Innovations usually come with some form of excessive hype, fads, and hyperbole.
For Nigeria’s regulatory authorities, separating the “wheat from the chaff” in digital innovations remains a challenge. This challenge has shaped the regulatory approach on cryptocurrencies in Nigeria in pursuit of financial and monetary stability. The focus of this article is to review the state of play on cryptocurrencies in Nigeria’s regulatory landscape and make recommendations on best approaches.
Nigeria’s Central Bank of Nigeria (CBN) Position on Cryptocurrencies
On 5 February 2021, a circular purportedly released by the CBN directed banks and other financial institutions that dealing in or facilitating payments for cryptocurrency payments is prohibited. In the circular, the CBN requires regulated financial institutions to identify persons and/or entities transacting in cryptocurrency or operating cryptocurrency exchanges within their systems and close such accounts immediately.
The circular effectively extends and expands the CBN’s previous directive of 12 January 2017 where the CBN similarly cautioned Deposit Money Banks (DMBs), Non Bank Financial Institutions (NBFIs), Other Financial Institutions (OFIs), and members of the public on the risks associated with cryptocurrencies transactions.
Conflicting Policies: the CBN’s and the Securities & Exchange Commission’s (SEC) Regulatory Dissonance
Regarding the treatment of cryptocurrencies in Nigeria, it appears that there is a lack of coordination between the CBN and the SEC. While the CBN views cryptocurrencies as a threat due to the susceptibility of cryptocurrencies to fraud, the SEC recently considered cryptocurrencies such as bitcoin for example as digital assets, specifically commodities or securities. In its statement released 14 September 2020, the SEC defined crypto assets “as digital representation of value that can be digitally traded and functions as: (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value — but does not have legal tender status in any jurisdiction.“
The SEC also stated its intention to regulate “any person, (individual or corporate) whose activities involve any aspect of Blockchain-related and virtual digital asset services”. According to the SEC statement, such persons would be mandated to be “registered by the Commission and as such, will be subject to the regulatory guidelines.” Though it is understandable that CBN’s regulatory jurisdiction is different from that of SEC, one would have expected that the CBN would at least acknowledge the SEC statement and then state its own approach to the monetary and currency dimensions of cryptocurrencies. CBN’s outright ban of banking services to an entire crypto industry—only second to the United States—does not demonstrate that the CBN is on the same page with the SEC. Interestingly, both the CBN and the SEC are key stakeholders—at least according to the draft National Blockchain Adoption Strategy—a policy document introduced by the National Information Technology Development Agency (NITDA) in November 2020.
Can the CBN really ban persons transacting in or operating cryptocurrency exchanges from access to banking services? What stakeholders are saying.
Whether the CBN, by virtue of its statutory powers, has the power to order DMBs, NBFIs, and OFIs to deny banking services to a set of persons, entities, or an entire industry where such persons or entities have not been declared illegal or criminal under any law or by any court of competent jurisdiction in Nigeria. Senator Ihenyen does not think so. According to him, “[CBN] can only regulate how banking services could be offered to these persons or entities, applying KYC/AML regulations. Total ban, unlike its January 2017 letter, appears to be rather arbitrary and lazy—an approach that I consider inconsistent with the CBN’s typically well-considered approach to issues.”
Regulation vs Strangulation: The way Forward
There is no doubt that regulation is vital. But as the SiBAN President, Senator Ihenyen, puts it, “…. the question is why should there be regulation? What kind of regulation? When should regulation come? How should regulation be? Where should it apply? [and] Who should it apply to?”
When it comes to disruptive innovations such as crypto technology for example a number of these questions remain largely unanswered by regulators. And when innovators—ever inspired to innovate and disrupt—ask questions or question why what is what and that is that, some of these “regulators remind you that they hold the knife and the yam.” This is a self-defeating approach to regulation. Consequently, opportunities are lost.
Recommendations on best approaches to adopt
In making recommendations, I recall the enriching engagement I had with some members of SiBAN on its virtual platform about the importance of what was described as “developmental regulation”, in contrast to restrictive regulation.
First, regulators must invest in blockchain & cryptocurrency education. This has become very necessary in an increasingly decentralized age. Chris Ani, founder of Digital Abundance Academy (DABA), observes that “the biggest tool of regulation is education not some sort of hammer.” When there is consumer and investment education, enforcements increasingly become lean and less tedious. “A new approach, informed by the desire to learn, unlearn, and relearn should be adopted by policymakers and regulators”, says Senator Ihenyen.
Second, there must be regulatory clarity. How the SEC, for instance, intends to regulate “any person … whose activities involve any aspect of Blockchain-related and virtual digital asset services”, as contained in its recent statement on digital assets remains a puzzle to be solved. I submit that the statement is vague and believe that when the eventual regulation eventually drops, this would be clearer.
Third, regulators must shun restrictive policies that may end up inhibiting the growth of an emerging or nascent industry. It must approach the industry like a farmer, not a rat killer. Pest control (such as consumer protection and investment safety) should not and cannot be enough reason to kill the crops (innovation). It is a failure of regulation. Regulation has moved past that.
Lastly, self-regulation should be encouraged in nascent industries, such as the blockchain & crypto industry. Referring to his remarks on self-regulation at the Off Charts Global Conference organized by Binance recently, Senator Ihenyen noted that self-regulation is an important first step to regulation that regulators, especially in developing countries with relatively lean public purses, must learn to integrate into their regulatory frameworks. Through self-regulation, industry players may adopt industry code of conduct, standards, and practices that ensure consumer protection and investor safety in the industry. It is not also out of place for regulators to support these self-regulatory bodies, ensuring that they are helping to grow and sanitize the nascent industry pending full regulation. This also avoids outright bans or zero regulation, what I consider two of the most risky and uncertain state a regulator should put any industry in.
Essentially, technology cannot be regulated, but the rights and liabilities of the users can. Blockchain or cryptocurrency cannot be stopped. Regulators must avoid fighting and resisting innovation. Also, they must avoid discriminating against such innovations or innovators. Rather, regulators should focus on the actors and their acts in the application of these innovative technologies. Regulators should consult widely with industry stakeholders and imbibe and adopt developmental regulation. NITDA does this very well, focusing on stimulating, supporting, and guiding the adoption of a thing rather than introducing premature restrictions that often result in stunted growth early on. If regulators do these, they would engender innovations and open more windows of opportunity for the people.