Last week, it was reported that the government instructed the NCC to block some crypto website platforms.
Initially, it seemed like sensational and unverifiable reporting, especially because the NCC Public Relations team denied they had gotten such directives.
It is important to emphasize that this directive is illegal because these exchange platforms aren’t operating in Nigeria unlawfully as SEC Nigeria hasn’t yet initiated pertinent processes for centralized exchanges to apply to be licensed VASPs in the country.
Also, according to the Money Laundering (Prohibition, Prevention, etc.) Act 2022 and the Finance Act 2023, one of the only recognizable government laws and instructions around cryptocurrencies both recognize “virtual assets” and “digital assets”, which include cryptocurrency respectively.
If this isn’t enough, the Federal Executive Council approved the National Blockchain Policy in 2023, which recognizes cryptocurrency as a catalyst for blockchain adoption in Nigeria, and finally, SEC Nigeria’s Rules on Issuance, Offering Platforms and Custody of Digital Assets (2022) sets adequate precedence to cryptocurrency operations in Nigeria.
While I am not going to rule out bad actors in the cryptocurrency space, what the CBN is doing is throwing the baby with the bathwater while understanding that the operations in the P2P market will directly correlate to the FX market’s volatility, and if not properly managed will lead to some risks.
Recommended reading: CBN intervenes in FX market, allocates $20,000 to each BDC to stabilise Naira
However, let’s define the problems the CBN is facing as understood;
1. Severe FX Supply Crunch
2. Galloping devaluation of the Naira due to “Price Speculators” in the P2P market
3. AML concerns around P2P transactions
With the above-listed problems here are the solutions identified
1. Open and market-first regulation on VASPs
2. Clear and defined regulatory roles and re-opening of naira payment infrastructure to VASPs
3. Enhanced compliance regime on VASPs
Supply Crunch: There is a severe USD supply crunch in the market. The CBN, foreign investors, IMF, creditors, pretty much any fund manager knows this.
Nigeria’s inability to settle its over $2bn in FX forwards (down from $7billion+) and lack of clarity around its foreign reserves has diminished market confidence.
Naturally, any currency facing these pressures will suffer currency value depreciation. The CBN reacted by further devaluing the currency in line with its willing buyer, willing seller mandate.
Despite these actions, the Naira had little to no respite. What needs to be done concerning the cryptocurrency market (of course if anything must be done) is Open and market-first regulation.
This provides a trusted source for FDIs in the country. Nigeria, as it is presently structured already attracts a sizeable amount of FDI in the cryptocurrency space due to the market appetite for crypto-related products.
Exchanges set up shop, hire local marketing teams, and spend marketing budgets in millions to get a piece of the number one market for cryptocurrency in Africa. According to Chainalysis, $57 billion was transacted between July 2022 and July 2023 in Nigeria.
I have noticed trends of certain regions becoming hubs for investments by setting up applicable local laws to attract FDIs. The UAE with the ADGM (Abu Dhabi Global Markets regulation around cryptocurrency) and Dubai with VARA (Virtual Assets Regulatory Authority).
Data indicates that the Crypto industry contributes approximately 100 billion dirhams (27.25 billion USD) to Dubai, constituting 4.3% of the UAE’s GDP. How about the government take a leaf from the Emirati’s book?
Galloping devaluation of Naira due to “Price Speculators” in the P2P market: Well, let’s put it this way. While some bad actors operate in the P2P market, its very nature can be intentionally and unintentionally used to drive depreciation and I will explain how.
When merchant X buys USDT at N1,500, when he is going to sell the USDT to user Y who wants to buy USDT with his Naira, he will only sell at a rate above N1,500 to make a profit.
This creates an unending loop especially when there is no relevant price discovery mechanism in the unofficial market. With that being said; I have to outline two critical past mistakes the CBN made to make the P2P market more important than it truly needs to be;
- In February 2021, CBN banned banks and Other Financial Institutions from facilitating cryptocurrency transactions.
- In September 2021, CBN’s public execution of AbokiFX left a telling price discovery gap in the unofficial market.
These two policies did two things. The first effectively took cryptocurrency transactions out of the official payment frameworks in Nigeria inclusive of banks, payment companies, etc to the unofficial window. Banks and OFIs were instructed to terminate any relationship with VASPs thereby encouraging opacity in the industry.
Cryptocurrency transactions are still being facilitated by banks, however, there is no appropriate classification from the bank side that it is a cryptocurrency transaction because there is no way they can know.
This has created gaps in the illicit movement of funds and other AML/CFT infractions resulting in the FATF (Financial Action Task Force) putting Nigeria on the ‘grey list’ citing the lack of robust AML regulations around digital assets and others.
The second point eliminated price discovery in the unofficial market. Without the AbokiFX, there was no reference rate for P2P merchants to set their market rate on, and rate discovery largely pivoted to Binance P2P as the most efficient market in the unofficial window.
Ideally, these are things that no central bank should tolerate but they made the beast. The solution is Clear and defined regulatory roles and re-opening of naira payment infrastructure to VASPs. The CBN, NFIU, SEC Nigeria, etc need to establish their roles in creating a robust and market-friendly cryptocurrency market.
First things first will be to get SEC Nigeria to actualize their licensing program for VASPs. There should be a guideline and timeline for all VASPs operating in the country to apply. South Africa’s FSCA (Financial Sector Conduct Authority) did it last year and got over 70 applications.
This way, when they start providing licenses, these licensed VASPs can work with banks and payment companies to remove the opacity around cryptocurrency transactions and also eliminate the need for users to use P2P.
P2P in itself is not a very user-friendly On/Off Ramp tool. It is subject to scams, takes a long time and the fact that you are interacting with another third-party individual increases the inefficiencies. I know there are some technology solutions around it to ensure escrow holdings, APIs, etc. I do not see its ultimate benefit as a fiat gateway in an ideal payment structure.
P2P operations should ideally be managed and regulated by the CBN, similar to how the NAFEM operates (if at all they want it regulated).
Therefore, by the provisions of the Investment and Securities Act, 2007 a P2P activity is not under the purview of the SEC, so I do not expect SEC Nigeria to license an exchange to operate a P2P system, instead, the VASPs are meant to work with banks and OFIs for payment facilitation.
Finally, AML concerns around P2P transactions: The opacity of P2P transactions raises compliance concerns. VASPs licensed by SEC Nigeria need to meet certain NFIU requirements and partake in an enhanced compliance regime for VASPs.
They have to provide AML policies, have a compliance program, and have an appointed compliance officer who files statutory reports to the NFIU, undertakes compliance training by NFIU, independent audit reports, and works similarly to how banks operate with KYC and EDD.
Conclusion
The policy U-turn from the CBN in less than 9 weeks after issuing guidelines for the operation of bank accounts for VASPs seems uncoordinated and will further drive cryptocurrency transactions out of the banking scope which is a risk.
The solution has to be long-term and robust, perhaps, they want to sell the news or get some reprieve on the Naira free fall.
What the CBN needs to prioritize short-term is ensuring that SEC Nigeria, NFIU, and other related regulators create, review, and implement their already existing guidelines on VASPs.
The medium-term will be to directly take control of the regulation around the P2P market, perhaps the BDCs and even the NAFEM can benefit from the technology and trading efficiency. Finally, long-term CBN and other regulators need to take a robust approach to ensure a healthy ecosystem for cryptocurrency to attract FDIs.
However, the main issue is that there is no supply of FX liquidity in the market, which is a much broader issue and the P2P market volatility is just a symptom of the main problem because of the lack of price discovery in the unofficial rate.
Recommended reading: CBN has cleared another $400 million of FX backlog
Author Name: Ade von Bismarck
Ade works at the forefront of innovation and driving solutions in the financial services industry through cryptocurrency and blockchain. Currently responsible for enabling fiat on/offramps through licensing and payment partnerships in key markets globally for a digital asset company.
