Cryptocurrency as an asset while CBN regulates Cryptocurrency that fall within its purview.
2.2.3 It is also important for the regulatory authorities like SEC to properly define the various types of cryptocurrencies to be able to decipher which regulatory body has the power to regulate a cryptocurrency based on its definition.
2.3 Security Risks in the Use of Cryptocurrencies
2.3.1 Although the CBN highlighted security concerns as well as risks that necessitated the circular such securities concerns are understandable giving that Philippine authorities, in 2018, arrested a couple for allegedly defrauding more than 100 people who poured at least 1 billion Philippine pesos (more than $19 million) into their bitcoin investment scam, it should be noted that the use of cryptocurrency by criminal elements follows an interesting technology pattern where grey market participants are often ahead of the technology adoption curve. In view of this, the CBN can use its supervisory oversight to regulate the cryptocurrency industry in Nigeria to manage the identified risks associated with disruptive technologies like Digital currencies such as Bitcoin. A regulated Nigerian Crypto market will make commerce faster and more secure, mobile smartphone based, create jobs, and bring more revenue to the country.
2.3.2 Although cryptocurrencies have indeed been a conduit for flouting capital controls, proper regulation and partnerships with global exchanges and stable coin issuers offer us a path to growing our foreign reserves and defending the Naira from unscrupulous speculators. The cryptocurrency market, like most markets, is subject to laws. The CBN can convene a forum of stakeholders within the cryptocurrency space to understand what it will take for Nigerian banks to adopt the use of stablecoins as an alternative means of payment emulating the USA, where the Office of the Comptroller of the Currency has approved the use of stablecoins by federally regulated banks for payments and other activities.
2.3.3 Most Cryptocurrency transactions save for some transactions involving privacy coins, are recorded on public ledgers, and can therefore be tracked and traced where KYC protocol is being adhered to. CBN should consider partnering with tech companies that can assist with tracing cryptocurrency transactions.
Prospects of Cryptocurrency
2.4.1 Cryptocurrency will empower Nigerians to quickly scale past the barriers of participating in a global financial system. More importantly, it will enable Nigeria to grow its foreign reserves making the elusive Naira price stability more of a reality. This is currently evident in the cryptocurrency markets as Nigerians have become very curious about bitcoin lately, going by Google search results. In the last 12 months, most global Google search queries for bitcoin originated in Nigeria. A leading global cryptocurrency trading platform estimated that Nigerians traded over $566 million in Bitcoin on its platform in the last five years, placing Nigeria second behind the United States Bitcoin volume traded.
2.4.2 In view of the above it is plausible that the actual volume of Nigerian cryptocurrency transactions is possibly much greater. Techpoint estimates Nigerian cryptocurrency transactions at US$400 million for 2020. We believe this demand is driven not just by speculation but by the average Nigerian’s desire to participate in a technology-driven global economy.
2.4.3 Non- Governmental organisations (“NGOs”) have received funds exchanges, with these funds NGOs have been able to achieve their objectives in the society for example for Pencils of Promise (“PoP”) works with communities to build schools and create programs that provide educational opportunities for students, no matter where they are born or what resources they have. Funds raised through the #BuiltWithBitcoin initiative will support Pencils of Promise’s mission to provide access to quality education to children around the globe In December 2017, first bitcoin-funded school was completed in December 2017, serving a community of 7,500 people.
2.4.4 Cryptocurrency has made international trade possible for individuals who cannot access banks for foreign exchange, especially in rural areas. It has also helped ease remittances from people in the diaspora to Nigeria.
2.4.5 In the banking industry, blockchain creates decentralization which can make it easier for banks to focus on other activities besides tracking payment transactions. The use of blockchain has changed banking in many ways. It has affected things such as payments, settlement systems, fundraising, securities management, loans, credit, and trade finance. With the decentralization ledger for payments, blockchain can provide faster payments and lower fees than banks. Blockchain affects clearance and settlement systems where distributed ledgers can reduce the costs of operations and bring more real-time transactions between financial institutions.
Part 3 and 4 of this letter will be published next week.