On the 5th of February 2021, the Central Bank of Nigeria (CBN)1 released a letter addressed to banks and other financial institutions which stated that dealing in cryptocurrencies and facilitating payment for cryptocurrency exchanges are prohibited. The CBN further instructed all banks and other financial institutions to identify individuals or entities who transact in cryptocurrency or operate cryptocurrency exchanges and close the accounts of such persons or entities.
Not surprisingly, the letter elicited major concern amongst the public with many concerned about the potential negative effect it could have on Nigeria's growing cryptocurrency market and innovation in the fintech industry.
In response, the CBN issued a press release (the "Press Release") on the 7th of February 2021, addressing its earlier directive and providing reasons for its prohibition of cryptocurrency transactions by banks and other financial institutions.
In this article, we shed light on the directive of the CBN, its effect on cryptocurrency trading in Nigeria, and the Securities and Exchange Commission's (SEC) stance on cryptocurrency in Nigeria.
What are the Justifications for the Prohibition of Cryptocurrency Transactions?
The CBN stated in the Press Release that cryptocurrencies are issued by unregulated and unlicensed entities and as such, the use of cryptocurrencies in Nigeria contravened existing law as they are not legal tender. It also identified the anonymity of cryptocurrency as an issue. It stated that anonymity and the lack of KYC made it susceptible to illegal use such as money laundering and the financing of terrorism. Another justification was the volatility of cryptocurrencies which it said has threatened the stability of financial systems in other countries.
The Effect on Cryptocurrency Trading in Nigeria
Nigeria has the second largest Bitcoin market in the world with over $500 million worth of Bitcoin traded over the last five years. The CBN's directive on cryptocurrency transactions will understandably have an effect on the cryptocurrency market in Nigeria as it essentially prevents traders from buying cryptocurrencies with their credit/debit cards issued by Nigerian banks or receiving proceeds of cryptocurrency sales from exchanges which facilitate the buying and selling of cryptocurrency.
It appears However some exchanges have found a way around the restriction by switching to peer-to-peer trading which enables individuals buy or sell cryptocurrency from individual traders as opposed to the exchanges. In effect, this does away with the need for exchanges to operate settlement accounts in Nigerian banks.
In response to the CBN's directive, banks have begun to identify and deactivate the account of individuals with inflows/outflows from/to cryptocurrency exchanges. It is unclear if affected individuals would be able to reopen accounts with these banks in future.
SEC's Intention to Regulate
On September 14 2020, the SEC issued a statement2 announcing its intention to regulate "digital assets" which includes cryptocurrencies. In light of the CBN's directive, the SEC faced calls to clarify whether there was a contradiction in the policies of the two regulators.
Subsequently, on February 11 2021, the SEC issued a statement stating that it would partner with the CBN to analyse and better understand the identified risks of cryptocurrency to ensure that appropriate regulations are put in place if cryptocurrency transactions are allowed in future.
The CBN's decision on cryptocurrency has also attracted attention from the highest levels of government. On the 11th of February, the Nigerian Senate deliberated on the CBN's directive, with some senators expressing reservations about the ban on cryptocurrency transactions.The Senate thereafter resolved to invite the CBN Governor to give a briefing on the actions of the CBN.
More interventions like this may be seen as stakeholders deliberate on the potential far-reaching effects of the CBN's stance on cryptocurrency in Nigeria
1 Pavestones has written several articles on CBN regulations and licenses. You can view them at https://pavestoneslegal.com/tag/cbn/
2 Pavestones wrote on the statement here https://pavestoneslegal.com/regulation-of-cryptocurrencies-and-other-digital-assets-in-nigeria/
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