NIGERIA’S CBN AND SEC ON CRYPTOCURRENCIES: A TALE OF WHAT HAPPENS WHEN ADMINISTRATION PRECEDES POLICY AND LAW

Introduction:

By virtue of a letter dated 5 February 2021[1], the Central Bank of Nigeria
(CBN) directed all banks, non-bank financial institutions and other financial
institutions to, with immediate effect, identify and close bank accounts being
used for cryptocurrency trade. This letter was met with criticism from members
of the public who saw the decision as an attempt by the CBN to stifle innovation
and business among youths in Nigeria. Other critics also believe that the CBN’s
letter was aimed at overriding the position of the Nigerian Securities and Exchange
Commission (SEC) on cryptocurrencies.

In this note, we consider from 2017 to date, the positions of both the
CBN and the SEC, the inconsistencies in both positions and perceived regulatory
inconsistencies and its potential effect on the cryptocurrency market in
general.

Central Bank of Nigeria’s position on
Cryptocurrencies:

The CBN has consistently maintained that cryptocurrency is not legal
tender in Nigeria and have urged Nigerians to desist from its use.

In January 2017, the CBN issued a circular to Nigerian banks highlighting
the associated risk of trading in cryptocurrencies particularly with respect to
the risks of terrorism financing and money laundering. In the said circular,
the CBN directed all banks not to hold, trade and or transact in anyway in
virtual currencies. It further directed that pending the issuance of
substantive regulations on virtual currencies, Nigerian banks should ensure
that existing customers that deal in virtual currency have effective anti-money
laundering and counter-terrorism financing controls that enable such exchanges
comply with customer identification, verification and transaction monitoring. Where
a bank or financial institution is not satisfied with the controls, the banking
relationship should be discontinued immediately.

On 28 February 2018, the CBN issued a press release stating that virtual currencies
are not legal tender in Nigeria. The press release stated that dealers and
investors in any kind of cryptocurrency in Nigeria are not protected by law and
cautioned persons engaged in the trade of virtual currencies on the inherent
risks of such activities due to the fact that the relevant currency
exchanges are unregulated.

As earlier mentioned, on 5 February 2021, the CBN directed all banks,
non-bank financial institutions and other financial institutions to, with
immediate effect, identify and close all bank accounts used in the cryptocurrency
trade.

As a follow-up to the 5 February 2021 letter, the CBN issued a press
release dated 7 February 2021[2] clarifying its decision to
ban cryptocurrencies. The communicated bases of its decision are:

a.   
Cryptocurrencies are issued by unregulated and unlicensed entities.

b.   
 The use of cryptocurrencies in
Nigeria goes against the key mandates of the CBN as the issuer of legal tender
in Nigeria.

c.    
The use of cryptocurrencies in Nigeria are a direct contravention of
existing law.

d.   
The opacity of cryptocurrencies has become well-suited for conducting
many illegal activities including money laundering, terrorism financing,
purchase of small arms and light weapons and tax evasion.

e.   
Cryptocurrencies are used as speculative assets rather than as a means of
payment.

The CBN further stated in its
press release that its actions are not in any way inimical to the development
of fintech or a technology-driven payment system but to protect the Nigerian
financial system and the generality of Nigerians from the risk inherent in
crypto assets transactions due to the fact that cryptocurrencies are largely
speculative, anonymous, and untraceable. Further and according to CBN,
cryptocurrencies have been used as tools or conduit for criminal activities.

We are aware
that some Nigerian banks have given effect to the position of the CBN and have
deactivated the bank accounts of some cryptocurrency traders.

Securities and Exchange Commission’s
Recognition of Crypto Assets:

In January 2017, SEC issued a
statement cautioning members of the investing public with regards to digital
currencies as a vehicle of investments. The statement was issued on the basis
that none of the persons or entities promoting cryptocurrencies are recognised
by any regulatory agency in Nigeria to receive deposits from the public or to
provide any investment or other financial services in or from Nigeria.

However, on 14 September 2020,[3] the SEC declared that all
virtual crypto assets are securities unless proven otherwise. In order to
determine if a crypto asset is registrable by SEC, an initial assessment filing
should be made with it.

SEC also mentioned that all forms
of Digital Assets Token Offering, Initial Coin Offerings, Security Token
Initial Coin Offerings and other blockchain-based offers of digital assets
within Nigeria or issuers or sponsors of foreign issuers targeting Nigerian
investors, shall be subject to SEC’s regulatory oversight. SEC’s said statement
listed the types of virtual digital assets to be regulated as follows:

a.   
Crypto Asset (e.g., non-fiat virtual currency)

b.   
Utility Tokens or Non-Security Tokens (e.g., virtual tokens that provide
users with a product and/or services)

c.    
Security Tokens (these are tokens that are analogous to equities, bonds,
etc)

d.   
Derivatives and Collective Investment Funds of Crypto Assets, Security
Tokens and Utility Tokens.

SEC further stated how these
categories of virtual digital assets are to be treated in accordance with the
Investment and Securities Act and the SEC Rules.

SEC proposed that the following
categories of persons would be regulated:

a.   
Any person, (individual or corporate) whose activities involve any aspect
of blockchain-related and virtual digital asset services.

b.   
Issuers or sponsors (start-ups or existing corporations) of virtual
digital assets. Foreign or non-residential issuers or sponsors may be required
to establish a branch office within Nigeria.

In a bid to clarify, SEC’s
position on cryptocurrencies in light of the recent position of the CBN, SEC
issued a statement on 11 February 2021[4] where it pointed out that
its position on cryptocurrencies and that of the CBN were not contradictory on
the basis that the trading in crypto assets fall under the regulatory purview
of the SEC and its September 2020 statement was to provide for regulatory
certainty within the digital asset space, due to the growing volume of reported
transactions. On the other hand, SEC mentioned that CBN as regulator of the
banking system has recognised certain risks which has the potential of
affecting stability of the financial system and has taken actions in line with
its mandate.

SEC mentioned that it has engaged
CBN to work together to further analyse and better understand the identified
risks to ensure appropriate and adequate mitigants are put in place in the
event cryptocurrencies are allowed in future. That said, the SEC has put on
hold admittance into the SEC Regulatory Incubation Framework[5] of all persons (and
products) affected by the CBN Letter of 5 February 2021 until such persons are
able to operate bank accounts within the Nigerian banking system.

Regulatory
Inconsistencies and its potential impact – Where does Jurisdiction lie?

From the foregoing, we see that
SEC’s position on digital currencies has evolved while CBN’s position has been
increasingly prohibitive since CBN’s first circular on cryptocurrencies in
2017. The above inconsistencies have put cryptocurrency traders in a bind as on
the one hand the SEC has provided what can be described as a “regulatory
shelter” for their activities while the CBN clearly prohibits banking
transactions for cryptocurrency traders. It is important to examine which of
the two regulatory bodies have the subject-matter jurisdiction to make laws or
policies concerning cryptocurrencies. To answer this question, we will look at
the definition of cryptocurrencies.

Cryptocurrencies are “any form of
currency that only exists digitally, that usually has no central issuing or
regulating authority but uses a decentralised system to record transactions and
manage the issuance of new units, and that relies on cryptography to prevent
counterfeiting and fraudulent transactions.”[6]

In accordance with the CBN Act,
the CBN is the only body that has the power to issue legal tender currency in
Nigeria.[7] The Bank is also solely
responsible for issuing any currency notes documents or tokens which are likely
to pass as legal tender.[8] These provisions of the CBN
Act, do not contemplate a decentralised system of payment such as
cryptocurrencies whose acceptance is derived from its usage. Therefore, we
reckon that the CBN’s regulatory powers with respect to cryptocurrency will
only be to the extent of determining whether cryptocurrency can be used as
legal tender in Nigeria.

Nigeria’s Investment and Securities
Act (ISA), which is SEC’s establishment and enabling law, recognises securities
and investments to include: “options to acquire or dispose of Nigerian currency or any other currency traded on
any of the exchanges and capital trade points registered with the SEC.”[9].
Securities by definition includes those which may be deposited kept or stored
with any licensed depository or custodian company under the ISA. [10]
The SEC is empowered to alter or modify the provisions of the Second Schedule
of ISA (which contains the list of securities and investments) in consultation
with the Minister of Finance.

SEC has therefore proceeded to define
a “Crypto Asset” to mean a digital representation of value that can be
digitally traded and functions as: (1) a medium of exchange; and/or (2) a unit
of account; and/or (3) a store of value; but does not have legal tender status
in any jurisdiction. A Crypto Asset is – neither issued nor
guaranteed by any jurisdiction and fulfils the above functions only by agreement
within the community of users of the Crypto Asset; and distinguished
from fiat currency and e-money.”[11]

SEC’s statement on defining Crypto
Assets as securities is therefore in line with its powers to alter what
constitutes an investment or security under the ISA.  

Based on the foregoing, the
ability to regulate cryptocurrencies/crypto assets will be determined from the
prism from which the regulatory action has been taken. It is clear from the CBN
Act that the CBN has powers to regulate matters regarding currencies. However, if
a crypto asset is to be traded, regulation may fall under the exclusive preserve
of SEC.

No doubt the different positions
taken by both regulators may put the market in a state of uncertainty. In our
view, the clarification by SEC and its decision to halt the admittance of FinTech’s
affected by the CBN letter of 5 February 2021 into the SEC Regulatory
Incubation Framework suggests an agreement with the position of the CBN and a
halt on its initial position of recognising crypto assets as registrable
securities. The SEC has also indicated its decision to engage with the CBN to
analyse and better identify risks to ensure that appropriate and adequate
mitigants are put in place with respect to cryptocurrencies.

Conclusion

The global acceptance of
cryptocurrency is on the rise with some multinational corporations exploring cryptocurrency
payment options. While Regulations typically follow the market, it is necessary
that Nigerian financial regulators put in place appropriate legal framework to
regulate cryptocurrencies. In addition to this, it is suggested that Nigerian
financial regulators may consider having the Nigerian Naira as a cryptocurrency
as contemplated by other jurisdictions.

[1] https://www.cbn.gov.ng/Out/2021/CCD/Letter%20on%20Crypto.pdf

[2]https://www.cbn.gov.ng/Out/2021/CCD/CBN%20Press%20Release%20Crypto%2007022021.pdf

[3] https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/

[4] https://sec.gov.ng/press-release-on-cryptocurrencies/

[5] The SEC Regulatory
Incubation Framework is an initiative of SEC which gives FinTechs the
opportunity to interact with SEC as part of SEC’s formulated capital market
fintech strategy.

[6] https://www.merriam-webster.com/dictionary/cryptocurrency

[7] Section 2(b) of the CBN Act.

[8] Section 17 of the CBN Act.

[9]Section 7(b), Part 1 of the Second Schedule of ISA

[10] Section 315 of the ISA.

[11]https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/#:~:text=%E2%80%9CCrypto%20Asset%E2%80%9D%20means%20a%20digital,tender%20status%20in%20any%20jurisdiction. 

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For further information on the foregoing (none of which should be construed to be an actual
legal advice), please contact:

Oyeyemi Oke

Partner

Oyeyemi.oke@ao2law.com

Bidemi Olumide

Partner

bidemi.olumide@ao2law.com

Moyo Omidiran

Associate

Moyo.omidiran@ao2law.com

Ogonna Nzekwe

Associate

Ogonna.Nzekwe@ao2law.com

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