Introduction
Background
Previous circulars versus CBN letter and press release
Implications of CBN letter
Domino effects
Comment
On 5 February 2021 the Central Bank of Nigeria (CBN) issued a letter to all deposit money banks (DMBs), non-bank financial institutions (NBFIs) and other financial institutions (OFIs) to remind them that further to its earlier circular dated 12 January 2017, dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges is prohibited. Accordingly, the CBN directed all DMBs, NBFIs and OFIs to identify persons or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately.
By its clarificatory press release dated 7 February 2021, the CBN cited the following reasons, among others, for prohibiting banks, NBFIs and OFIs from dealing in or facilitating cryptocurrency transactions:
- inconsistency with the CBN Act 2007;
- high volatility;
- money laundering;
- terrorism financing;
- purchase of small arms and lights weapons; and
- tax evasion.
The CBN has launched an investigation into financial institutions offering services to cryptocurrency traders, according to an exclusive report published by The Cable News on 9 February 2021.
2017 CBN circular
On 12 January 2017 the CBN expressed concern that cryptocurrencies are traded on unregulated exchange platforms and as such consumers may lose their money without any legal redress. It stated this in a circular that it issued to banks and other financial institutions (ie, institutions under its regulatory purview), directing them to take the following actions pending substantive regulation or decision by the CBN:
- ensure that they do not use, hold, trade or transact in cryptocurrencies in any way;
- ensure that existing customers that are virtual currency exchangers (eg, Luno Nigeria, Patricia, NairaEx or Binance) have effective anti-money laundering and counterfeiting (AML/CFT) controls which enable them to comply with customer identification, verification and transaction monitoring requirements;
- where they are not satisfied with the controls put in place by the virtual currency exchangers and customers, the relationship should be discontinued immediately; and
- any suspicious transactions by these customers should immediately be reported to the Nigerian Financial Intelligence Unit.
2018 CBN circular
In a circular dated 28 February 2018, the CBN further reiterated that cryptocurrencies are not legal tender in Nigeria. In other words, cryptocurrencies are not recognised means of exchange for value of goods and services. This was not a ban on cryptocurrencies but a caveat that those who deal or invest in cryptocurrencies in Nigeria do so at their own risk.
Previous circulars versus CBN letter and press release
The CBN letter went further than its previous circulars, which required banks and OFIs to close the accounts of cryptocurrency exchangers only if they are not satisfied with the AML/CFT put in place by such exchangers. DMBs, NBFIs and OFIs are now directed to:
- identify persons or entities transacting in or operating cryptocurrency exchanges within their systems; and
- ensure that such accounts are closed immediately.
In light of the above, the CBN placed new restrictions on (transactions in) cryptocurrencies contrary to the press release, which seemed to suggest otherwise. As per earlier circulars, cryptocurrencies are still not recognised as legal tender and regulated entities are still not permitted to transact in them. However, the CBN letter placed new restrictions on banks, NBFIs and OFIs as they are now expressly prohibited from facilitating or authorising any transaction on their platforms relating to cryptocurrencies. In fact, they must take steps to identify third parties (not regulated by the CBN) engaged in such transactions and close their bank accounts.
The CBN letter affects different parties in the following ways.
Centralised cryptocurrency exchanges
A "centralised exchange" is an exchange that acts as a middleman when a user sells or buys assets (eg, Patricia, Luno or NairaEx). Accounts of such centralised cryptocurrency exchanges with any Nigerian banks, NBFIs or OFIs are likely to be closed with immediate effect. It is expected that funds in those accounts will be made available to these exchanges, which will either refund all users or move their funds to accounts in offshore banks.
P2P exchanges
A "peer-to-peer [P2P] exchange" is a decentralised exchange in which assets are bought directly by one from the other party. Users interact directly with each other and hold their own wallet and the exchange offers escrow services that lock the funds until both parties agree to the transaction. P2P exchanges are expected to flourish as a result of the CBN letter.
Cryptocurrency investors and traders
Active cryptocurrency investors and traders (whether individuals or corporates) may not be able to fund their wallets on a centralised exchange (eg, Bundle, Binance, Patricia or Luno) with a credit or debit card issued by a Nigerian bank or directly from their Nigerian bank account. Also, active traders' accounts may be flagged due to frequency of transactions and volumes and such bank accounts may be closed unless the account holders can show proof of legitimate transactions not involving cryptocurrencies.
Policy inconsistency between CBN and SEC
The Securities and Exchange Commission, by a statement dated 14 September 2020, has taken the view that unless proven otherwise, crypto assets are deemed as securities and are subject to its regulatory purview by virtue of section 13 of the Investment and Securities Act 2007. While the SEC has recognised crypto assets as securities to be regulated by it, the CBN, on the other hand, is warning strongly against their use and has banned all entities regulated by it from dealing in or facilitating cryptocurrency. This is obviously a policy inconsistency between two departments of the same government. It is therefore uncertain how the SEC intends to facilitate the issuance of crypto assets in light of the CBN letter, which prohibits CBN-regulated entities from offering services to cryptocurrency traders or cryptocurrency-related transactions.
Providus Bank deactivation of virtual accounts
Following the CBN letter, many financial technology companies (fintechs) – including Piggyvest, Risevest, Chaka and Monnify – have announced the removal of virtual accounts provided by Providus Bank. However, the affected fintechs have assured customers that deactivation does not affect funds in customers' wallets and that they are in the process of integrating with another bank partner. While the cause of the withdrawal of Providus Bank from its partnerships with the fintechs is unknown, it has been suggested that many of the affected fintechs could be involved in cryptocurrency investments – buying, selling and conversion to Nigerian naira. There is likely to be more ripple effects of this nature across the fintech space as a result of the CBN letter.
CBN letter and operation of regulatory sandbox
The press release noted that innovations in Nigeria's payment system have (to a large extent) been catalysed by regulatory reforms driven by the CBN. One of these reforms is the regulatory sandbox framework recently implemented by the CBN. Therefore, the role of the CBN in promoting innovation and protecting consumers cannot be overstated.
A regulatory sandbox enables fintechs and other innovators to conduct live experiments in a controlled environment under a regulator's supervision before the products are rolled out into the market. However, one of the unintended consequences of the CBN letter is that fintechs with cryptocurrency-powered innovations or technologies may not be able to apply to the sandbox to test such innovations as regulated institutions are banned from dealing in or facilitating cryptocurrencies or their use.
The 2017 CBN circular stated that the restrictions were interim, pending substantive regulation. A case should therefore be made for cryptocurrency-powered innovations to be permitted to apply to the sandbox so that the CBN can learn more about cryptocurrencies to be better equipped to appropriately regulate it.
As the apex regulator for the banking industry, the CBN has the responsibility to ensure that its policies are well thought out so that they do not have unintended consequences. Whereas the intended players appear to be cryptocurrency exchanges, other fintech companies may be affected by the CBN letter because banks, NBFIs and OFIs are likely to close any accounts suspected to be involved in cryptocurrency transactions to prevent penalties from the CBN. However, it appears that decentralised currency innovations such as cryptocurrencies are here to stay, which suggests that a better approach would be to regulate, rather than ban outrightly.
For further information on this topic please contact Ina Arome or Oluwaseun Ayansola at Aluko & Oyebode by telephone (+234 1 462 8360 71) or email ([email protected] or [email protected]). The Aluko & Oyebode website can be accessed at www.aluko-oyebode.com.