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Columnists

Nigeria’s cryptocurrency ban: A legal analysis

A legal analysis of CBN’s decision to prohibit banks from facilitating crypto-related transactions through the banking system.

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CBN forex restrictions on food itemsCBN approves new cheque standard for banks

Through its circular dated 5th February 2021, the Central Bank of Nigeria (CBN) directed all Deposit Money Banks, Non-Financial Institutions and Other Financial Institutions to immediately close the accounts of persons and/or entities transacting in or operating cryptocurrency exchanges within their systems. Consequently, the trading of cryptocurrency with the Naira is henceforth prohibited.

Notably, the prohibition of trading cryptocurrency through withdrawal or deposit of money to a financial institution is clearly different from the prohibition of ownership of cryptocurrency. While the CBN is empowered by the Banks and other Financial Institutions Act to regulate the activities of financial institutions, including the facilitating of payments for cryptocurrency exchanges, it has no power to regulate ownership, use, or transfer of cryptocurrency.

Remarkably, the CBN’s approach to cryptocurrency differs from that of the Securities and Exchange Commission (SEC) and the National Information Technology Development Agency (NITDA), both regulators of the Federal Government of Nigeria, and calls into question the policy coordination of the government.

READ: CBN instruct banks to close accounts related to Crypto

In a statement published on its website, the SEC classified crypto assets (such as cryptocurrencies) as securities, which may be offered to the public. With the CBN’s ban, it is technically illegal to purchase these securities.

The NITDA also issued a draft National Blockchain Adoption Strategy, with the goal of “creating and fostering an efficient, safe, and economically productive and viable Digital Nigeria using the blockchain technology”, which will develop Nigeria’s digital economy and amplify “the government’s efforts to move away from its heavy economic reliance on the oil and gas sector”. It is needless to state that cryptocurrency is powered by blockchain. While the blockchain technology has other uses, it was primarily developed for a cryptocurrency – Bitcoin.

READ: Why Banks don’t trust Cryptos

The outright ban of Naira-backed cryptocurrency trading significantly restricts the potential growth of Nigeria’s burgeoning cryptocurrency industry, which accounts for the world’s second-largest Bitcoin trading volume and the 8th country with the highest adoption of cryptocurrency in the world.

Taking the cue, some cryptocurrency exchanges have begun consideration of the migration of their companies to other crypto-friendly jurisdictions. In the meantime, they have deactivated Naira deposits and Naira withdrawals from the exchanges.

READ: CBN seeks standard practice from fintech operators 

The necessity of balancing regulation with innovation has risen in recent years with the exponential growth of Nigeria’s FinTech industry, which has attracted significant interest from foreign investors. Unfortunately, it has also exposed the seeming cluelessness of the regulators who have struggled to keep up with the rapid developments in the industry. The recent crypto ban by CBN is evidence of this.

Although the rationale for the CBN’s decision is yet unknown, there are indications that it may not be unconnected with foreign currency controls and the 97% drop in remittances through official channels, between January 2020 and September 2020. Notwithstanding the justification, the hastiness with which the decision was reached, particularly without an attempt to engage the industry, is unbecoming of a regulator of the financial industry.

The CBN’s power to regulate the activities of financial institutions is being wielded capriciously to abort what has been described as the future of the global financial industry. In an age of globalisation, it will not be long before the country loses the opportunity to establish leadership in the regulation of cryptocurrency.

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A better approach may have been to utilise its recently created regulatory sandbox for the payments system to understudy the use cases of cryptocurrency within the system. Alternatively, the CBN may have developed a regulatory sandbox specifically for cryptocurrency innovations. This would have afforded the CBN a better opportunity to understand the risks and more so, the opportunities for the country to explore the industry.

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Following this, it may then attempt to regulate the cryptocurrency industry, by developing stopgaps to mitigate these risks, while ensuring Nigeria cultivates the strong interest of its teeming population in cryptocurrency.


About author

Olayanju Phillips is a lawyer and an Associate within the Corporate Finance and Capital Markets Department of SPA Ajibade & Co. He can be reached at [email protected]

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Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform.To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

3 Comments

3 Comments

  1. Abdulmajeed

    February 6, 2021 at 6:25 pm

    I love how this man finished everything

  2. Vaughan

    February 6, 2021 at 10:47 pm

    SEC regulates investments.

  3. Bubelah

    February 7, 2021 at 1:38 pm

    “it was primarily developed for a cryptocurrency – Bitcoin”… kindly provide supporting evidence.

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Columnists

AfCFTA: The underlying principles, objectives and benefits

The fears around the issue of dumping and border security should not outweigh the huge benefits that AfCFTA offers to the member-states.

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The Agreement (the “Agreement”) establishing the African Continental Free Trade Area (the “AfCFTA”) has continued to generate discussions following the commencement of trading under the new economic bloc. The Agreement was signed on 21 March 2018 at the Extra-Ordinary Summit of the African Union held in Kigali Rwanda and came into force on 30 May 2019 after the Gambia became the 22nd State to ratify it.

Nigeria signed the Agreement on 7th July 2019 and after initial dilly-dallying, ratified it in November 2020 leading to the formal deposit of the Instrument of ratification before the 05 December 2020 submission deadline. Paradoxically, Nigeria (34th member State to ratify the treaty) who was at the forefront of developing and negotiating the AfCFTA Agreement later became jittery at the point of ratification. The initial hesitation has been explained on the basis that prior consultation with the manufacturing community and other stakeholders was needed before ratification.

COVID-19 pandemic delayed the phase 2 negotiations and commencement of trading under AfCFTA which was earlier scheduled to start on 1st of July 2020. Trading eventually kicked off on 1st January 2021 and it is too early to assess the impact of trading yet particularly as some countries are yet to ratify the treaty. The AfCFTA has been lauded as a game-changer and ambitious project capable of lifting over 30 million people out of poverty on the continent, through trade liberalization and economic integration in line with the Pan African Vision (Agenda 2063) of an integrated, prosperous and peaceful Africa.

In terms of structure, the main Agreement is divided into 7 Parts and 30 Articles. In addition, there are Protocols, Annexes and Appendices which equally form part of the AfCFTA Agreement. Three of these Protocols are (i) the Protocol on Trade in Goods (ii) the Protocol on Trade in Services, and (iii) the Protocol on Rules and Procedures on the Settlement of Disputes. Article 8 of the Agreement is to the effect that the Protocols, Annexes and Appendices shall, upon adoption, form integral of the Agreement.

The Phase Two Negotiations for both Trade in Goods and Trade in Services include (i) the Protocol on Investment (ii) the Protocol on Intellectual Property and (iii) the Protocol on Competition Policy as well as the associated Annexes and Appendices. As common with most treaties, the AfCFTA Agreement is expected to be organic as future amendments and updates are possible, provided that any additional instruments deemed necessary are to be concluded in furtherance of the objectives of AfCFTA and shall upon adoption, form an integral part of the Agreement.

Modelled after the principles of the World Trade Organization/General Agreement on Tariffs and Trade and General Agreement on Trade in Services (WTO/GATT/GATS), the AfCFTA has some of the trappings of custom union and common market even though one of the AfCFTA objectives is the creation of Continental Customs Union at a later stage. Conceptually, economic integration is broadly classified into five stages, viz: free trade area, Custom union, Common market, Economic union (single market) and Political union.

One key feature of Custom Union being the acceptance of a unified external common tariff against non-members. The European Union presents a unique example of the Customs Union through the instrumentality of the Union Customs Code which applies a uniform tariff system for imports from outside the EU. Unlike the Custom Union, the AfCFTA under its rules on Most-Favoured-Nation Treatment allows member States to conclude or maintain preferential trade arrangements including different tariff arrangements with Third Parties provided that such trade arrangements do not impede or frustrate the objectives of the Protocol on Trade in Goods. By default, WTO member countries trade based on conditions laid down under GATT.  It is in a bid to address the tariff and non-tariff barriers existing under the WTO, that some regions have opted for more favourable trade deals as seen in Europe, Asia, North America and now Africa.

As with any WTO-based trade treaty, there are key non-exhaustive underlying principles that underpin the AfCFTA. Some of these principles will form the subject of our discussions in subsequent publications. These include (i) the Most-Favoured-Nation Treatment and (ii) the Rules of Origin. Whilst the former mandates the State Parties to accord preferential treatment to one another, the latter spells out criteria for goods that will be eligible for preferential treatment under the AfCFTA. Equally important is the Anti-dumping and Countervailing Measure which provides trade remedies and remedial actions against imports which are detrimental to local industries. In relation to the Trade in Services, the Most-Favoured Nation exemptions afford State Parties a margin of leeway to exclude certain sectors or sub-sectors from their Schedule of Commitments and limit market access to those sectors or sub-sectors.

Key Objectives

The overarching objective behind the AfCFTA is the elimination or reduction of tariff and non-tariff barriers amongst the 54 Countries that agreed to be members of the bloc by providing a single market for goods and services, facilitated by movement of persons in order to deepen the economic integration and prosperity of the African continent. This key objective is to be achieved through successive rounds of negotiations that are to be done in phases.

In specific terms, the Agreement also seeks to (i) lay the foundation for the establishment of a Continental Customs Union; (ii) promote and attain sustainable and inclusive socio-economic development, gender equality and structural transformation of the State Parties, (iii) enhance the competitiveness of the economies of State Parties within the continent and global market, (iv) promote industrial development through diversification and regional value chain development, agricultural development and food security, and resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes. In order to actualize these noble objectives, Article 4 of the Agreement mandates State Parties to:

  • Progressively eliminate tariffs and non-tariff barriers to trade in goods;
  • Progressively liberalise trade in services;
  • Cooperate on investment, intellectual property rights and competition policy;
  • Cooperate on all trade-related areas;
  • Cooperate on customs matters and the implementation of trade facilitation measures;
  • Establish a mechanism for the settlement of disputes concerning their rights and obligations; and
  • Establish and maintain an institutional framework for the implementation and administration of the AfCFTA.

There is no doubt that the actualization of these objectives will put Africa on the part of economic posterity and industrialization. It is expected that each State Party should demonstrate commitment, sincerity, and integrity in dealing with other member States. The success of the European Union and other similar regional trade blocs has shown that with the right political will and commitment from member-states, regional trade deals as seen in AfCFTA often contribute to the economic development of the participating region.

Benefits

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The AfCFTA is the world’s largest free trade zone since the establishment of the WTO in 1994 and offers a lot of benefits to member States particularly those with competitive advantage and enabling infrastructures. Africa has a population of 1.3 Billion people and a combined GDP of over $2.6 Trillion (more than 6 times of Nigeria’s GDP). According to the Brookings Institution’s report, intra-African trade accounts for 17 percent of Africa’s exports compared to 59 percent in Asia and 69 percent in Europe.

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The report projected that the removal of tariffs if well implemented could boost intra-regional trade up to 50 percent by 2040, from the current 17 percent. Nigeria has a competitive advantage in a number of sectors and stands in a position to benefit from the newly enlarged market. This will further increase investment in the distribution and logistics supply chain as cross-border trades will spiral up. Nigeria’s increasing unemployment rate of over 30% which has been made worse by the pandemic is expected to reduce when trading starts in commercial quantity.

The AfCFTA will progressively reduce trade tariffs by over 90% by 2022 and by extension address the increasing inflation and infrastructural deficits within the continent. Nigeria, being the largest economy in the continent with strong service sector should position itself to benefit from the economies of scale that will follow the localization of industries. Oil refineries, cement, agriculture, food processing, minerals, banking and financial services, aviation, information technology and legal services have been identified as some of the critical sectors where Nigeria has competitive advantage.

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The fears around the issue of dumping and border security should not outweigh the huge benefits that AfCFTA offers to the member States. Rather, this should be a wake-up call for Nigeria to invest heavily in rail and road transport, port infrastructure, border security, internal security, electricity, education, and other enabling infrastructures. The last border closure was largely attributed to the issue of dumping and security as it was alleged that Nigeria was amongst other things being swamped with fake and sub-standard goods mostly from Asian countries through the Benin Republic.

The AfCFTA Rules of Origin provision is meant to address this, and it is hoped that the AfCFTA member States should demonstrate the political will to ensure strict compliance. While the regime of Trade in Goods appears to be taking shape, particularly with the commencement of trading early this year, the progressive framework for the negotiations of specific commitments by the member-states in the area of Trade in Services, should afford Nigeria the platform to ensure that the service sectors benefit from the huge opportunities provided under the AfCFTA.

 

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Prince I. Nwafuru, MCIArb (UK)

Lagos, Nigeria

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Columnists

Repricing of yields reduces activity level in January

For foreign investors, outflows fell to N30.8bn (US$78.3m) compared with N48.8bn (US$124.5m) in December.

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Based on the data released by the NSE on Domestic & Foreign Portfolio Investments for January 2021, total value fell 13.7% m/m to N232.5bn (US$590.8m) from N269.2bn (US$687.1m) in December 2020. Furthermore, total value declined 1.27% y/y to N232.5bn (US$590.8m) in January 2021 from N235.5bn (US$600.8M) in January 2020.

Activity level among domestic investors decreased 7.2% m/m to N184.9bn (US$470.0m) while foreign investor transactions also took a dip, down 32.0% m/m to N47.52bn (US$120.78m). Domestic investors still retained dominance of trading activities on the local bourse as their share of total transactions in January stood at 79.6%.

On the domestic front, transactions were dominated by institutional investors who traded N117.5bn (US$298.6m) while retail investors executed transactions worth N67.4bn (US$171.4m). Notably, the volume of transactions declined 14.9% m/m at the institutional level contrary to an increase of 10.16% m/m at the retail level.

For foreign investors, outflows fell to N30.8bn (US$78.3m) compared with N48.8bn (US$124.5m) in December. In the same vein, foreign inflows decreased to N16.7bn (US$42.5m) in January from N21.1bn (US$53.9m) in December, resulting in a net outflow of N14.1bn (US35.7m) compared with a net outflow of N27.6 (US$70.5m) in December.

Looking ahead, for as long as yields in the fixed income space continue to rise, the equities market will continue to take a hit in our view. In the near term, we believe good corporate earnings and dividend announcements will support some stocks in the equities market. We, however, expect FPIs to retain apathy towards the Nigerian market in the short term, though the inability to source FX for repatriation may continue to force reinvestments.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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