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.
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.
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.
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.
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.
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.
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 firstname.lastname@example.org