Cryptocurrency blockage: Fighting a lost battle

Four days after the Musk endorsement, the Central Bank of Nigeria (CBN) issued a circular, preventing financial institutions from “dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges.” In a letter, the CBN said it was reminding banking institutions that deal in digital currencies or facilitating their transactions was “prohibited”.

It charged the banks to identify people or entities transacting with cryptocurrency or operating cryptocurrency exchanges on their platforms and “ensure that such accounts are closed immediately” or face “severe regulatory sanctions”.

Before and even after the latest CBN’s statement on cryptocurrency, Nigeria is classified on the global digital currency map as a “permissive”, as against “contentious” and “hostile”, country. But with the recent move, there are concerns among market traders that the country could join the prohibition list of the investment that has become a fad globally.

This is not the first time the apex bank would flirt with the youth-centric investment window. In 2017, it issued similar circular, banning transactions in all forms of virtual currencies. Subsequently, it issued statements to caution Nigerians to be wary of investments in cryptocurrency, stressing that “virtual currencies are not a legal tender” in the country.

Some time ago, a committee was jointly set up by the Central Bank and the Nigeria Deposit Insurance Corporation (NDIC) to look into the possibility of adopting bitcoin and other technology-driven currencies. The committee submitted its report after which several sub-committees were said to be “working on the issue”, according to the Director, Banking and Payments System Department at CBN, ‘Dipo Fatokun.

In a press release issued on February 28, 2018, the regulator repeated that cryptocurrencies such as Bitcoin, Ripples, Monero, Litecoin and Dogecoin Onecoin as well as exchanges such as NairaEx were not licensed or regulated by the CBN. It warned, like many of its peers around the world, that dealers and investors in any kind of cryptocurrency were not protected by law, hence may be unable to seek legal redress in event of failure of the exchangers or collapse of the business.

Of course, investors in digital currencies are aware that it is a risky business where individuals lose miserably or make unimaginable fortunes in a twinkle of an eye. Crypto assets are volatile. But so also are many other investments, including equity and foreign exchange. When the bubble bursts, investors lick their wounds and wish they were a little smarter.

Indeed, participation and knowledge of crypto investment have continued to spread like wildfire. But among the regulators, digital currency exchange bears the burden of wariness and contention, similar to historical controversy and scepticism witnessed every time money transformed to a more technologically relevant form.

And there are sufficient concerns about its safety, volatility and security to keep financial regulators awake. For one, in the history of mankind, money laundering had never been this sensitive. Yet, a reasonable number of countries have been bold enough to confront the underlying challenges of digital currencies and accept the innovation for what it is – undeniable reality.

For instance, apart from Ecuador and Bolivia, Caribbean, North and South American countries have recognised virtual currencies as acceptable means of exchange. In Canada where official acceptable is still in distrust, companies dealing in virtual currencies are required to register with the Financial Transactions and Reports Analysis Centre of Canada (Fintrac), implement compliance programmes, keep specified records, report suspicious or terrorist-related transactions and check if a customer is a politically-exposed person.

In Europe – across the west, central and north –, there are no legal constraints on virtual currency transactions. As of 2013, the German Finance Ministry had announced that bitcoin was a “unit of account” and could be used for taxation and trade in the country, implying that transaction, as in the case of euros, must attract value-added tax (VAT). It, however, did not classify it as foreign currency or e-money but as “private money” which could be used in multilateral clearing circles. In November 2019, Germany took its bitcoin liberalism a notch higher, passing a law to allow banks to sell and store the money equivalent.

Whereas cryptocurrencies are considered illegal as a means of exchange in many Asian countries, a few countries have braved the odds. For instance, the Israeli government imposes a 25 per cent capital gain tax on the transaction in bitcoins. Trading in bitcoins is also treated as a formal business; hence it attracts a corporate income tax as well as a 17 per cent VAT.

As Nigeria makes fresh regulations to outlaw crypto asset trading, a new legal document is awaiting approval in South Africa to formalise the space. Late last year, the Financial Sector Conduct Authority (FSCA) announced that it had published “a draft declaration of crypto assets as a financial product under the Financial Advisory and Intermediary Services Act (FAIS)”, opening the document for inputs until January 28, 2021.

South Africa’s authorities began the journey to find the right domestic classification label for cryptocurrencies in 2014 as an increasing number of its jobless youths embraced the platforms to keep themselves legally engaged and steer clear of crimes.

“The draft declaration in no way impacts the status of crypto assets in the context of other neither laws … nor does it attempt to regulate, legitimize or give credence to crypto assets. The draft declaration is merely intended to be an interim step in mitigating certain immediate risks in the crypto assets environment, pending the outcome of broader developments currently taking place through the Crypto Assets Regulatory Working Group (CAR WG), which will inform future policy interventions to be implemented across a variety of regulators and laws,” FSCA noted.

There are still several countries that have not taken an official position on the trend.

For instance, Nigeria is the only West African country with official data on the subject. Notwithstanding, official pronouncements made in recent times have been largely progressive and accommodating as against Nigeria’s drift to the past. Thus, with leading economies already mainstreaming cryptocurrencies into their asset classes and formalising their exchanges, the recent CBN’s decision seems to leave much to be desired.

While the Apex did not give a specific reason on why it debarred financial institutions from getting involved in the business, financial experts suggested the authority is simply buying time pending when the regulatory framework would be fine-tuned.

“Now, there is no regulatory framework for cryptocurrency in Nigeria. Putting stop to it is okay until the government and its agencies have the capacity to do so,” Chief Operating Officer of InvestData Limited, Ambrose Omordion, told The Guardian.

Godwin Owoh, a professor of applied economics, also described the directive as “very apt” but added the action was a cloak to shield the CBN incapacity to monitor the complexity involved in the business.

He noted that the CBN “has no regulatory expertise to monitor complex schemes of that nature. This is only suited where banking sector regulation is less opaque and manned with advanced auto-applications that would have trapped the transactions without the mechanical approach of directing banks to close customers’ accounts.”

Owoh said the inability of the apex bank to rise to the technical call of cryptocurrency exchange settlement was an indication that the “deposit money banks (MDBS) are far ahead of their regulator in product development and innovation.” He added that it should be worrisome that a regulatory authority would resort to a fiat approach and “bossiness” to hide its technical deficiency.

To address the shortcomings, he advised that “an extensive innovative ‘war office’ scenario build-up on what aggressive banking hi-tech products, recruiting the best fresh IT brains to propel standards over and above what obtains among DMBs and peer bench-marking” are necessary.

The crackdown on cryptocurrency trading is a flash on the CBN’s plan to keep the youth-centric virtual space under check. In December, it came up with a capital requirement for operators in the electronic payment ecosystem. The capital requirement for mobile money and switching/processing operators is N2 billion. Payment terminal solution service providers (PTSP) and payment solution service providers (PSSP) are pegged at N100 million just as super agents are to raise N50 million each.

CBN said the capitalisation applies to “new and existing market participants” in the directive, which many industry players said would crush the innovative spirit of the youths and tech-driven start-ups.

Nigeria is Africa’s leader in bitcoin trading. In 2020, Nigeria led the continent’s bitcoin trading with peer-to-peer monthly volumes of about $25.8 million, followed by South Africa ($8.2m) and Kenya ($7.7m).