In our previous publication we discussed Nigeria's digital future in light of the Draft Blockchain Adoption Strategy ("Strategy") formulated by the government of the Federal Republic of Nigeria in conjunction with the Nigerian Information Technology Development Agency ("NITDA"). By this Strategy, the government recognized the potential of blockchain technology to create new transaction channels for the development of the digital economy, and the need to embrace its disruptive nature.
This recognition presents a great opportunity for entrepreneurs in the technology space especially with the development and increased popularity of cryptocurrencies, smart contracts, decentralised autonomous organisations (DAO), and metaverse, non-fungible tokens (NFTs).
In this publication, we have highlighted some of the considerations to bear in mind in the use of blockchain/Distributed Ledger Technology ("DLT") in Nigeria.
- What is Blockchain?
According to the Strategy, blockchain technology is defined as a decentralized and distributed ledger that records and validates the authenticity of digital assets. Its technology allows individuals and organisations to record information which cannot be altered without the authorization of the persons or organisations who share the network.
According to Euromoney Learning, blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Blockchain technology offers a secure way for individuals to deal directly with each other with no external influence, and without the fear of hacking or alteration of transactions.
Blockchain is a type of DLT in which transactions are recorded with an immutable cryptographic signature. While blockchain is primarily associated with words like 'bitcoin' and 'cryptocurrency', its use has far outgrown only the trade in such digital assets. Below are some businesses showing practical uses of blockchain technology-
- Accenture– uses blockchain solutions to serve its insurance clients by translating traditional insurance industry procedures into blockchain-ready procedures;
- MedRec- developed a process that uses blockchain electronic medical records to manage authentication, confidentiality and data sharing;
- Barclays- uses a number of blockchain initiatives to track financial transactions, compliance and combat fraud;
- Estonia- formed a partnership with Ericsson following an initiative to move public records to blockchain, etc.
- What are the Legal Considerations?
There are currently no specific laws or regulations governing blockchain or DLT in Nigeria. However, depending on its use and industry of application, some regulations and/or laws may become applicable for the purpose of such use.
a. Securitiesand Exchange Commission (SEC) Rules on Issuance, Offering Platforms and Custody of Digital Assets- the rules apply to all issuers seeking to raise capital through digital assets (which include the issuance of tokens to the general public in return for cash, cryptocurrencies or other assets; and other DLT offers of digital assets). Entities that intend to conduct initial digital assets offerings within Nigeria or targeting Nigerians are required to make an initial assessment filing with SEC, and register the digital asset offering. The rules also provide limit on funds to be raised by an issuer, and investments limits for individuals. Please see our article on issuance, offering platforms, and custody of digital assets in Nigeria
b. CentralBank of Nigeria's (CBN) Regulatory Framework- the CBN over the years in exercising its regulatory oversight over the finance sector has made a plethora of regulations which entrepreneurs/startups using blockchain/DLT in their business processes may do well to consider, even though they are not specifically applicable to blockchain/DLT. Some of these regulations include:
- CBN Consumer Protection Regulations, 2019;
- CBN Anti-Money Laundering/Combating the Financing of Terrorism (Administrative Sanctions) Regulations, 2019;
- CBN Three-Tier KYC Requirements, 2013, etc.
c. Other laws and Regulations some laws which are worthy of note include:
- The Nigeria Data Protection Act (NDPA), 2023- this is applicable in consideration of the fact that technology firms collect and process the data of Nigerians. Consequently, they are expected to comply with the provisions of the NDPA on the protection of the data of Nigerians.
- Nigerian Startup Act, 2022- which makes certain provisions to create an enabling business environment for startups in Nigeria, such as the creation of the startup portal and procedure for startup labelling.
- Cybercrimes (Prohibition, Prevention, etc) Act, 2015- this Act applies to all companies providing services online including those using blockchain technology. Technology firms and entities using blockchain technology should not engage in the trafficking of passwords and similar information. Measures should also be put in place to ensure that their technology is not used to commit any cybercrime.
- The Money Laundering (Prohibition) Act, 2022- this will apply to financial technology companies utilizing blockchain to receive and transfer funds.
- The Terrorism Prevention Act, 2012 (as amended);
- The Terrorism Prevention (Freezing of International Terrorist Funds and other Related Matters) Regulations, 2013;
- The Economic and Financial Crime Commission (Establishment) Act, 2004,
- The National Identity Management Act, 2017;
- The Finance Act (as amended each year); and the general laws and regulations that typically apply to companies operating in Nigeria.
It is important to note here that in May 2023, SEC started accepting applications from fintech firms for digital exchanges on a trial basis. The plan is that applicants will undergo a one-year regulatory incubation with limited service offerings. It will only authorize the registration and listing of tokens based on equity, debt, or property. This however does not extend to cryptocurrencies like bitcoins, Ethereum, and the like.
d. National Blockchain Policy- this was developed by the Federal Ministry of Communications and Digital Economy, and it lays a framework for the acceptance and execution of blockchain in Nigeria. Although not a legislative document carrying the force of law, its provisions serve as a guide and pointer for blockchain/DLT enthusiasts and users on the government's focus areas towards the increased acceptance and development of blockchain/DLT towards improving the Nigerian economy.
- What are the Tax Considerations?
Prior to May 2023, digital assets were not subject to taxation under Nigerian law. However, with the enactment of the Finance Act 2023, and the consequent amendment of the Capital Gains Tax (CGT) Act, digital assets are now subject to tax. Section 3(a) of the CGT Act provides thus: Subject to any exceptions provided by this Act, all forms of property shall be assets for the purposes of this Act, whether situated in Nigeria or not, including options, debts, digital assets, and incorporeal property generally". That means every gain made on any trade or disposal of digital assets is now subject to 10% CGT. It is however not clear how the government intends to enforce this.
The regulatory framework around blockchain/DLT is still within its development phase. We however believe that with the increased acceptance by the government of blockchain technology and its application in the economy, a proper and robust framework for its regulation will be formulated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.