The CBN through a circular issued on 5 February 2021 instructed regulated institutions dealing in or facilitating payments for cryptocurrencies exchange to close all accounts used in trading cryptocurrencies. We look at what the circular means for Nigeria's crypto-community, what we can learn from India and why the circular is flawed.
Issue-Brief | Oluwayemisi Adeluoye
In recent years, cryptocurrencies have gained prominence against the backdrop of Nigeria’s weak local currency. Virtual currencies gained prominence when Nigeria’s Securities and Exchange Commission in 2020 issued regulatory guidelines for crypto assets that qualified as investments for securities transactions.
Nigeria has the world’s second-largest bitcoin by trading volume according to Crypto Market Place Paxful reports in 2020. In 2020, the Global Crypto Adoption Index ranked Nigeria eighth out of 154 countries for cryptocurrency adoption. The expansive growth of cryptocurrencies has prompted more national and regional authorities to grapple with their regulation.
The CBN through a circular reference number BSD/DIR/GEN/LAB/14/001 issued on 5 February 2021 instructed that regulated institutions dealing in cryptocurrencies or facilitating payments for cryptocurrencies exchange and all Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NFBIs) and Other Financial Institutions (OFIs) are to close all accounts used in trading cryptocurrencies and other related transactions. The CBN further added that breaches of the directive would attract severe regulatory sanctions. Prior to this circular, the CBN had through a press release in 2018 warned investors and dealers about the risks involved in trading in cryptocurrencies.
Interestingly, the CBN did not highlight any new risk in this circular rather it hinged on previously highlighted risks in its circular issued in 2017 asseverating that virtual currencies were largely untraceable and anonymous heightening the risk of financial fraud, money laundering and terrorism financing.
However, there are lots of speculations and educated guesses on the rationale behind this policy noteworthy is the End SARS protest in October 2020 where the organizers accepted bitcoins for funding after the government allegedly blocked local payment platforms for collecting donations. Also, a significant part of cryptocurrencies are remittances which is a source of concern to the CBN seeking to control its exchange rate.
This CBN’s proscription is reminiscent of the policy issued by the Reserve Bank of India (RBI) via its circular issued in 2018 putting a lid on the use of cryptocurrencies which was challenged by the Internet and Mobile Association of India - in the case of Internet and Mobile Association of India v Reserve Bank of India on two alternative grounds. Firstly, RBI doesn’t within its powers encompass the regulation of virtual currencies as it is considered a tradable commodity and not legal tender.
Secondly, assuming virtual currencies fell within the RBI’s regulatory purview, the circular had disproportionately infringed the rights of the Internet and Mobile Association of India. Regarding the first ground, the court held that where a commodity isn’t currency but functioned as legal tender, under certain circumstances the RBI had the power to handle it in pursuance of its role as the apex regulator of the country’s financial system.
On the second ground, the court held that RBI could have achieved its stated objectives through alternative regulatory methods and thus ruled against the RBI holding that the guidelines issued by the RBI prohibiting banks and other financial institutions from trading in virtual currencies are illegal and unenforceable.
Interestingly, while the case against RBI was still in court the reports of Indian’s inter-ministerial committee tasked with proposing cryptocurrency measures were presented to the parliament containing a draft “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019.” The draft bill seeks to create a facilitative framework for the creation of official digital currency by the Reserve Bank of India and prohibits all private cryptocurrencies in India with exceptions. However, according to India’s ministry of finance, the draft bill is to be examined collaboratively with relevant departments and regulatory authorities before it is either rejected or passed into law.
Using India as a case study, while the social media uproar is ongoing, the Nigerian crypto-community could challenge this policy before the Nigerian judiciary, based on the grounds highlighted in the RBI's case with reference to relevant sections of the constitution, cases and principles.
What Is The Implication of This Policy?
The emergence of cryptocurrencies as a radical innovation and financial solution through internet-based technology is indubitably a tool for economic development. Hence, this recent development in Nigeria’s cryptocurrency space is illaudable and creates rippling effects on Nigeria’s economy. Simultaneously, Nigeria’s foreign capital inflow is at its lowest declining from $23.9billion in 2019 to $9.68 billion in 2020 according to the data released by the National Bureau of Statistics and currently running at a debt of over ₦31 trillion.
This policy further reiterates CBN’s position that cryptocurrency is not a legal tender in Nigeria albeit no effect on its financial institution since cryptocurrency had never been legally integrated into Nigeria’s financial institutions and it would incapacitate cryptocurrency exchangers like Patricia, Binance, Luno amongst others from facilitating payments for cryptocurrency exchanges.
What is the Way Forward?
With the future of global electronic transactions involving digital currencies, efforts have been made by the CBN to reduce the number of bank-related fraud cases through requesting all accounts to be linked with a Bank Verification Number. Hence, rather than a ban, the CBN should issue guidelines and adopt strategies that encourage innovation while protecting the interests of consumers and citizens such as obligating cryptocurrency exchanges to conduct comprehensive KYC procedures on their customers and holders of cryptocurrencies amongst others.
However, this requires communication and collaboration between all stakeholders particularly with regards to enacting regulations. Furthermore, the contrasting opinion on cryptocurrencies held by SEC and CBN reflects the inherent dilemma that cryptocurrencies represent as a tradeable asset therefore both SEC and CBN should harmonize their stance on cryptocurrencies in Nigeria.
This issue brief was provided by
Oluwayemisi Adeluoye | Research Analyst, Banking and Finance | email@example.com
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