Introduction
In February 2021, the Central Bank of Nigeria (CBN) banned financial institutions from facilitating cryptocurrency transactions, aiming to address concerns over fraud, volatility, and financial crime.1 However, this move drove crypto activity underground, sparking a rise in peer-to-peer trading.2 Recognising the limitations of its rigid stance, the CBN introduced the Guidelines on the Operations of Bank Accounts for Virtual Assets Service Providers dated 22nd December 2023 (the Guidelines) and published as a circular on CBN's website on 2nd January 2024.3 The Guidelines mark a shift towards regulating Virtual Assets Service Providers (VASPs) and formalising crypto operations in Nigeria, while enforcing stricter compliance to prevent illicit activities. This article explores the impact of the Guidelines on the crypto ecosystem, Fintech, and the future of digital asset services in Nigeria, offering insight into what this regulatory shift means for a sector that continues to grow despite the challenges.4
An Overview of the CBN Circular on Crypto Currency
The Guidelines create a pathway for VASPs to access formal banking services in Nigeria by setting the minimum standards and requirements for the opening, operation and monitoring of a bank account belonging to a VASP, Digital Assets Exchange (DAX), Digital Assets Offering Platform (DAOP) and Digital Assets Custodian (DAC).5 An account opened under the Guidelines shall be designated as a virtual/digital assets business account (designated account) and cash withdrawal from such account is prohibited.6 The prohibition of cash withdrawal ensures effective monitoring of outflows from designated accounts. It is instructive that only an entity with a valid licence issued by the Securities and Exchange Commission (SEC) to engage in the business of VASP/DAX/DAOP is eligible to open a designated account.7
Another key provision of the Guidelines governs the opening and operation of designated settlement accounts for SEC's licenced VASPs. Settlement accounts, which can only be opened with the authorisation of the CBN, are non-interest-yielding accounts and they cannot be used to secure credits by VASPs. Transactions on VASPs platforms and by extension all inflows and outflows from settlements accounts shall strictly be in naira. A settlement account is where funds belonging to the users of a VASP platform are kept and paid out. According to the Guidelines, funds can only be transferred from a settlement account to the same fully KYCed bank account 8 domiciled in Nigeria through which a user funded his wallet or account on a VASP's platform in the first place.9
The Guidelines impose an obligation on financial institutions to ensure that a designated account is not used as a conduit pipe for terrorism financing, money laundering and proliferation financing.10 To this end, financial institutions are to rigorously conduct customer due diligence, not only at the stage of onboarding but also whenever there is a transaction of significant value; substantial changes in customer information/documentation; material change in the way a designated account is being operated; or lack of sufficient information by the financial institution about an existing customer.11
Financial institutions are further required to maintain records of every transaction in a designated account for a minimum of five years after the completion of the transaction;12 monitor and report suspicious transactions;13 and continuously verify and validate addresses and documentation of designated accounts.14 According to the Guidelines, financial institutions are to put stringent measures in place to safeguard VASPs customers against fraud by maintaining open lines of communication and ensuring speedy redress of customer complaints.15
Finally, the failure of a financial institution to comply with any of the provisions of the Guidelines may attract sanctions in the form of prohibition from opening any further designated account; a monetary penalty against the financial institution, its board, senior management and staff; or suspension of the operating license of the financial institution.16
Impact of the Guidelines on Technology Companies Providing Digital Assets Services
The Guidelines have considerable impact on technology companies operating in the Nigerian cryptocurrency market as VASPs. It is important to note that the definition of VASPs under the Guidelines includes any entity operating as a DAX, DAOP, DAC.17
One of the implications of the Guidelines on VASPs is that only an entity that is duly incorporated as a company with the Corporates Affairs Commission (CAC) is eligible to apply for the opening of a designated account. This is implicit in the requirements outlined in paragraphs 7.3 (b) – (k) of the Guidelines. Therefore, a VASP wishing to be a player in the Nigerian Cryptocurrency sector should incorporate a Nigerian company with the Corporates Affairs Commission. For a foreign entity, this may require obtaining Certificate of Capital Importation (CCI), Expatriate Quota, Combined Expatriate Residence Permit and Alien Card (CERPAC).
Secondly, under the Guidelines, a company intending to open a designated account as a VASP shall accompany its application for a designated account with a valid licence obtained by it from SEC to engage in the business of VASP, DAX or DAOP.18 This makes a SEC-issued licence a prerequisite for operating as a VASP in Nigeria. Therefore, affected entities must meet the requirements in the regulatory instruments issued by SEC to govern virtual assets in Nigeria, particularly the New Rules on Issuance, Offering Platforms and Custody of Digital Assets 2022 and the ARIP Framework 2024, including the Five Hundred Million Naira (N500,000,000) paid up capital requirement for DAX and DOAP.19
Under the current framework, VASPs must now operate under the close supervision of regulatory bodies like the CBN and SEC. This is noteworthy, especially for DAX, because such strict regulatory supervision means that it is unlawful for a DAX to operate a decentralised exchange (DEX) in Nigeria. A key feature of DEX is that it makes it possible for crypto transactions to be done underground, i.e., in obscurity through Peer to Peer (P2P) platforms which do not require the involvement of the traditional banking sector. Due to the manipulations and risks prevalent in P2P transactions, the SEC recently expressed its determination to stamp it out.20 Therefore, a DAX can only operate a centralised exchange (CEX) by ensuring that every user of its platform is fully KYCed and the user's assets (whether digital assets or fiat currency) are in its custody. This is opposed to DEX which merely connects buyers and sellers, while allowing them to keep their assets in non-custodial wallets or accounts, even when such wallets or accounts are not KYCed.
Impact of the Guidelines on Fintech
A careful reading of the Guidelines indicates that it does not override the 2021 circular in its entirety. The 2021 circular prohibited all financial institutions from transacting in cryptocurrencies or facilitating payments for cryptocurrency exchanges. It further directed the financial institutions to identify persons and/or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately. Against this backdrop, the Guidelines can only be said to have lifted the ban partially for the following reasons.
Under the Guidelines, the only entities transacting in cryptocurrency that are eligible to open and operate designated accounts in Nigeria are SEC-licenced DAX, DOAP, DAC and VASPs. Accordingly, individuals or entities that are not within the above categories are still prohibited from using their bank accounts for cryptocurrency transactions. This implies that Fintech companies, to avoid regulatory sanctions, are still required to identify accounts or wallets on their platforms that are used for cryptocurrency transactions in violation of the Guidelines. However, monies accruing from trades or transactions conducted on licenced platforms in Nigeria are exempt since the record of such funds would show that they were received from designated settlement accounts of licenced VASPs.
Furthermore, not all financial institutions are eligible under the Guidelines to open and operate designated accounts for VASPs. According to the Guidelines, the eligible financial institutions are commercial banks, merchant banks and payment service providers.21 While Fintech readily falls under the last category, the Guidelines further restrict the category of payment service providers that are eligible stakeholders to those that are involved in settlement for third parties. Although not expressly stated in Guidelines, it appears Fintech can open and operate only designated settlement accounts for VASPs. Finally, a Fintech that is not involved in settlement for third parties is precluded from opening and operating designated accounts or designated settlement accounts for VASPs. Anything done to the contrary may attract sanctions, including revocation of operating licence.
Conclusion
The Central Bank of Nigeria's Guidelines mark a significant shift in the regulatory approach toward cryptocurrency in Nigeria. While the partial lifting of the 2021 ban offers new opportunities for Virtual Assets Service Providers (VASPs), it also imposes strict compliance measures, particularly any company involved in digital asset services like DAX, DOAP, and DAC. Fintech firms face continued regulatory scrutiny, with only a subset of them eligible to open designated settlement accounts for VASPs. Overall, the Guidelines are a step toward formalising the crypto sector, ensuring transparency, and mitigating risks like money laundering and terrorism financing. However, the challenge for businesses remains in navigating these requirements while leveraging the growing opportunities in Nigeria's vibrant cryptocurrency market.
Footnotes
1. CBN, 'Letter to All Deposit Money Banks, Non-Bank Financial Institutions and Other Financial Institutions' (5 February 2021) https://www.cbn.gov.ng/Out/2021/CCD/Letter%20on%20Crypto.pdf accessed 30 September 2024.
2. Premium Times, 'Why crypto is booming in Nigeria despite govt ban' (Premium Times, 6 September 2021) https://www.premiumtimesng.com/promoted/483386-why-crypto-is-booming-in-nigeria-despite-govt-ban.html accessed 3 October 2024.
3. CBN, 'Guidelines on the Operations of Bank Accounts for Virtual Assets Service Providers (VASPs)' (CBN, 22 December 2023) https://www.cbn.gov.ng/Out/2024/FPRD/GUIDELINES%20ON%20OPERATIONS%20OF%20BANK%20ACCOUNTS%20FOR%20VIRTUAL%20Asset%20Providers.pdf accessed 30 September 2024.
4. Chainalysis Team, 'Sub-Saharan Africa: Nigeria Takes #2 Spot in Global Adoption, South Africa Grows Crypto-TradFi Nexus' (Chainalysis, 2 October 2024) https://www.chainalysis.com/blog/subsaharan-africa-crypto-adoption-2024/#:~:text=In%20recent%20years%2C%20Nigeria%20has,July%202023%20and%20June%202024 accessed 3 October 2024.
5. Paragraph 2.0 of the Guidelines.
6. Paragraphs 7.1 and 7.4(ii) of the Guidelines.
7. Paragraph 7.3(a) of the Guidelines.
8. KYCed bank account is a term used by the author to refer to a bank account that has complied with all the Know Your Customer requirements necessary to open a bank account in Nigeria.
9. See generally paragraph 7.9 of the Guidelines.
10. Paragraph 8.0 of the Guidelines.
11. Paragraph 8.1 of the Guidelines.
12. Paragraph 8.3 of the Guidelines.
13. Paragraph 8.4 of the Guidelines.
14. Paragraph 8.2 of the Guidelines.
15. Paragraph 9.0 of the Guidelines.
16. Paragraph 10 of the Guidelines.
17. Paragraph 4.0 of the Guidelines.
18. Paragraph 7.3(a) of the Guidelines. See also paragraph 7.9(i) which provides that designated settlement accounts shall be for SEC's VASPs/DA entities.
19. Paragraphs 6.3(a) and 11.4(a) of the New Rules on Issuance, Offering Platforms and Custody of Digital Assets 2022.
20. Olalekan Fakoyejo, 'SEC to delist naira from P2P platforms' (The Cable, 6 May 2024) https://www.thecable.ng/just-in-sec-to-delist-naira-from-p2p-platforms/ accessed 3 September 2024.
21. Paragraphs 5.0 (i) and (ii) of the Guidelines.
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.
