In 2017, two of Nigeria’s most important regulatory authorities — the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) released circulars denouncing cryptocurrencies. The circulars warned Nigerians of the grave risks involved in dealing with these digital assets. The then position of the regulators notwithstanding, digital assets’ popularity in Nigeria continued to soar. According to blockchain.com, Nigeria is now one of the fastest-growing crypto markets globally.
In September 2020, predictably, the SEC walked back on its earlier position and showed a willingness to regulate digital assets it considers securities — leaving the CBN alone in their previously jointly held stance. As a currency whose acceptance and usage is continuously growing, the CBN will inevitably have to step into the cryptocurrency space (as the SEC has begun) to play its role as the country’s foremost financial regulator.
This article seeks to explore and recommend a potential cryptocurrency regulatory/supervisory route for the CBN through Cryptocurrency Exchanges.
What are Cryptocurrencies and Crypto Exchanges?
A cryptocurrency is a digital asset (i.e. it rarely exists in physical form like paper money) designed to work as a medium of exchange. Individual coin ownership records are stored in a decentralized ledger existing in a form of a computerized database using cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
A long-standing and important debate regarding cryptocurrencies revolves around their qualification as money. Proponents argue that cryptocurrencies already fulfill all the requirements of functional money as they currently serve as
- a medium of exchange;
- a unit of account; and
- a store of value.
They further assert that because of this, cryptocurrencies are functionally money, even if not legally, since sovereign states across the globe continue to have exclusive power to designate legal tender.
A Cryptocurrency Exchange (Crypto Exchange) is a business that allows customers to trade cryptocurrencies for other assets such as conventional fiat money or other digital currencies. Crypto Exchanges also offer other auxiliary services to ease their customers’ crypto transactions and dealings, and although Crypto Exchanges are not the only avenue to transact in cryptocurrencies; the ease, safety, and order that they enable have seen them take a significant share of crypto transactions.
The Need to Monitor Cryptocurrencies
One of the strongest criticisms of cryptocurrency is that it is a potential enabler of a myriad of illegalities. This concern is fueled by the relative anonymity provided to users transacting on the blockchain. This presents a difficulty in ascertaining the identity of transacting parties — a very attractive situation to those looking to launder money, finance terrorism or transact in illegal trades (drugs, hacks, illegal pornography and even murder-for-hire).
To curb this already identified potential propensity for criminalities, cryptocurrency transactions should be monitored where possible to prevent harmful outcomes. Crypto Exchanges as identifiable business entities present a great opportunity to solve this problem by helping in unmasking transacting parties through standard Know Your Customer (KYC) requirements for their customers. Once the identity of transacting parties is easily determinable, further established financial sector safety measures like Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) can then be implemented to curb criminal activities.
‘Other Financial Institutions’
The identification of Crypto-Exchanges’ potential to regulate cryptocurrencies is a significant starting point. It is however similarly important to legally bring them under the regulatory wings of the CBN. Fortunately, the Banks and Other Financial Institutions Act (BOFIA/the Act) offers ways out.
The Act gives the CBN wide powers to regulate not only banks but other financial institutions in Nigeria. It further gives the CBN power to designate businesses it deems fit as constituting ‘other financial institutions’. In line with this, the CBN has promptly designated certain businesses as financial institutions and consequently regulates them.
One business so designated as a financial institution is the business of a Bureau De Change, which deals in foreign currencies. The CBN, through regulating Bureau De Change businesses, monitors dealings in foreign currencies within Nigeria. As earlier noted, proponents argue that cryptocurrencies are already functionally money. If the CBN is to agree to these arguments and designate cryptocurrencies as foreign currency (in which case they still wouldn’t be legal tender in Nigeria), Crypto Exchanges automatically essentially become Bureaux De Change and subject to the CBN’s regulation.
Alternatively, the Act also gives the CBN power to directly designate businesses it so deems as financial institutions. The CBN can, without recognizing cryptocurrencies as foreign currency, designate Crypto Exchanges as financial institutions and consequently regulate them as empowered by the Act.
Proposed Limits to Regulation of Cryptocurrencies
The regulatory intervention in the crypto space must be strictly supervisory and not stifling innovation, as is sometimes the case with regulations. In recent times, we have witnessed innovative and groundbreaking use cases for cryptocurrencies. Notable instances include low-cost cross-border transfer of money. We should allow the sector to continue innovating, growing, and solving problems while its activities are monitored to prevent criminal activities.
Regulators must be careful to not approach this like business as usual. Over-regulating Crypto Exchanges and hindering innovation might frustrate users and chase them to other readily available mechanisms of dealing in cryptocurrencies outside of Crypto Exchanges which may currently be impossible to regulate.
The American decision in SEC v. Shavers which recognized bitcoin as money offered a glimpse into an unavoidable future. Inevitably, Nigerian regulators eventually accept this future, since technology can neither be fought nor ignored. Crypto Exchanges present a unique regulatory opportunity for the CBN, which has been adequately empowered by the relevant laws; it must however approach this regulatory task carefully so as not to lose a golden opportunity.
Popoola Mubaraq is a legal practitioner with a keen interest in the intersection of law and technology. He graduated from the University of Ilorin in 2017 and was called to the Nigerian Bar in November 2018 and is currently a Counsel at The Law Lounge. To reach him, send a mail to at email@example.com
- ‘Circular to Banks and Other Financial Institutions on Virtual Currency Operations in Nigeria’, January 12, 2017, REF: FPR/DIR/GEN/CIR/06/010.
- ‘Public Notice on Investments in Cryptocurrencies and Other Virtual or Digital Currencies’, January 12, 2017, http://sec.gov.ng/public-notice-on-investments-in-cryptocurrencies-and-other-virtual-or-digital-currencies/ (accessed November 15, 2020)
- ‘Nigeria attracts more bitcoin interest than any country globally’, August 8, 2020, Nairametrics, www.nairametrics.com/2020/08/08/nigeria-attracts-more-bitcoin-interest-than-any-country-globally/ (accessed November 15, 2020)
- ‘Statement on Digital Assets and Their Classification and Treatment’, September 14, 2020, https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/ (accessed November 15, 2020)
- Iris M. Barsan, ‘Legal Challenges of Initial Coin Offerings (ICOs)’, Revue Trimestrielle de Droit Financier (RTDF), No 3, pp. 54–65, 2017
- Section 130 of the Banks and Other Financial Institutions Act, 2020.