Funmilayo Odude, Partner, Commercial and Energy Law Practice (CANDELP)
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CBN’s new regulation for cryptocurrency in Nigeria 22 Jan 2024
The Central Bank of Nigeria (CBN) by its circular issued on the 22nd of December 2023, reversed its earlier position on the operation of bank accounts linked to or facilitating payments for cryptocurrencies or cryptocurrency exchanges. The CBN had in February 2021 directed all financial institutions including deposit money banks and non-bank financial institutions to identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately. The CBN had expressed reservations about digital currencies since 2017 when it repeatedly warned against it, stating that the anonymity provided by the virtual transactions enabled the use of digital currencies such as Bitcoin, Litecoin, Ethereum and other cryptocurrencies for terrorism financing and money laundering.
The apex bank has now reversed its 2021 circular and issued the Guidelines on Operations of Bank Accounts for Virtual Assets Service Providers. The guidelines govern the opening, operations, and use of bank accounts opened by Virtual Assets Service Providers (VASPs) and Digital Assets (DA) entities. VASPs include entities that conduct activities and operations relating to exchange between virtual assets and fiat currencies; exchange between one or more forms of virtual assets; transfer of virtual assets, safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets, and participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
“Virtual asset”, under the guidelines, is defined as “a digital representation of value that can be transferred, digitally traded, and can be used as payment or investment purposes.” CBN offered clarifications that virtual assets shall not include digital representation of fiat currencies, and that securities and other financial assets are already covered elsewhere in the FATF recommendations. According to its guidelines, digital asset is defined as a digital token that represents assets such as debt or equity claim on the issuer.
It is important to state that at no time was there any law that banned cryptocurrency in Nigeria contrary to widely held view on its banning in the country. The CBN circular of 2021 undoubtedly affected the operations of virtual and digital assets and currencies through the traditional banking platforms but did not ban virtual or digital assets and currencies in the country. There were, in fact, laws that recognised the existence of virtual assets and digital currencies. For example, the Money Laundering (Prohibition, Prevention, etc.) Act 2022 recognises VASPs as part of “financial institutions”, while the Finance Act 2023 introduced a charge of Capital Gains Tax (CGT) on profits made from disposal of digital assets in Nigeria.
The Securities and Exchange Commission (SEC) had in May 2022 published its Rules on Issuance, Offering Platforms and Custody of Digital Assets. The position adopted by SEC was that virtual crypto assets are securities and as the apex regulator of the Nigerian capital market, pursuant to its powers under the Investment and Securities Act (ISA), it opted to regulate rather than “ban” crypto-token or crypto-coin investments when the character of the investments qualify as securities transactions. The CBN February 2021 circular, however, acted as a drawback on the effectiveness of the SEC rules.
The CBN circular, however, did not negate the use of cryptocurrency in Nigeria. It, perhaps, enhanced Nigeria's P2P (peer-to-peer) crypto market, in view of the unavailability of use in the banking system. According to Chainalysis, relied upon by Forbes and Reuters, Nigeria's crypto transaction volume surged by 9 percent year-on-year (YoY) to $56.7 billion between July 2022 and June 2023. Additionally, in the Chainalysis 2023 Global Crypto Adoption Index report, Nigeria ranked 1st for P2P exchange trade volumes and 2nd for overall adoption, rising from its previous rankings of 17th and 11th, respectively, the year prior year.
The CBN’s December 2023 guidelines alluded to the Financial Action Task Force (FATF) 2018 updated regulations which included a requirement for VASPs to be regulated to prevent misuse of virtual assets for money laundering, terrorism financing, and proliferation financing. Additionally, FATF, had in June 2019 announced that it had adopted and issued “an Interpretive Note to Recommendation 15 on New Technologies,” which clarifies the amendments to the international standards relating to crypto assets and describes how countries must comply with relevant recommendations. It advised countries to assess and mitigate the risks associated with virtual asset activities and service providers and implement sanctions and other enforcement measures when service providers fail to comply with their AML/CFT obligations. Countries are required to license or register service providers and subject them to supervision or monitoring by competent national authorities, and will not be permitted to rely on a self-regulatory body for supervision or monitoring.
The CBN December 2023 guidelines does not regulate VASPs or DA entities in the country. The SEC regulations does that. The new CBN guidelines govern financial institutions under the regulatory purview of the apex bank in the conduct of their banking relationship with VASPs, including account opening, restrictions on the operations of the account collection, and reportage of data from the accounts. The guidelines provide for the minimum standards and requirements for banking business relationships and account opening for VASPs in Nigeria, provide guidance on the relationship and operations of accounts opened for licensed VASPs and DA entities including effective monitoring of the activities of the financial institutions providing service for the VASPs and DA entities and ensuring effective risk management in the banking industry with respect to their operations.
Financial institutions are to obtain authorisation from the CBN for the opening and operation of designated settlement accounts of VASPs and DA entities. For opening of accounts, financial institutions are to note the following: (i) only a specific type of account is permitted to be opened – one designated as a virtual/digital assets operations account. VASPs are not to open or operate NUBAN accounts; (ii) a designated account can only be opened with the approval of senior management in the financial institution, i.e., someone in the role of Assistant General Manager (AGM) or superior; and (iii) apart from the regular documentation required for the opening of accounts of corporate organisations, such as incorporation documents issued by the Corporate Affairs Commission (CAC), a VASP or DA entity potential account holder must provide a valid license issued by SEC to the financial institution as well as its AML, CFT, CPF policy.
The guidelines further place the following restrictions on designated accounts opened for VASPs and DA entities: (i) such designated accounts cannot be used for multiple purposes. They can only be used for transactions on virtual or digital assets; (ii) there are withdrawal restrictions on the accounts – first, no cash withdrawals can be allowed on the accounts, no third-party cheque can be cleared from the account. Withdrawal can only be made through managers’ cheque or transfer to an account. Where the payment is in relation to settlement of virtual or digital assets transactions, it must be by transfer; and (iii) The designated settlement account including any associated linked account for warehousing settlement monies shall not be interest-bearing accounts.
In the operations of the designated accounts, financial institutions are to note the following: (i) they must establish transactions limits in line with their risk assessment criteria. These accounts must, however, be subjected to the maximum transaction charges band as provided for under the CBN Guide to Charges for Banks and other Financial Institutions; (ii) they are not to enter into any concession agreement or arrangement with a holder of a designated account; (iii) the designated accounts become dormant where there is no customer induced transaction for three months and must be closed. The balance in such accounts will be treated as provided for under the Banks and Other Financial Institutions Act (BOFIA) for unclaimed funds. The funds will remain deposit liabilities in the books of the bank; (iv) for the purposes of giving effect to transfer requests on designated accounts, the financial institutions must have access to the details of the transactions on the VASP platform, leading to settlement on real time basis; (v) debits from the designated accounts must only be in favour of the specific accounts used to fund Naira position on the VASPs/DA entities’ platform; (vi) the designated accounts cannot be used to facilitate FX payments as transactions on the VASP/DA entities platforms must only be in Naira; and (vii) The designated accounts cannot be used as collateral for credit.
Financial institutions have a strict reporting compliance duty under the guidelines. They are to submit returns to the CBN between the end of a month and the 10th of the following month. The returns will have such information as the number of designated accounts opened during the reporting period, the value and volume of transactions conducted in each account, the details of the counterparties to the transactions, incidents of theft, and number of customer complaints and remedial measures taken.
Central banks are critical to the regulation of cryptocurrencies and the new position of the CBN to regulate virtual and digital assets makes Nigeria open to deepening the market and ensuring safety for its users. As technologies evolve, regulations would improve and perhaps we may yet see the operation or trading of crypto and digital assets as part of the definition of ‘other financial institutions’ in the Banks and Other Financial Institutions Act (BOFIA) to bring VASPs and DA entities under the full regulatory authority of the CBN.
Funmilayo Odude is a Partner at Commercial and Energy Law Practice (CANDELP).
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