Invaluable opportunitiesIt's not a secret that due to infrastructure problems African countries have less available financial services as around 57% of the population remain unbanked. In turn, nascent infrastructure has made Africa a perfect vector for cryptocurrencies. Despite the fact that Africa has the smallest cryptocurrency economy compared to any other region of the world, it’s still showing the most dynamic growth. According to Chainalysis, Africa’s cryptocurrency market has grown over 1200% by value received in the last year.
Talking about Nigeria, the last one has entered the top 20 countries in the 2021 Global Crypto Adoption Index.
Notwithstanding the above mentioned facts, The Central Bank of Nigeria (hereinafter: -“CBN”) has prohibited commercial banks to trade with cryptocurrencies, Nigerians found the other implementations of cryptocurrencies because "Nigerians find it easier to use [cryptocurrency] as an investment tool."
The Nigerian administration has an unsteady approach when it comes to policy making on cryptocurrencies and is not well characterized. The establishment and introduction of eNaira, on the other hand, suggests that the Nigerian authorities are attempting to keep up with global innovation. Although eNaira is more of a virtual currency than a cryptocurrency, the introduction of an eNaira is a significant step forward for Nigeria.
This article discusses recent regulatory efforts by Nigerian authorities to control the cryptocurrency market.
SupervisionThe CBN Act of 2007 of the Federal Republic of Nigeria entrusts the CBN with comprehensive control and administration of the Federal Government's monetary and financial policy.
The Investments and Securities Act of 2007 (hereinafter:- “ISA”) likewise established the Securities and Exchange Commission (hereinafter:-“SEC”) as the primary regulator of the Nigerian capital market. Furthermore, the SEC will regulate all digital asset token offerings, initial coin offerings (“ICOs”), security token ICOs, and other blockchain-based offers of digital assets made within Nigeria or by Nigerian issuers or sponsors, as well as foreign issuers targeting Nigerian investors. Besides, any person (individual or corporate) whose activities involve any aspect of blockchain-related and virtual digital assets services must register with the SEC, according to the Statement.
Legislative oversightIn Nigeria, there is still no clear regulatory framework on the status of virtual assets. Because of the divergent perspectives of the CBN and the SEC on virtual currencies, it is premature to discuss regulation of virtual currency exchanges. The ISA 2007 is Nigeria's main legislation for capital market regulation. In addition, the SEC, to augment the ISA, published The Securities and Exchange Commission Rules and Regulations 2013 (the SEC Rules). The existing legislation (including the ISA and SEC Rules) does not establish clear standards of key policies of the virtual currencies industry.
However, there has been some attempts to bring some clarity:
- The SEC, via the Statement, maintains its position that it will be taking a three-pronged approach to regulate innovation in the cryptocurrency sector, hinged on safety, market deepening, and providing solutions to problems. SEC believes that virtual cryptoassets are securities (unless proven otherwise by the issuer or sponsor).
- Press Release On Cryptocurrencies 2021: about coordinated activity of SEC and CBN. The goal of this activity is to further analyse, and better understand the identified risks to ensure that appropriate and adequate mitigants are put in place, should such securities be allowed in the future.
- In the CBN Circular dated 12 January 2017 the CBN sets the rules to banks and other financial institutions about effective AML/CFT controls; report any suspicious transactions by virtual currency exchanges or customers etc.
- SEC, 'Circular on the SEC Regulatory Incubation Program' 2021 (The RI programme): “as an interim measure to aid the evolution of effective regulation which accommodates the innovation by FinTechs…”. The RI requirement applies to fintech entrepreneurs seeking registration whose functions and operations have been reviewed and deemed to require an amendment to the existing SEC Rules or the creation of completely new rules.
AML requirementsThe Money Laundering (Prohibition) Act 2011 (as modified) is the principal legislation governing money laundering in Nigeria (MLPA). Also, The CBN released the CBN AML/CFT Regulations 2013 and the SEC issued the SEC AML/CFT Regulations 2013.
In the CBN Circular 2017, the CBN directed banks and other financial institutions to:
- ensure that existing customers that are virtual currency exchanges have effective AML/CFT controls to enable them to comply with customer identification, verification and transaction monitoring requirements;
- discontinue any relationship with virtual currency exchanges or customers where the banks or other financial institutions are not satisfied with the controls put in place by the virtual exchanges concerned; and
- report to the Nigerian Financial Intelligence Unit any suspicious transactions by virtual currency exchanges or customers.
The "Cybercrimes (Prohibition and Prevention) Act, 2015" creates a comprehensive legal, regulatory, and institutional framework in Nigeria to prohibit, prevent, detect, prosecute, and punish cybercrime. According to the Nigerian Cyber Crime (Prohibition, Prevention) Act 2015, all financial institutions, including Fintech companies, must verify the identity of customers involved in electronic transactions, integrate and implement know-your-customer (KYC) processes, and keep all subscriber data safe for two (2) years.
KYC requirements include:a. verify its customer’s identity and update all relevant information on the customer-
before opening an account for, issuing a passbook to, entering into fiduciary transaction with, i.renting a safe deposit box to or establishing any other business relationship with the customer, and
ii. during the course of the relationship with the customer;
b. scrutinize all on-going transactions undertaken throughout the duration of the relationship in order to ensure that the customer’s transaction is consistent with the business and risk profile.
The rules of the MLPA and AML/CFT Regulations will apply to virtual currency exchanges if they are later classified as FIs (financial institutions) or DNFIs (designated non-financial institutions) by the CBN or other applicable authorities. Capital market operators, money laundering operations in the Nigerian capital market, and other connected topics are covered under the SEC AML/CFT Regulations. For its part, the SEC AML/CFT Regulations apply to capital market operators and cover KYC/identification procedure, CDD (Customer Due Diligence) measures and other relevant AML rules.
Virtual currency operators (individual or corporate) would be expected to comply with the KYC and other reporting requirements in the regulations that apply to capital market operators once they are able to operate accounts within the Nigerian financial system and register with the SEC.
TaxThere is no particular legislation in Nigeria that governs the tax treatment of virtual currency transactions. Such transactions, however, will be subject to the country's current general tax regulations, which means that any income or profit generated from such investments will be taxed in the hands of the investors.
Taxes on personal income:
- Minimum income tax - rate of 1% of the total income is payable.
- Employees earning less than the National Minimum Wage (currently N30,000 =64.30 EUR ) are no longer subject to taxation or PAYE deductions.
If a firm is medium-sized, it must pay 20% of its taxable income in company income tax, or 30% of its taxable income if it is large. However, because of the nature of cryptocurrencies, tax authorities will have a tough time determining and tracking any gains on such investments.
The classification of virtual assets/instrumentsThe SEC categorizes the virtual assets/instruments as follows:
- Crypto Asset- e.g non fiat virtual currency. Treated as commodities if traded on a Recognized Investment Exchange and/or issued as an investment, and is subject to Part E of SEC Rules and Regulations (the SEC Rules 2013г.) and any other relevant sections and subsequent Rules which will be enacted in future.
- Utility Tokens or “Non-Security Tokens”(e.g., virtual tokens. These tokens simply provide users with a product and/or service). Treated as commodities. However, spot trading and transactions in Utility Tokens do not fall under SEC purview unless conducted on a Recognized Investment Exchange and therefore subject to Part E of SEC Rules and Regulations (the SEC Rules 2013г.) and any other relevant sections and subsequent Rules which will be enacted in future.
- “Security Tokens’’ (e.g., virtual tokens that have the features and characteristics of a security. Represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds, etc.). Deemed to be Securities pursuant to PART XVIII (315) of ISA, “definition of Securities’’. All financial services activities in relation to Security Tokens, such as operating primary /secondary markets, dealing / trading / managing investments in or advising on Security Tokens, will be subject to the relevant regulatory requirements. Market intermediaries and market operators dealing or managing investments in Security Tokens need to be registered / approved by SEC as CMOs, Recognized Investment Exchanges or Recognized Clearing Houses, as applicable.
- Derivatives and Collective Investment Funds of Crypto Assets, Security Tokens and Utility Tokens.
ConclusionIn Nigeria, regulators are expected to take more active efforts toward the establishment of a comprehensive legal and regulatory framework for virtual currencies.
Despite the conflicting stance between the CBN and the SEC, legislators understand the relevance of cryptocurrency in Nigeria and are taking steps to address the issue (e.g. eNaira).
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