Cryptocurrency in Nigeria: The impact and legal implications on the economy

Cryptocurrency is a virtual encrypted medium of exchange that is decentralized in nature, it is operated online and uses cryptographic protocols that encrypt sensitive data transfers to secure their unit of exchange which renders them virtually impossible to tamper or to duplicate the protected currencies. These protocols also mask the identity of the users, therefore making any transaction and fund flows difficult to attribute to specific individuals or group.

Bitcoin is a common example of cryptocurrency and is the first to be used globally. According to the Bitcoin trading platform Paxful, which analyzed the transaction flow for the past five years (2015-2020), it found that Nigeria traded more than $566 million worth of bitcoin during that period. It was thus found to have become the world’s second largest peer-to-peer (P2P) bitcoin market after the United States of America.

How does cryptocurrency work?

Cryptocurrency is a virtual currency that can be used to buy goods and services issued by largely anonymous entities and secured by cryptography, it uses decentralized technology to let users make secure payments and store money without the need to use their names or  through commercial banks. They run on a distributed public ledger called blockchain which is a record of all transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining which involves using computer power that generates virtual-coins. Users can also buy currencies from brokers then store and spend them using cryptographic wallets. 

Are cryptocurrencies generally accepted legal tender?

Cryptocurrencies are not recognized as legal tender in most jurisdictions due to the fact that they are neither issued nor regulated by a central authority. Legal tender is established by law or statute which specifies what qualifies as a legal tender, and the Central Bank of Nigeria (CBN) is the institution that is authorized to produce and issue it to the general public in Nigeria.

What are the Laws regulating cryptocurrencies in Nigeria?

In Nigeria at the moment, there are no specific Laws regulating transactions on cryptocurrency. However, there have been several directives by the CBN and the Securities and Exchange Commission (SEC) in respect to dealings in digital currencies.

By virtue of Section 13 of the Investment and Securities Act 2007, SEC is the apex regulatory authority for the Nigerian capital market which is empowered to regulate investments and securities business in Nigeria. In line with these, SEC released a statement made on the 14th of September 2020 on digital assets and their classification and treatment. The statement dwelled entirely on cryptocurrency regulations in Nigeria.

According to the Commission, it will be taking a three-pronged approach to regulate innovation in the cryptocurrency sector which includes safety, providing solutions to problems that will guide its operations, strategy and its interaction with innovators seeking legitimacy and relevance in the emerging industry.

Consequently, SEC issued regulatory guidelines for digital currencies and crypto based companies including startups, stating that they will regulate crypto token or crypto coin investments when it qualifies as securities transaction.

Can the recent CBN directive curb the risks associated with cryptocurrency?

The Nigerian Government through the CBN perceives the rapid rise of investments in cryptocurrencies as a threat which is largely due to the anonymous nature of the users and patrons, hence questions are arising since most of the transactions are concealed. This gave way to the latest directive which ordered that every account linked to cryptocurrency exchange platforms were required to be closed, it also required all Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NBFIs) and Other Financial Institutions (OFIs) to obey the directives in the circular against providing support for cryptocurrency exchange operations, and further threatened to sanction those that go against the directive. According to the CBN, this became necessary to protect the financial system and generality of Nigerians from the risks inherent in cryptocurrency transactions.

In the case of loss of investment in cryptocurrency, can an investor seek for a remedy?

Cryptocurrencies unlike the recognized legal tender are issued by unregulated and unlicensed entities and their use in Nigeria are unrecognized and prohibited by the CBN for CBN regulated financial institutions owing to the various directives by the CBN in that respect; as such anyone transacting in such currencies does so at their own risk.

Can cryptocurrency be said to be illegal under the new CBN directive?

The effect of the CBN directive indicates that transactions involving cryptocurrencies are no longer permissible in Nigeria. Any person that contravenes this directive will stand a risk of their accounts being frozen by their respective banks and furthermore, the CBN would sanction banks found to be providing support to cryptocurrency trading platforms.

What are the alternatives  crypto-exchange (fiat to crypto & crypto to fiat) transactions?

Users of cryptocurrency have an alternative means of trading cryptocurrencies, not currently regulated by Nigeria’s CBN. An example of such platforms is the option of conducting Peer-to-Peer (P2P) trading. These are transactions usually done between individuals where they can buy and sell directly into the sellers account and the seller credits the buyer’s wallet directly with the purchased units of the cryptocurrency. Whereas, before now, the buyer would have to pay into the cryptocurrency exchange’s account through which it would facilitate the trade, the alternative route allows for direct barter between the customers thereby eliminating the cryptocurrency exchange’s direct involvement in the trade. It is important to note that this is a very risky option, as there are limited controls in place to manage the risk of sending money to an unknown person who may choose not to hold their end of the bargain (sending the purchased cryptocurrency to the buyer’s wallet).

Another alternative would be for interested individuals in the cryptocurrency that operate bank accounts in countries outside Nigeria to use their funds in such foreign banks to conduct the transaction directly with the cryptocurrency exchange. Thereby side-stepping the jurisdictional limitations of Nigeria’s CBN regulations.

Kusamotu & Kusamotu

(The Greenfish Chambers)

2A, Udi Street, Osborne Foreshore Estate,

Ikoyi, Lagos State.

Email: [email protected]

Website: www.kusamotu.com

Tel: +234 (0) 8147203068

Disclaimer

Nothing in this Question & Answer should be construed as legal advice from any of our lawyers or the firm. The answers are a general summary of developments and principles of interest on the subject of discussion and may not apply directly to any specific circumstances. Professional advice should therefore be sought before action based on any answer is taken