The Lifting Of The Cryptocurrency Ban in Nigeria; An Overview Into The Current Regulatory Framework and The Probable Legal Consequences

INTRODUCTION

The Central Bank of Nigeria, on the 22nd day of December, 2023 announced it's decision on the reversal of the prohibition on local banks and financial institutions in cryptocurrency transactions.

Notwithstanding the positive implications the lifting of the cryptocurrency ban will have on the economy and the lives of Nigerians in general, the probable legal consequences cannot be ignored. 

Recall, in 2021, the CBN placed a ban on the use of cryptocurrency by banks and other financial institutions in transactions, citing concerns about their potential use for illegal activities such as money laundering, terrorism financing, tax evasion, increased risks of frauds, scams, etc. There were also concerns on cybersecurity risks, IP issues, cross- border legal issues, etc.

This article therefore, aims to understudy the current regulatory framework for cryptocurrency transactions in Nigeria as well as the legal issues arising from the lifting of the cryptocurrency ban.

BACKGROUND

February 5, 2021, elicited many reactions from Nigerians expressing the potential negative effect the actions of the Central Bank of Nigeria will have on the economy and the innovation in financial technology.

Prior to the outpouring of emotions by Nigerians as a result of the directives laid by the Apex bank, the Central Bank of Nigeria had released a circular addressed to banks and other financial institutions stating that all transactions in cryptocurrencies and facilitating payment for cryptocurrency exchanges were prohibited. 

Three years later, on the 22nd December, 2023 the Central Bank of Nigeria reversed it's decision on the prohibition on local banks and financial institutions on cryptocurrency transactions.

CURRENT CRYPTOCURRENCY REGULATION IN NIGERIA

The Guidelines on operations of bank accounts for virtual assets service providers signed on the 22nd day of December, 2023 by the Director of Financial Policy and Regulation Department, CBN oversees the regulation of cryptocurrency transactions in Nigeria.

OPERATION OF BANK ACCOUNT BY VASPs

Financial Institutions shall not open or permit the operation of any account

by any person or entity to conduct the business of virtual/digital assets unless that account is

designated for that purpose and opened in line with the requirement of these Guidelines.

Designated account to be opened with approval of the senior management of the financial institution.

Any application for opening a designated account by a company providing virtual/digital asset services

under these Guidelines shall be supported by the following documents:

a. evidence of a valid licence issued by the Securities and Exchange Commission (SEC) for the

entity to engage in the business of VASP/DAXIDAOP.

b. certified true copy of the memorandum and article of association.

c. certified true copy Form CAC 2— Statement of share capital and return of allotment of shares.

d. certified true copy Form CAC 2.1 particulars of secretary.

e. certified true copy Form CAC 3—notice of registered address.

f. certified true copy Form CAC 7— Particulars of Directors.

g. verifiable registered address of the company.

h. copy of Certificate of Capital Importation (CCI) (where applicable)

i. valid means of identification of all the directors, principal officers and beneficial owners of the

company.

j. BVN of all the directors, principal officers and beneficial owners of the company.

k. Home address of all the directors, principal officers and beneficial owners of the company.

I. AML, CFT and CPF Policy of the entity.

m. All other requirements of a corporate account in line with the CBN ODD Regulations

n. Any other requirement that the CBN may impose from time to time.

RESTRICTION ON THE USE OF ACCOUNT

An account opened in accordance with these Guidelines shall only be used for transaction on virtual/digital assets and not for any other purpose.

No cash withdrawal shall be allowed from the account.

No third-party cheque shall be cleared from the account.

Except for settlement of a virtual/digital assets transaction which shall be done through a

transfer to another designated account, withdrawal shall be only through a Managers’ Cheque or transfer to an account.

RETURNS ON THE ACTIVITIES OF THE ACCOUNTS TO CBN

Financial Institutions shall monitor, on a continuous basis, all activities conducted in designated accounts opened in

accordance with these Guidelines. Financial Institutions shall, at the end of every month and not later than the 10th day of the following month, submit to the relevant supervisory department of CBN, data and other information on designated account.

The content of the returns shall include but not limited to:

a. The number of designated accounts opened within the reporting period;

b. The value and volume of transactions conducted in each account within the reporting period;

c. The details of the counter party(ies) to the transactions;

d. Incidents of fraud or theft; and

e. Number of customer complaints and remedial measures taken.

OPERATIONAL AND TRANSACTIONAL LIMITS

I. FIs shall establish transaction limits for each designated account opened in accordance with

these Guidelines in line with its assessment criteria.

ii. The limits shall be prudent and bear a relationship to the volume of cash moved by the account

holder and the risks associated with the conduct and nature of the business of the account holder.

Designated accounts shall not be run on concession.

FIs shall not allow or enter into any concession agreement/arrangement with a holder of a designated

account. The account shall, at all times be subject to the maximum transaction charges band as

provided for under the CBN Guide to Charges for Banks and Other Financial institutions.

DORMANT ACCOUNT

i. Any designated account opened in accordance with these Guidelines shall be declared dormant if

no customer induced transaction is carried out for three (3) consecutive months.

U. Any account declared dormant in line with the requirement of these Guidelines shall be closed

forthwith and a notice of such closure shall be served on the account holder and the balance in

such account shall be treated in line with the requirement of Section 72 of BOFIA 2020.

PROVISION FOR DESIGNATED SETTLEMENT ACCOUNT

i. FIs shall obtain authodsation from the CBN for the opening and operation of designated settlement

account of SEC’s VASPs/DA entities.

ii. All obligations arising from transactions within the VASP5/DAs entities platform shall be settled into

the designated settlement accounts maintained by them in the banks.

iii. The designated settlement accounts shall warehouse all Naira positions of individuals with the

VASPs/DAs.

iv. The designated settlement account, including any associated linked account for warehousing

settlement monies, shall not be interest beadng.****

v. The details of the transactions on the VASP platform leading to settlement on the designated

settlement account shall be accessible online, on real-Ume basis to the FIs at all times.

vi. Credit to the designated settlement account shall be for the funding of Naira positions of persons

in the VASP/DAs platform.

vii. Debit from the designated settlement account shall only be in favour of the specific accounts that

was used to fund Naira position on the VASP/DAs platform.

viii. Returns on transactions on the designated settlement accounts shall be rendered to the Bank

monthly or at any frequency that the Bank may require.

ix, The designated settlement account shall not facilitate FX positions of persons on the VASP/DAs

platform

x. FIs shall ensure that the SEC-licensed VASP/DA entities always maintain a minimum collateral

equal to 150% highest net debit position into the designated settlement account (over the past 10

days).

xi. FIs shall not use the designated settlement account as collateral for credit.

x. The settlement cycle for transactions of VASPs/DAs shall be Ti-3.

xi. Value shall NOT be given to VASP/DAs before settlement occur or eadier than the settlement

cycle.

xiv. FIs shall not facilitate transfer and settlement from the FX positions of persons on the VASP/DAs

platform to any foreign account.

xv. Transfers from the Naira position of persons on the VASP platform into their bank account shall

not be more than twice in a quarter.

xvi.Fls shall ensure that only accounts that have completed full KYC process (Tiered accounts subject

to exemptions are excluded) can fund or receive from positions on the VASP/DAs plafform.

xvii. Fls/NIBSS shall not allow usage/creation of NUBAN accounts by VASPs.

xviii. Transactions on the VASP/DA platform shall only be in Naira.

RISK MANAGEMENT FOR ANTI-MONEY LAUNDERING, COMBATING THE FINANCING OF

TERRORISM AND COUNTER PROLIFERATION FINANCING (AML, CFT, AND CPF)

As shall establish appropriate risk management systems to determine whether a designated account

opened under these Guidelines has been used, is being used or is likely to be used for ML, TF and PF.

Fls shall take reasonable measures to establish the Beneficial Ownership, source of wealth and the

source of funds of designated account under these Guidelines.

CUSTOMER DUE DILIGENCE (CDD)

i. The appropriate time to conduct CDD by Fl shall be, but not limited to, the following cases, when:

a. On boarding a VASPs in a new relationship;

b. a transaction of significant value takes place;

c. a customer information/documentation change substantially;

d. there is a material change in the way that the account is being operated; or

e. the institution becomes aware that it lacks sufficient information about an existing customer.

f. FIs shall apply EDD requirements to all designated accounts opened in accordance with these

Guidelines on the basis of materiality and risk and continue to conduct due diligence on such

existing relationships at appropriate times.

CONTINUOUS VERIFICATION, VALIDATION OF ADDRESS AND DOCUMENTATION

REQUIREMENT

Fls shall independently validate the address and documentation requirement provided under these

Fuidelines and where it is discovered to be incorrect or invalid, the account shall be placed on Post No-Debit and the customer shall be asked to update its record, Provided that an STR shall be rendered

to the NFIU in that regard.

MAINTENANCE OF RECORDS

i. FIs shall maintain all necessary records of transactions of a designated account for at least five

years after completion of the transaction or such longer pehod as may be required by the CBN.

Provided that this requirement shall apply regardless of whether the account or business

relationship is on-going or has been terminated.

The components of records of transactions to be maintained by FIs shall include the:

a. records of customers and beneficial owners obtained through ODD measures including

opies of records of official identification documents like passports, identity cards, drivers’

licenses or allied documents and beneficiary’s names, addresses or other identifying

i itnformation normally recorded by the intermediary;

b. nature and date of the transaction;

c. type and amount involved;

d. type and identifying number of any account involved in the transaction; and

e. results of any analysis including inquiries to establish the background and purpose of

complex unusual large transactions.

f. FIs shall ensure that all customer transaction records and information are available on request

to the OBN on a timely basis, not later than 24 hours from the time of receipt of such request.

iv. Records of the supporting evidence and methods used to verify identity shall be retained for a minimum period of five years after the account is closed or the business relationship has ended.

SANCTIONS

Notwithstanding the powers of the CBN under the BOFIA 2020 and in addition to the use of remedial

measures in these Guidelines, the CBN may take any or all of the following sanctions against a Fl, its

board of directors, officers or staff for failure to comply with any of the requirements of these Guidelines:

i. Prohibition from opening any further designated account;

ii. Monetary penatty not below the sum of 2,000,00O.00 against the FIs, members of its board,

senior management, and any staff, for any infraction.

iii. Suspension of operating licence of a FI

THE PROBABLE LEGAL CONSEQUENCES

 Cryptocurrency has gained significant popularity in Nigeria over the past decade, with a growing number of individuals and businesses engaging in digital currency transactions. While cryptocurrencies offer several advantages, such as decentralization, security, and ease of cross-border transactions,we cannot ignore the probable legal consequences.

The probable legal consequences include;

1. Increased Cybersecurity Risks: The rise in cryptocurrency transactions has also resulted in an increase in cybersecurity risks. Hackers and cybercriminals target cryptocurrency exchanges and wallets, aiming to steal digital assets(crypto jacking). The lack of centralized control and the pseudonymous nature of transactions make it difficult to trace and recover stolen funds. This poses a significant threat to individuals and businesses engaging in cryptocurrency transactions, potentially resulting in financial losses.

Some malware can steal private keys for bitcoin wallets allowing the bitcoins themselves to be stolen. The most common type searches computers for cryptocurrency wallets to upload to a remote server where they can be cracked and their coins were stolen. Many of these also log keystrokes to record passwords, often avoiding the need to crack the keys. A different approach detects when a bitcoin address is copied to a clipboard and quickly replaces it with a different address, tricking people into sending bitcoins to the wrong address. This method is effective because bitcoin transactions are irreversible.

A virus, spread through the Pony botnet, was reported in February 2014 to have stolen up to $220,000 in cryptocurrencies including bitcoins from 85 wallets. 

Security company, Trustwave which tracked the malware, reports that its latest version was able to steal 30 types of digital currency.

2. Potential for Illegal Activities/ Increased Crime: Cryptocurrencies have been associated with illegal activities, including money laundering, drug trafficking, and terrorist financing. The anonymity and decentralized nature of transactions make it easier for criminals to engage in illicit activities without leaving a trace. This poses a challenge for law enforcement agencies in Nigeria, as they struggle to combat these illegal activities effectively.

Due to the inability of third parties to de-pseudonymize crypto transactions criminal entities have often resorted to using cryptocurrency to conduct money laundering. 

Especially ICOs lacking KYC guidelines and anti-money laundering procedures are often used to launder illicit funds due to the pseudonymity offered by them. By using ICOs criminals launder these funds by buying tokens off of legitimate investors and selling them. This issue is intensified through the lack of measures against money laundering implemented by centralized cryptocurrency exchanges.

A well-known early example of money laundering using cryptocurrencies is Silk Road . Shut down in 2013 with its founder Ross Ulbricht, the website was used for several illicit activities including money laundering solely using Bitcoin as a form of payment. 

Apart from traditional cryptocurrencies, Non-Fungible Tokens (NFTs) are also commonly used in connection with

money laundering activities.

3. Difficulty In Recovering Funds In The Event Of A Fraud: Unlike traditional financial systems, cryptocurrency transactions often lack adequate consumer protection measures. In the event of fraud, it can be challenging for individuals to seek legal recourse or recover their funds.

There have been many cases of bitcoin theft.

In December 2017, around 980,000 bitcoins over five percent of all bitcoin in circulation had been lost on cryptocurrency exchanges.

One type of theft involves a third party accessing the private key to a victim's bitcoin address, or of an online wallet. If the private key is stolen, all the bitcoins from the compromised address can be transferred. In that case, the network does not have any provisions to identify the thief, block further transactions of those stolen bitcoins, or

return them to the legitimate owner. 

 Cryptocurrency transactions in Nigeria come with a range of consequences, both positive and negative. However, the potential for economic growth and technological advancements cannot be overlooked. Striking a balance between regulation and innovation is crucial to harness the benefits of cryptocurrencies. 

Also, while we study the probable legal consequences arising from the lifting of the cryptocurrency ban, we would also take a look at the various laws that aid in the regulation of these possible legal issues;

1 The Cybercrime (Prohibition, Prevention, etc.) Act 2015 of Nigeria which does not specifically mention cryptocurrency transactions. However, the act provides for the prohibition of certain activities that may be related to cryptocurrency transactions.

Section 13 of the Act prohibits the unauthorized access to computer systems and networks, which could include unauthorized access to cryptocurrency wallets or exchanges.

Section 14 of the Act prohibits the interception of electronic communications, which could include interception of cryptocurrency transactions.

Section 15 of the act prohibits the use of computer systems or networks to commit fraud, which could include fraudulent cryptocurrency transactions.

Section 16 of the Act prohibits the use of computer systems or networks to commit identity theft, which could include stealing someone's cryptocurrency wallet or using their identity to conduct cryptocurrency transactions. Although the Cybercrime Act does not specifically mention cryptocurrency transactions, it provides for the prohibition of activities that could be related to such transactions.

2. The Central Bank of Nigeria Guidelines already stated above.

3. The Securities and Exchange Commission:

Section 13 of the Investment and Securities Act, 2007 conferred powers on the Commission as the apex regulator of the Nigerian capital market to regulate investments and securities business in Nigeria. 

Consequently, any person, (individual or corporate) whose activities involve any aspect of blockchain-related and virtual digital asset services, must be registered by the Commission and as such, will be subject to the regulatory guidelines. 

CONCLUSION

Cryptocurrency has come to stay in Nigeria's digital market sequel to the announcement made by the CBN lifting the ban off cryptocurrency transactions. While we cannot ignore the probable legal consequences, there are vast regulations to ensure safety in these transactions.

The lifting of the cryptocurrency ban in Nigeria is a positive step towards embracing innovation and harnessing the potential of digital currencies. With a robust regulatory framework and effective enforcement, Nigeria can position itself as a leader in the cryptocurrency space, attracting investment and driving economic growth.

REFERENCES

1. The Central Bank of Nigeria's Directive on cryptocurrency, 2023

2. Wikipedia: Cryptocurrency and crime