Tiwalola Osazuwa
AELEX Partners, Lagos
tosazuwa@aelex.com

Peretimi Akinmodun
AELEX Partners, Lagos
pakinmodun@aelex.com

Mubaraq Popoola
AELEX Partners, Lagos
mpopoola@aelex.com

The regulators

Cryptocurrency possesses the attributes of both money and securities. Like money, some cryptocurrencies can be used to buy goods and services, while other crypto projects are akin to securities or investment, with the expectation of future profits. Due to its functionality – as money and securities – the following regulators have taken steps to regulate cryptocurrencies in Nigeria.

Securities and Exchange Commission (SEC)

The SEC was established by the Investment and Securities Act 2007 (the ‘ISA’) and empowered to, among other things, regulate investments and securities business in Nigeria and register and regulate securities exchanges, capital trade points, futures, options and derivative exchanges, commodity exchanges and any other recognised investment exchange.^[1]

Central Bank of Nigeria (CBN)

The CBN is empowered by the Central Bank of Nigeria Act 2007 (the ‘CBN Act’) to, among other things, issue legal tender currency in Nigeria and promote a sound financial system in the country.^[2] Given that there is no legislation prohibiting cryptocurrency, the CBN’s approach to regulating it has been in the form of directives or guidance to its regulated entities, including banks and other financial institutions.

The CBN’s initial position on cryptocurrency

On 12 January 2017, the CBN, through its Circular to Banks and other Financial Institutions on Virtual Currency Operations in Nigeria (the ‘Circular’),^[3] instructed banks and other financial institutions to: avoid using, holding or transacting in any way in virtual currencies;^[4] implement effective anti-money laundering controls and controls that counter the financing of terrorism (AML/CFT) controls for existing customers that are virtual currency exchanges; and report any suspicious transactions by these customers.

Subsequently, on 5 February 2021, the CBN, through its Letter to all Deposit Money Banks, Non-bank Financial Institutions and other Financial Institutions (the ‘Letter’),^[5] took additional measures to restrict trading in cryptocurrency via official channels. In the Letter, the CBN stated that dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges is prohibited for regulated institutions. Furthermore, the CBN directed the regulated banks and institutions to identify and close accounts of persons and/or entities involved in cryptocurrency transactions or operating cryptocurrency exchanges within their systems. The Letter effectively excluded cryptocurrency businesses from accessing services provided by financial institutions in Nigeria.

It is important to note that the CBN’s position, as communicated through the Circular and Letter, did not place a ban on cryptocurrency in Nigeria. Instead, it only prohibits banks and other financial institutions that are statutorily under its regulatory control from processing/enabling such transactions. Consequently, individuals and exchanges seeking to transact in cryptocurrencies were forced to pivot to/adopt peer-to-peer (P2P) cryptocurrency business models.

The SEC’s position and the new Rules on Issuance, Offering Platforms and Custody of Digital Assets (the ‘Digital Assets Rules’)

On 11 September 2020, the SEC issued a statement recognising virtual/digital assets as securities, in line with recommendations from its Fintech Roadmap Committee. However, given the CBN’s subsequent letter in February 2021, the regulatory stance on cryptocurrency became unclear. The impact of the CBN ban on licensed institutions, against the statement issued by SEC, triggered a perceived conflict between the regulators.

To dispel speculation as to perceived regulatory conflict, the SEC issued a press statement^[6] on 11 February 2021, clarifying that the CBN’s actions aligned with its role as the apex regulator of the banking sector. To demonstrate its collaboration with the CBN, the SEC suspended admission into the SEC’s Regulatory Incubation Program (SRIP) until the affected entities could operate accounts within the Nigerian banking system.

Notwithstanding the SEC’s statement and suspension of the SRIP, in 2022, the SEC issued the Digital Assets Rules, which was the first attempt at a comprehensive regulation of digital and virtual assets in Nigeria. The Digital Assets Rules define virtual assets as ‘a digital representation of value that can be transferred, digitally traded and can be used for payment or investment purposes’. The Digital Assets Rules also create various categories of digital assets with their respective registration and licensing requirements.

The registration/licensing categories under the Digital Assets Rules include:

• virtual assets service providers (VASPs): for platforms that facilitate the trading, exchange and transfer of virtual assets, and/or any person (individual or corporate) whose activities involve any aspect of distributed ledger technology (DLT)-related and virtual/digital asset services;
• digital asset offering platforms (DAOPs): for electronic platforms operated by a DAOP operator for offering digital assets;^[7]
• digital asset custodians (DACs): for the provision of the safekeeping, storing, holding or maintaining custody of virtual assets/digital tokens for another person’s account; and
• digital asset exchange (DAX): for electronic platforms that facilitate the trading of a virtual or digital asset, other than those the SEC has objected to.

Following the issuance of the Digital Assets Rules, stakeholders’ expectations of a clear regulatory path were heightened. However, this expectation was short-lived as the Digital Assets Rules were not operationalised. In addition, the SEC reportedly stated^[8] that the Digital Assets Rules do not apply to cryptocurrency. The SEC’s reported position was surprising, given the definition and categorisation of virtual assets under the Digital Assets Rules.

Given the regulatory dynamics, it is reasonable to conclude that the SEC’s alleged statement and the non-operationalisation of the Digital Assets Rules was influenced by the CBN’s aversion to cryptocurrency.

CBN’s Guidelines on Operations of Bank Accounts for Virtual Assets Service Providers (VASPs) (the ‘VASP Guidelines’) and proposed amendment to the Digital Assets Rules

In December 2023, following the advent of a new administration, the CBN released the VASP Guidelines and relaxed its over two-year restriction on financial institutions operating accounts for cryptocurrency service providers or processing crypto-related transactions. While financial institutions remained banned from dealing in cryptocurrency, the ban on facilitating transactions for crypto businesses was lifted. Therefore, pursuant to the VASP Guidelines, financial institutions are now permitted to open bank accounts for crypto businesses, provided they fulfil the requirements set out in the VASP Guidelines. One such requirement is that the crypto platform must have obtained a relevant licence or registration from the SEC.

Following the CBN’s issuance of the VASP Guidelines, there were high hopes that Nigeria’s cryptocurrency regulatory environment would become more favourable in 2024. Indeed, there were private indications that the SEC was preparing to implement the Digital Assets Rules and begin registering and licensing qualified companies across the various licence categories. It was reported that some crypto startups had already approached the SEC^[9] to initiate the registration process.

Shortly after the issuance of the VASP Guidelines, the SEC issued a proposed amendment to the Digital Assets Rules (the ‘Proposed Digital Assets Rules’). A notable amendment is the inclusion of crypto in the term ‘virtual asset’. Thus, ‘virtual asset’ is now written as ‘virtual (crypto) asset’, retaining the same definition. This proposed amendment, particularly the renaming of ‘virtual asset’, supports the position that the SEC’s earlier statement excluding cryptocurrency from the Digital Assets Rules was superficial and that the SEC’s delay in operationalising the Digital Assets Rules was primarily in connection to the CBN’s initial hostile stance on cryptocurrency.

The Proposed Digital Assets Rules and VASP Guidelines address some major concerns regarding the adoption of cryptocurrency, such as money laundering, terrorism financing and fraud. These regulations address these concerns through the requirement for licensing, robust AML/CFT provisions and disclosure of information about the directors, beneficial owners and principal officers of the entities. In theory, the regulatory framework was being established to enable cryptocurrency businesses to operate in Nigeria.

Recent developments

In parallel with the cryptocurrency regulatory reforms noted above, the CBN also implemented a currency float, allowing the value of the Nigerian Naira to be determined by market forces. Initially, these reforms remained separate. However, by February 2024, there were allegations that Binance, a major crypto trading platform operating in Nigeria, was involved in or enabling currency manipulation, contributing to a downward spiral^[10] in the value of the naira. This resulted in the arrest and prosecution of Binance executives and restrictions on Binance’s operations in Nigeria, ultimately leading to Binance removing the naira as a currency on its platform.

There is now a clear shift in the regulatory stance of both the CBN and SEC, with the SEC signalling its intent to crack down on illegal trading activities in the cryptocurrency space, including delisting the naira^[11] from P2P trading platforms in order to mitigate its manipulation. Similarly, the CBN has suspended the onboarding of new customers^[12] in four Fintech companies, due to alleged complacence in money laundering and foreign exchange (‘forex’) speculation activities linked to cryptocurrency.

Some of these Fintech companies immediately put disclaimers up emphasising that they are licensed by the CBN and do not allow any cryptocurrency or virtual currency trading transaction on their platforms. The disclaimers noted that any account in violation will be closed.

Additionally, in April 2024, the Economic and Financial Crimes Commission, a law enforcement agency, secured a court order to freeze 105 accounts across nine Fintech companies in relation to unauthorised forex trading, money laundering and terrorism financing. This action is part of a broader investigation into 1,146 bank accounts suspected of manipulating the forex market^[13] through crypto platforms.

Conclusion

The recent crackdown on cryptocurrency activities in Nigeria has tempered earlier optimism about the alignment in the CBN and SEC’s regulatory approach to cryptocurrency and the regulatory clarity provided. Even the P2P market that had gained traction following the ban on official banking channels may now face significant disruption.

However, despite these developments, the foundation has been laid by the regulators for the operation of cryptocurrency businesses and activities in Nigeria through the Digital Assets Rules, VASP Guidelines and Proposed Digital Assets Rules. Therefore, considering recent efforts from the government to attract foreign investment and Nigeria’s status as a global cryptocurrency hub, a return to a more favourable regulatory environment would not be unexpected.