THE LAW AND VIRTUAL CURRENCY IN NIGERIA:
A COMPREHENSIVE OVERVIEW
Virtual Currency
Introduction
In recent years, the rise of virtual currencies, particularly cryptocurrencies like Bitcoin and Ethereum, has sparked significant interest and debate worldwide. As Nigeria continues to embrace digital innovation, understanding the legal framework surrounding virtual currencies becomes essential for investors, businesses, and consumers alike. This article delves into the current legal landscape governing virtual currencies in Nigeria, examining key regulations, challenges, and the potential future of digital currency in the country.
THE HISTORY OF VIRTUAL CURRENCY
Early Developments:
The concept of virtual currency is not entirely new. In the early 1980s, David Chaum, a computer scientist, introduced the idea of e-cash, a digital currency that utilized cryptography to provide secure transactions. Chaum's proposal laid the groundwork for future developments in digital currencies, but it wasn’t until the 21st century that cryptocurrencies gained significant traction.
The Birth of Bitcoin:
The true revolution in virtual currency began with the creation of Bitcoin in 2009 by an anonymous entity known as Satoshi Nakamoto. Bitcoin was designed as a decentralized digital currency that allowed peer-to-peer transactions without the need for intermediaries like banks. Its underlying technology, blockchain, provided a secure and transparent method for recording transactions.
Bitcoin’s emergence marked a paradigm shift in the way people perceived money and transactions. It gained popularity rapidly, particularly among tech enthusiasts and those disillusioned with traditional banking systems. By 2011, various alternative cryptocurrencies (altcoins) began to appear, including Litecoin and Name coin, each offering unique features and functionalities.
Growth and Speculation:
The years following Bitcoin’s launch saw a surge in interest and investment in cryptocurrencies. As more people began to recognize the potential of digital currencies, the market expanded significantly. By 2013, Bitcoin reached a value of over $1,000 for the first time, attracting the attention of mainstream media and investors. This surge also brought a wave of skepticism and concern regarding the speculative nature of cryptocurrencies.
The rise of Initial Coin Offerings (ICOs) in 2017 further fueled the growth of the cryptocurrency market. ICOs allowed startups to raise funds by issuing their own tokens, often without regulatory oversight. While some projects were legitimate, many were scams, leading to significant losses for investors and prompting calls for greater regulation.
Regulatory Responses:
As the cryptocurrency market grew, so did concerns about fraud, money laundering, and the potential for financial instability. Countries around the world began to develop regulatory frameworks to address these issues. In 2018, the Financial Action Task Force (FATF) issued guidelines for regulating virtual currencies to combat money laundering and terrorist financing.
In Nigeria, the Central Bank of Nigeria (CBN) issued a circular in 2017 cautioning against the use of Bitcoin and other cryptocurrencies, marking the beginning of the regulatory journey in the country. This initial caution evolved into more stringent measures by 2021, as the CBN banned banks from facilitating cryptocurrency transactions, several bank accounts were frozen for being involved in activities with cryptocurrencies emphasizing the risks involved
Recently in May, 2024 the Nigerian government announced a new regulatory framework that aimed to delist the Nigerian naira from peer-to-peer cryptocurrency exchanges. Peer to peer (P2P) trading is a way of buying and selling cryptocurrencies where traders buy and sell directly with each other on a cryptocurrency exchange app or websites.
UNDERSTANDING VIRTUAL CURRENCIES
Definition and Types:
Virtual currency is a digital representation of value that can be used for transactions or as an investment. Cryptocurrencies, a popular subset of virtual currencies, employ cryptography for security and operate on decentralized networks using blockchain technology. Unlike traditional currencies, which are regulated by central banks, cryptocurrencies function independently, creating both opportunities and challenges in the financial landscape.
There are four major types of virtual currency:
- Open
- Closed
- Centralized
- Decentralized
However, in terms of legal status, centralized and decentralized are the two major types of virtual currencies.
- centralized virtual currency has a single central administrator or authority. The central administrator of a virtual currency is typically the issuer of that currency. The role is similar to a central bank in a regulated currency system
- decentralized currency does not have a third-party central administrator or authority. Instead, a distributed system will authenticate the transactions of a decentralized virtual currency decentralized currencies are based on blockchain networks such as Bitcoin, Ethereum and Litecoin etc. However, because these decentralized transactions must be approved by a majority of users on a network, they are difficult to undo once recorded. This makes decentralized virtual currencies attractive to criminals looking to launder money or conduct other illegal transactions irreversibly. For this reason, the Central bank of Nigeria and the Securities and Exchange Commission has put forth stringent guidelines to regulate the Virtual Currency market.
- Open virtual currency is one that is given value outside of its origin software or network. As such, it can be exchanged for other virtual currencies, or even some fiat currencies in some instances. Examples include Bitcoin and Ether, two of the most popular cryptocurrencies.
- Closed virtual currency is issued only within the context of the network in which it is found an example is a currency used in an online game; it can be purchased with other types of money but has no value outside of being exchanged for assets in that game.
Common types of virtual currencies include:
- Cryptocurrencies: These are decentralized digital currencies, with Bitcoin being the most well-known. Others, like Ethereum and Litecoin, have gained popularity for their unique features and use cases. This is an open and decentralized Virtual Currency.
- Stablecoins: These are pegged to traditional currencies or assets, aiming to reduce volatility. Examples include Tether (USDT) and USD Coin (USDC). This is an Open and Centralized Virtual Currency.
- Central Bank Digital Currencies (CBDCs): These are digital forms of a country’s official currency. Nigeria has launched its own CBDC, the eNaira, to facilitate regulated digital transactions. This is an open and centralized Virtual Currency.
THE LEGAL FRAMEWORK GOVERNING VIRTUAL CURRENCY IN NIGERIA.
Central Bank of Nigeria (CBN) Regulations:
The Central Bank of Nigeria (CBN) is empowered by the Central Bank of Nigeria Act 2007 to issue legal tender currency in Nigeria whilst promoting a sound financial system, plays a pivotal role in overseeing virtual currencies.
In 2017, the CBN issued a circular titled “Caution on Bitcoin,” which alerted financial institutions and the public to the risks associated with cryptocurrencies. This circular made it clear that cryptocurrencies are not recognized as legal tender in Nigeria, urging caution in their use and also serving as a regulatory control.
On February 5, 2021, the CBN escalated its stance by issuing a directive prohibiting banks and financial institutions from facilitating transactions involving cryptocurrencies. This move sparked considerable debate, with many stakeholders arguing that such restrictions could stifle innovation and exclude Nigeria from the burgeoning global digital economy. However, CBN cited its need to protect the public from threats by unregulated activities that are potential areas of illegal operations.
In October 2021, the CBN announced the launch of the eNaira, Nigeria’s Central Bank Digital Currency (CBDC). This digital currency aims to provide a regulated alternative to private cryptocurrencies, promoting financial inclusion and ensuring the stability of the financial system.
CBN released a new guideline for Virtual Assets Service Providers (VASPs) called the VASP Guidelines in 2023. Pursuant to the VASP Guidelines, financial institutions are now permitted to open bank accounts for crypto businesses, provided they fulfil the requirements set out in the VASP Guidelines. One such requirement is that the crypto platform must have obtained a relevant licence or registration from the SEC.
Securities and Exchange Commission (SEC):
The SEC is another key Regulatory body empowered by the Investment and Securities Act 2007 (ISA) to regulate investments and securities business in Nigeria such includes virtual currencies in Nigeria.
In September 2020, the SEC recognized virtual / digital assets as Securities, however due to the subsequent CBN letter in 2021 to banks which made the issue of virtual currency unclear and conflicting to that of SEC, a statement was issued in 2022 by SEC clarifying and showing its alignment with the CBN’s letter.
In 2022, the SEC made its first attempt to a comprehensive regulation of digital and virtual assets in Nigeria through its issuance of the digital Assets Rules, which defined virtual assets, categories of digital assets and the registration / licensing categories etc. This framework stipulates that any entity offering digital assets classified as securities must register with the SEC, thereby ensuring investor protection and compliance with existing financial regulations.
In 2023, SEC issued a proposed amendment to the Digital Assets Rules (the ‘Proposed Digital Assets Rules’). This amendment was to include crypto in the meaning of virtual asset and in alignment with the VASP Guidelines These address some major concerns regarding the adoption of cryptocurrency, such as money laundering, terrorism financing and fraud. These regulations address these concerns through the requirement for licensing, robust AML/CFT provisions and disclosure of information about the directors, beneficial owners and principal officers of the entities. Also, the recent delisting of the peer-to-peer(P2P) cryptocurrency exchange by CBN serves as a form of regulatory control.
The SEC’s approach highlights the importance of due diligence for investors, emphasizing the need to carefully evaluate the risks associated with investing in digital assets. This proactive stance reflects a growing awareness of the potential for fraud and market manipulation within the cryptocurrency space.
Other Relevant Legislation:
The legal status of virtual currencies in Nigeria is shaped by several other laws, including:
- The Money Laundering (Prevention and Prohibition) Act 2022: This law provides guidelines for combating money laundering and terrorist financing, extending its provisions to virtual currencies. It requires individuals and businesses dealing in cryptocurrencies to implement stringent anti-money laundering measures.
The Cybercrimes (Prohibition, Prevention, etc.) Act 2015: This legislation addresses various cyber-related offenses, including fraud and the misuse of virtual currencies. It aims to protect individuals and organizations from cyber threats, which are particularly prevalent in the realm of digital currencies.
CHALLENGES AND RISKS ASSOCIATED WITH VIRTUAL CURRENCY.
Regulatory Ambiguity:
One of the primary challenges facing virtual currencies in Nigeria is regulatory ambiguity. While the CBN and SEC have established some guidelines, the rapid pace of technological advancements often outstrips legislative frameworks. This lack of clarity creates uncertainty for investors and businesses, making it difficult to navigate the legal landscape.
Furthermore, the conflicting positions of the CBN and SEC can lead to confusion. For instance, while the CBN prohibits financial institutions from engaging with cryptocurrencies, the SEC recognizes certain digital assets as securities. This dichotomy underscores the need for cohesive regulatory policies that provide clear guidance.
Security Concerns:
Security remains a significant issue within the realm of virtual currencies. Cryptocurrencies are attractive targets for hackers, and incidents of fraud and cybercrime are on the rise in Nigeria. The SEC’s framework emphasizes the need for due diligence, but many investors remain unaware of the risks involved in trading or investing in cryptocurrencies.
Moreover, the pseudonymous nature of cryptocurrencies can facilitate illegal activities, including money laundering and fraud. The implementation of robust security measures and regulatory oversight is crucial to safeguarding consumers and maintaining market integrity.
Financial Inclusion vs. Regulation:
Cryptocurrencies hold the potential to enhance financial inclusion, particularly for Nigeria’s unbanked population. With millions lacking access to traditional banking services, virtual currencies can provide an alternative means of financial participation. However, the restrictive regulatory environment poses a barrier to access, potentially excluding many from the benefits of digital financial services.
The challenge lies in balancing effective regulation with the need to foster innovation and inclusivity. Policymakers must find a way to support the growth of the cryptocurrency market while ensuring consumer protection and financial stability.
THE FUTURE OF VIRTUAL CURRENCY REGULATION IN NIGERIA.
Potential Regulatory Developments:
As Nigeria navigates the complexities of virtual currency regulation, there is a growing recognition of the need for comprehensive legal frameworks. Collaboration between the CBN, SEC, and other stakeholders is essential for developing policies that support innovation while safeguarding investors and consumers.
Proposals for clearer regulations, including licensing requirements for cryptocurrency exchanges and service providers, could help establish a more structured market environment. Engaging with industry experts and stakeholders can provide valuable insights into creating effective regulatory measures.
Central Bank Digital Currency (CBDC):
The launch of the eNaira marks a significant step toward embracing digital currency in Nigeria. The eNaira aims to offer a secure, government-backed alternative to private cryptocurrencies while promoting financial inclusion and reducing transaction costs.
The introduction of a CBDC could help mitigate some of the risks associated with cryptocurrencies, such as volatility and security concerns. By providing a regulated digital currency option, the Nigerian government can encourage the responsible use of digital financial services.
Global Trends and Local Implications:
As countries worldwide adopt various approaches to cryptocurrency regulation, Nigeria has the opportunity to learn from international best practices. Countries like the United States, the European Union, and others are developing frameworks that balance innovation with consumer protection. By examining these models, Nigerian authorities can refine their policies to create a more favorable environment for virtual currencies.
Conclusion
The legal landscape surrounding virtual currencies in Nigeria is evolving rapidly, marked by both challenges and opportunities. While the regulatory environment poses certain barriers, it also opens avenues for innovation and growth within the digital economy. As Nigeria continues to navigate this complex terrain, it is crucial for stakeholders to engage in open dialogues, ensuring that regulations support the development of a vibrant digital financial ecosystem.
The future of virtual currency regulation in Nigeria hinges on adaptive policies that respond to technological advancements while safeguarding the interests of consumers and maintaining the integrity of financial markets. By fostering collaboration and embracing innovation, Nigeria can position itself as a leader in the global digital economy.
References
1. Central Bank of Nigeria, “Caution
on Bitcoin” (2017).
2. Central Bank of Nigeria,
“Regulatory Framework for Digital Assets” (2021).
3. Securities and Exchange Commission,
“Framework for Digital Assets and Cryptocurrency” (2020).
4. Investment and Securities Act 2007.
5. Money Laundering (Prevention and
Prohibition) Act 2022.
6. Cybercrimes (Prohibition, Prevention,
etc.
