The google analytic which revealed that the most Google searches, globally, for the word ‘bitcoin’ in 2017, came from South Africa and Nigeria, respectively, is perhaps the last & connecting puzzle piece of a growing economic constant, that speaks to the astronomical rise in the demand for and consumption of cryptocurrency business/services in Nigeria. Now, there are a variety of economic fundamentals driving the demand for bitcoins in Nigeria. For most, it’s the prospect of wealth creation. For others, it’s the prospect of solving the long-standing in-bound and out-bound remittances problem in Africa. For another sub-set, it’s the prospect of using block chain technology to leapfrog the solution to some of the continent’s infrastructure and social innovation gaps. From bitcoin exchanger services, to cold storage, hobby mining, lending, funds transfer, e-commerce, captive adoptions, museums and ATMs, the Nigerian cryptocurrency ecosystem is vibrant with bitcoin entrepreneurs and investors who are beginning to take strategic positions ahead of an imminent crypto-revolution.
We are confident in our view that cryptocurrencies & blockchain technologies bear a peculiar significance for Africa and therefore create considerable opportunities for both local and foreign investors. Accordingly, the Government has to find a way to intelligently regulate crypto-businesses.
In this update, we reflect and draw on the experience from a recent regulator engagement, to share for the benefit of investors and businessmen interested in the cryptocurrency business, the state of the law and regulation of cryptocurrencies in Nigeria as of January 2018
- Nigeria recorded its first case of bitcoin fraud/litigation earlier in 2017. In that case, the local bank account of one of the more popular bitcoin exchange platforms, whose services are available in Nigeria, was frozen, following an order of court, ordering that the account be frozen and with the effect that Naira withdrawals and deposits were disabled and couldn’t be processed by the exchanger’s platform. In that case, a fraudster stole the identity of a Nigerian bank customer and then, accessed the said customer’s bank account. The fraudster then created an account on the exchanger’s platform, using the customer’s identity, the transferred the customer’s money to the bitcoin exchanger and converted it to bitcoin.
- Although the Central Bank of Nigeria has issued a regulation that relates to cryptocurrencies, the relevant CBN Regulation does not prohibit the operation of crypto-businesses in Nigeria. The Securities and Exchange Commission (SEC) also issued a public notice warning the public to exercise caution with regards to making investments in cryptocurrencies. There is yet no definitive regulation from the SEC on investment in crypto-businesses or on Initial Coin Offerings (ICOs).
- In point of law, cryptocurrencies, as a subject matter for regulation, will appear to transcend the regulatory competence of the CBN and is ideally, initially, a matter for legislative consideration and review. The debate at that level needs be centred on the determination of whether cryptocurrencies should be classified as a currency or as a commodity. Although we have a view on this point, there are differing implications that a classification will engender. Where it is decided that cryptocurrencies be classified as currency, CBN will rightly exercise regulatory control; otherwise, not. There are also tax considerations that arise from a classification, either way. For instance, if bitcoin or other cryptocurrencies is considered a commodity, this classification may trigger sales tax obligations. Also, a classification as a commodity will take bitcoins (and other cryptocurrencies) out of the Exclusive Legislative List in the Nigerian constitution – not being legal tender- and provide state governments with the legislative competence to regulate cryptocurrencies. From a property rights perspective, a commodity classification for bitcoin establishes it as a definite form of property over which specific title can be exercised. A ‘currency’ classification, will however be considered in law as a mere claim for value.
- In point of substance, what the relevant CBN Regulation does is to prohibit Banks and Financial Institutions (BFIs) from investing in cryptocurrencies and from carrying on business as a virtual currency exchange. The CBN regulation also requires BFIs to ensure that operators of crypto-currency exchanges comply with standard AML/CFT requirements.
- For investors and businessmen looking to set up cryptocurrency services/ businesses in Nigeria, crypto-businesses are generally permissible under Nigerian law. However, it is incorrect to assume that there exists no legal framework for regulation of crypto-businesses in Nigeria. Although the CBN is yet to issue generally-applicable guidelines specific to the trading of cryptocurrencies in Nigeria, there exists a discernible legal framework, with which investors and promoters of crypto-businesses must comply.
- The existing regulations which persons engaged in crypto-businesses must comply with vary, depending on a number of factors. One of such factors, is the nature of the crypto-business. Where, for instance, it’s an exchanger business, defining factors will include (i) whether the exchanger business is operated using a decentralised repository or centralized repository model (ii) whether the exchanger business uses cash, cards or electronic transfers (iii) whether the exchanger renders remittance services; amongst others.
- Exchangers, whose services are currently available in Nigeria, regardless of the nature of their repositories, will need to review their operations to bring same in line with regulatory standards, prescribed under existing laws, which are applicable to crypto-businesses in Nigeria.
- Cryptocurrencies and blockchain are now firmly on the radar of the CBN and under consideration. We expect that the CBN will issue regulations on the operation of cryptocurrency businesses very soon. At the very minimum, we expect that such regulations will model global regulatory trends in this area and make provisions regarding:
(a) security standards
(b) customer service standards
(c) risk management standards
(d) captive deployment of cryptocurrencies
(e) industry-specific AML/CFT
(f) privacy issues
(g) inward and outward remittances
(h) exchange rate regulation
(i) the definition of ‘currency’
(j) a clear delimitation of crypto-activities that are subject to regulation, including the deployment of social media platforms by crypto-firms
(i) Decentralized and centralized repositories.
- There are no known ICOs yet except for Sure Remit’s acclaimed USD7m ICO. There also exists no provision in the existing laws that prohibits a Nigerian company from launching a private coin offering. From a securities law, point of view, private companies are by law, generally, outside the regulatory purview of the SEC. To the extent however, that an offering is “public”, the SEC will have original regulatory oversight. We expect that the SEC will take proactive steps to issue ICO-specific regulations. A possible legal basis for this will be on the premise that bitcoin-denominated investments are securities, a fortiori, a special class of securities, to the extent that, they form a unit of investment.
Although, the Nigerian government has legitimate interests to protect the public by establishing minimum rules of engagement as relates to crypto-businesses, we must exercise a note of caution on the need for regulators to take a dispassionate look at cryptocurrencies especially given the possibility to use same as a unique tool for innovating around some of the fiscal and monetary challenges we face as a nation.
For further enquiries about setting up, regulating or investing in, a crypto-business in Nigeria, please write us on firstname.lastname@example.org