Cryptocurrency and government regulation in Nigeria

We have for many years been in the age of technology which has permeated all sectors of global economies. To be on the cutting edge, individuals in the corporate world have to be technology savvy or “techi” if they want to compete in the ever-changing corporate landscape and move their businesses to the next level.

With advances made in technology has come cryptocurrency, which has been defined as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. I quote “Decentralized cryptocurrencies such as Bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation.”

There has been a lot of positive and negative discourse on the value of crypto currency to fiscal systems. With all the hype about the Bitcoin, the bubble eventually burst in June last year and has left a lot of Bitcoin investors, including myself, skeptical as to whether there is a future for cryptocurrency without government regulation.

I was recently briefed by a client seeking legal advice regarding the use of cryptocurrency by way of an Agri Coin to unify farmers, farm products and product trading in the rural areas of Nigeria. The coin would be utilized to project, coordinate and monitor agricultural services. I was really interested in proffering legal advice in such a ‘techi’ area. I immediately, but with some help from my ‘techi’ sons embarked on research into this subject. I didn’t mention the fact that it was one of my ‘techi’ sons who urged me to invest a small amount of money in the Bitcoin, which unfortunately I lost and fortunately had the sense not to invest my entire life savings.

As a lawyer, I am always interested in new products and services. To enter a discussion on the value of cryptocurrency it is important to learn about related things like blockchain, smart contracts and ICOs. It has been established that cryptocurrency springs from cryptography, which is the process of converting plain text into unintelligible text and the reverse; it is entirely digital which relies on encryption that enhances secure transactions. In researching this topic I can say with some authority that cryptocurrency was devised as an alternative form of payment to cash and cash equivalents such as credit/debit cards, cheques etc. independent of traditional banks. In other words the use of cryptocurrency dispenses with the use of intermediaries in the form of banks and other financial institutions.

Cryptocurrency is based on a technology called Blockchain. To answer the question, “what is a Blockchain?” we first need to define a ledger. In accounting, a ledger is a computer file or a book where you can find a complete record of a company’s financial transactions throughout its life. Using this record, accounting officers can prepare the company’s financial statements. The ledger records financial information on liabilities, assets, expenses, revenues and owners’ equity.

With the above information in mind, Blockchain is simply a decentralized ledger, meaning, the records it contains can be verified autonomously without the need to have a central entity. It should also be noted that it is not just a public ledger, but a real-time ledger that records practically anything that can be put on record, including contracts, financial transactions, information on supply chain, physical assets, etc. One major idea behind Blockchain technology is that there is no one organization or person who is in charge of keeping this ledger. Instead, the ledger is open for everyone in the chain who can see every detail of every record. Each of the records in this chain of records is referred to as a block.

So, in summary, think of Blockchain as a long chain of records (financial transactions or otherwise) made up of blocks, with each block being each of the records that make up the long chain. Each block is encrypted and has a time stamp.

Smart contracts are computer protocols intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. These transactions are trackable and irreversible. Smart contracts have been touted as the true building blocks of Blockchain applications. At the core of smart contracts is self-execution, code write-ups and Blockchain enforcement. This means that a smart contract is designed using lines of code and executes itself without the intervention of a third party and after fulfilment of certain laid out conditions. Using smart contracts, you eliminate both enforcement costs and ambiguity, making all business transactions instantaneous. Smart contracts lets you replace traditional contracts and can save time and money for your business.

An Initial Coin Offering, also commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for a crytocurrency be it Bitcoin, Ethereum etc. An ICO is similar to an Initial Public Offering (IPO) in which investors purchase shares of a company, in the case of an ICO they are purchasing units of cryptocurrency. SureRemit a Nigerian start-up company raised $7 million through a Blockchain ICO aided by ‘Hashed’ one of the largest cryptocurrency funds domiciled in South Korea.

The exigencies of commerce rely to a large extent on the dissemination of information. We rely on information in our daily commercial activities be it withdrawing or transferring money at an ATM point, opening letters of credit, operating credit cards, paying for goods and services, effecting a takeover bid the list is inexhaustible, but it is clear that information is the main driver and often lack of information can lead to dire consequences. That is why it is imperative in banking transaction to “Know Your Customer” similarly in the case of M & As due diligence investigations is a sine qua non.

Where am I going with all this? I am looking at the value of cryptocurrency in global financial systems and the need for government regulation. Some exponents believe that cryptocurrencies are ripe to compete with traditional financial systems and that “money is an asset with value meaning that money competes with money” therefore cryptocurrencies should be fully integrated into global financial systems. The downside is that without government regulation, massive fraud and theft may be perpetrated through cryptocurrency, which can be used to promote money laundering activities, support radical movements and bad governments, finance illegal drug trafficking and human trafficking. Truth be told, there will always be crime and criminals therefore the axiom “prevention is better than cure” comes in, hence the need for government regulation.

Since money has always played a fundamental role in the development of global financial systems and historically paved the way for global trade and economic growth, we are gradually seeing a transition from physical currency to almost virtual currency. The fact that most economies have or are in the process of doing away with cash means that financial systems are still evolving. Although some skeptics are of the view that cryptocurrency can never be worth more than zero, it should not be disregarded as a technological whim. Hence, governments should start looking seriously at the advantages of promoting legislation and regulations in this regard. The value of digital assets is increasing with the world’s top five companies having data as a primary asset.

Trading in cryptocurrency in Nigeria is becoming very popular and can be a profitable idea for investment; we even have full time crypto traders who employ various strategies and methods of trading. Because the trading is decentralized there is no central bank to affect the pricing process, therefore trading is transparent. There are at present 10 cryptocurrency exchange platforms in Nigeria otherwise termed e-currency exchanges. There are on-line training courses on how to buy trade and invest in cryptocurrency with the interest of individuals increasing.

The Central Bank of Nigeria (CBN) and the Securities Exchange Commission (SEC) both regulators of money market and capital market respectively have intermittently given warnings to the public regarding investing in cryptocurrencies. However, cryptocurrency businesses have not been prohibited and there is currently no legislation in this regard. The main issue seems to be defining what cryptocurrency is. Different jurisdictions have defined cryptocurrency as security, currency, property, cash equivalent, asset or commodity etc., this way it is easier to legislate, regulate and monitor.

Nigerian Banks and Other financial Institutions as well as capital market operators are prohibited from investing in cryptocurrencies or carrying on business as a virtual currency exchange. Most authors on this topic including Chimezie Chuta, the coordinator of Blockchain Nigeria User Group, who has written extensively are of the opinion that “government must seek out avenues and intelligent approaches to deal with Blockchain and cryptocurrency”.

With evolving global trends in the financial sector Nigeria is really lagging behind. There is the need for government to review the financial services sector and completely revolutionize institutions and soft structures if they want Nigeria to be part of the technology jet set. We have already seen a trend whereby Nigerian tech companies are operating through off-shore locations such as Mauritius. As an erstwhile member of Financial Systems Strategy 20:20 a CBN initiative established by Professor Soludo, CBN chairman in 2007 to provide for a robust financial system that will power the Nigerian economy, I often wonder where we are with 2020 being just a year away!

I personally believe that cryptocurrency has come to stay and the advantages clearly outweigh the disadvantages. Both CBN and SEC need to make an informed decision on how they can provide regulations for this product so that it can gradually be integrated into our financial ecosystem.

• Akodu is the Managing Partner, Olisa Agbakoba Legal, Lagos.