Serah Onyeche Sanni
The wide spread in the acceptance of crypto currencies across the globe has over time projected certain ambiguities in areas surrounding its usage, operations and regulation. A peculiar feature of crypto currency transactions is that they are operated through the use of cryptography (secret codes). The regulation of crypto currency varies based on different countries, while its status remains unidentified in some jurisdictions, others attempt its regulation based on what they categorize crypto currencies to mean. Although, most countries do not make the usage of crypto currencies illegal, its status as currency varies in line with different regulatory implications. The absence of a specific dedicated central authority and regulation, which supervises activities and transactions involving the use of crypto currencies makes it vulnerable to exploitation for illegal purposes such as economic crimes.
This paper aims to identify and review the legal policies surrounding the use of crypto currencies in a number of jurisdictions, particularly in Nigeria. The past recent years have seen crypto currencies become ubiquitous prompting most national and regional authorities to grapple with a suitable form of regulation or supervision. The expansive growth and use of crypto currencies as well as its distinctive features when compared to other legal tender no doubt sparks the need to question its legality. The fluidity of this form of currency creates the need to further beam a search light on its use and operations. Currently, there is no a global movement in terms of setting policies and regulations around the use of Crypto currencies, however, its peculiar nature and features creates a dare need for it.
Crypto currency has been defined in a number of related forms. It is 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. It has also been defined as digital asset (currency or medium of exchange) that is designed using cryptography, to be secure and anonymous. Decryptionary.com further defined crypto currency as "electronic money created with technology controlling its creation and protecting transactions, while hiding the identities of its users." The seduction of crypto-currency is the convenience in its generation, storage, management and accounting.
It operates based on a technology called ''Blockchain''. Crypto-currencies are largely designed to operate without sovereign regulation and are protected from being discovered by government authorities for supervision, this is the major feature directly related to the line of discuss. Crypto-currency does not require any material resources for its production as it is generated through highly encrypted computer programs, stored on computers and its transactions are performed through the Internet. There is no gold or license required to generate crypto currency unlike in other currencies where governments and central banks which require certain security, assets and procedure to follow when deciding how much currency government can print for a state.
Features of Crypto Currencies
The crypto currency market has grown over the years and it keeps expanding as new crypto currencies emerge more frequently. As at August 2018, records revealed the existence of over 1,600 crypto currencies available on the internet. Currently, there are over 2000 crypto currency and virtual currencies, this goes to show the speed at which it grows.
Some major types of crypto currencies include Bit coins, Lite coin, Z cash, Dash, Ripple, Ethereum, NEO, Altcoins and Tether. Bitcoin is widely seen as a pioneer and the most successfully used in the world of crypto currencies. Bitcoin was first made available to the public in 2009, and has ever since expanded by maintaining the highest market capitalization.
Major features associated to crypto currencies include:
- Created to be Anonymous: As the name implies, crypto means something concealed in secrecy or hidden. Their operation involves the use of codes in a form known as cryptography.
- Designed to operate with limited control from the government: Crypto currencies are modeled to operate with absolute independence. No central authority, government or cooperation has access to the funds or personal information of the currency owners.
- Funds transfer is carried out directly between parties, and in the absence of any third party like a bank or credit card company.
Issues Associated to the Use of Crypto currencies
- Very volatile: Crypto currency has been identified as being liable to rapid and unpredictable changes as they are prone to fluctuation. The reason for this is that their prices are based on supply and demand.
- The anonymous/semi-anonymous nature of crypto currencies makes them susceptible to a host of nefarious activities such as money laundering and tax evasion.
- The crypto currency market is known for being speculative, there is no assurance that what is invested is what will be reaped or even more
- Non-revenue producing asset to states: The nature of crypto currencies and its secret operational system which is not controlled by any government places it in a position, whereby it operates without remitting any form of revenue to the government.
- Unstable regulations surrounding its usage: There is yet to be a recognized regulation on the use of crypto currencies, although there are countries where there exist some forms of regulation on its use, there is no specific dedicated regulatory system.
Crypto currency: Economic and Cyber crimes
Cybercrimes exploit vulnerable infrastructural systems that progressively become interconnected on an almost daily basis. Jesse Bray made the connection between anonymity, crypto-currency and cybercrime. He posited that the use of crypto-currency is open to cyber-attacks such as Denial of Service (DoS) attacks, theft, release or manipulation of sensitive data. He argued that the anonymity created in cyberspace allows for the loss of self-regulation, which could amount to deviant behavior. In 2017 a ransom ware attack affected over 200,000 computers in 150 countries. Sensitive data on these computers were encrypted and the owners were asked to pay ransom amounts to release the information back to them.
There have been a number of criticisms on crypto currencies, and most have been associated to the criminal tendencies connected with its usage. The US president, Donald J. Trump stated, ''Crypto currencies are not money given; they are highly volatile and tend to facilitate criminal behavior". In a similar light he again stressed the potential for using crypto currencies in other illegal activities such as drug trafficking. A US Senator, Charles Schumer, in another statement explicitly referred to Bitcoin as a "surrogate currency" that enabled criminal activities. These observations and a host of others goes to confirm the that the nature of crypto currencies make them well suited for a host of nefarious activities such as money laundering, tax evasion, drug trafficking etc.
The Regulation of Crypto Currencies
As earlier identified, crypto currencies are founded on the principle of decentralization, meaning that it is consciously structured in a way that excludes it from being regulated by a central authority in the manner that a traditional currency would be. Although, some states have taken the effort of imposing some form of regulation on the usage of crypto currencies, some authors however classify those regulations as quasi-regulatory. The fact is, there are different views and perspectives to what crypto currencies may be termed as per time. This and more has contributes to the factors impeding on its regulatory frame work. The few regulations now obtainable in certain jurisdictions took a slow turn as most authorities grappled with getting a grip of what exactly the technology is all about before attempting to assign certain regulations to its use and operations. Irrespective of moves taken, there exists no uniform international approach to regulating virtual currencies. As it stands, its regulation depends more on efforts taken by individual countries.
In the United State of America crypto currencies are regulated through at least five (5) different Federal Agencies namely:
- The Internal Revenue Service (IRS)
- The Financial Crimes Enforcement Network (FinSEC)
- The Securities and Exchange Commission (SEC)
- The Commodity Future Trading Commission (CFTC)
- Office of Foreign Assets Control (OFAC)
It will interest us to know that each of these Agencies view crypto-currencies from different standpoint. While the IRS classifies crypto-currencies as properties which should be taxed, the FinSEC views crypto-currencies as currencies and not properties. The SEC on its part views crypto-currencies as securities, while the CFTC declared crypto currencies as commodities. The OFAC in its operations tags crypto-currencies as assets. In a whole the USA is yet to come up with a specific national regulation which regulates the usage of crypto currencies. However, some states do have developed guidelines.
China on another hand has out rightly banned the use of crypto currencies, this action has been confronted with a lot of resistance, and however the China government is adamant on quashing the crypto currency market with the purpose of preventing financial risks. China aims to clamp down on all crypto currency trading with a ban on its foreign exchange. These regulatory actions by the Chinese government are aimed at controlling the increasing mania involving decentralized, non-regulated crypto-currencies which have recently soared to astronomical valuations. However, despite the ICO ban and momentary decline, crypto currency trading continued in China, as many participants switched to foreign exchanges, like those based in Hong Kong and Japan, to deal in virtual currencies.
Data protection has become much more important in recent times as technology and its use is in boom. Different countries have enacted various laws, national and regional, to ensure the protection of consumer data. For example, in 2018 the European Union enforced the General Data Protection Regulation across the continent and all organizations were mandated to implement its provisions. In Nigeria also, there are laws that cater for the protection of consumer data dating way back to the 1999 constitution (as amended). This provided for the citizen's right to privacy of home, correspondence, telephone conversations and telegraphic communications.
The Nigerian Cyber Crime (Prohibition, Prevention) Act 2015, requires all financial institutions, including Fintech companies, to verify the identity of customers involved in electronic transactions, integrate and implement know-your-customer (KYC) processes and keep all subscriber data safe for a period of two (2) years. Also, the Central Bank of Nigeria (CBN) Consumer Protection Framework requires all financial institutions regulated by the CBN to keep private consumers' data and implement protection measure to prevent unauthorized disclosure of such data. However, there is a difference between data protection and untraceable data. Globally, data protection laws are made to protect personally identifiable information of consumers. This means that the information is traceable to particular consumers and the financial institutions affected are required to make these data available when so directed by a law enforcement agency.
The use of crypto-currency goes beyond data protection and enters the realm of data that is untraceable. Several governments have banned the use of crypto-currencies within their realm, others have advised the public against it as they claim crypto-currencies cannot be regulated, and yet others have accepted the use of these digital currencies and subjected their use to their Fintech laws.
The first legal issue to be considered in the use of crypto-currency is its legality. Many countries have banned the use of crypto-currency and have tagged it illegal currency. So, there lies the question of the consequences of involvement in transactions that have no legal validity. The answer is the lack of legal recourse to substantiate claims in court in case of fraud or loss. Most government warnings against crypto-currencies stem from the fact that they are unregulated and therefore it is impossible to enforce rights in any court of law.
Secondly, anonymity has always been one of the many appeals associated with using crypto-currency. Jesse Bray, in his thesis survey, claimed that the idea of anonymity alone would generally entice people to engage in online acts and crimes that they would not normally engage in. Cybercrimes that stem from this anonymity involve:
- Trade of illegal goods and services (drugs, weapons, human organs).
- Ransom ware attacks.
- Money laundering.
- Cryptojacking – this is where the processing power of unsuspecting person's CPU is hijacked to mine for crypto-currencies without their knowledge.
- Ponzi Schemes such as Bitconnect, DavorCoin, OneCoin, etc.
- Crypto-currency theft achieved through exchange hacks.
- Initial Coin Offerings Fraud.
Approach to Crypto-currencies in Nigeria
The global financial system is no doubt embracing the current transition from physical currency to almost virtual currencies through the medium of technology. This wave has ushered in the birth of crypto currencies. In the light of this outbreak, there has been a lot of positive and negative discourse on the value of crypto-currencies to the Nigerian fiscal system. Investors have in their masses invested in crypto currencies, the most common being Bitcoins all in a bid to some sort of recoup interests in the nearest future. Over time the awareness that bitcoins like most crypto currencies operates independently and outside the control or regulation of any intermediaries such as banks, financial institutions, or the government triggered a wakeup call directed to the risks investors may be exposed to when involved in this venture.
Relatively, the Nigeria government has attempted to place a ban on crypto currency, although its legal status remains ambiguous unlike in countries like Morocco and Algeria where there is a clear ban on trading in Bitcoins such that a breach attracts heavy fines.
One of the actions taken by the Nigerian government is by issuing very strong notices about the pitfalls of investing in the crypto currency markets. Such warnings were issued by the Central Bank (CBN) and the Securities and Exchange Commission (SEC). The warnings are largely designed to educate the citizenry about the difference between actual currencies; which are issued and guaranteed by the state, and crypto currencies; which are not. The government also added the risk resulting from the high volatility associated with crypto currencies and the fact that many of the organizations that facilitate such transactions are unregulated. It was also emphasised that citizens who invest in crypto currencies do so at their own peril and personal risk and that no legal recourse is available to them in the event of loss.
The various warnings issued also projects the opportunities that crypto currencies create for illegal activities, such as money laundering and terrorism, illegal drug trafficking, human trafficking, and support for radical movements. In January 2017, the CBN issued a statement banning any transactions in Bitcoins, this was carried out by the banks' regulator circulating a statement to all banks in the country warning them against facilitating the trading of Bitcoins in the country. The CBN stated that traders risked losing all their money when they trade in a currency that is not regulated. This risk is largely associated to the volatile nature of crypto currencies. However, a lot did not heed to this warning as most crypto currency exchanges continued to operate as usual.
The Nigeria's SEC also made a statement in 2017 warning Bitcoin traders to exercise extreme caution. Again in March, 2018, the CBN reiterated its stance on crypto currencies warning traders that digital assets are a mere gamble.
The trade in crypto currency is not extinguished despite the series of warnings, the CBN however took decisive steps by having an organized committee to review and articulate a road map for blockchain and crypto currency regulation as well as the possible safety when used as an asset of value and in line with global practices.
Like most African countries, Nigeria is yet to introduce a legal framework or legislation for crypto currencies or crypto exchanges; however there is a great interest to develop one very soon. Following the moves taken by the CBN and SEC, Nigerian lawmakers have also urged the regulatory authorities to speed up efforts in introducing a legal frame work for crypto currencies in the country.
There are legal issues associated with almost every financial activity in the world and crypto currency is not an exception. The peculiarity of the currency no doubt has contributed to the difficulties associated with its regulation globally. Every new technology is pre-destined to suffer legal setbacks, from mainstream acceptance to misuse and abuse. In 2018 alone, it was reported that £4billion was laundered via crypto-currencies in Europe. An increase in this special brand of money laundering and other cybercrimes has a negative impact on the crypto-market, as investors lose confidence to invest their money into the market. The European Banking Authority (EBA) explained that crypto-currency falls outside the scope of EU financial regulations making it almost impossible to regulate.
A call for governmental introduction of a distinctive anti-money laundering regulations and data recoverability regulations is therefore eminent, considering the technological advancement in the use of crypto currencies. The ability to uncloak masked transactions in the crypto-world is vital to reducing the associated legal risks, ensuring accountability and eliminating frauds. As earlier observed some countries have taken notable steps in expanding their laws on money laundering, counterterrorism, and organized crime to include crypto currency markets, thereby requiring banks and other financial institutions to conduct all necessary due diligence requirements imposed under such laws.
With these evolving global trends in the financial sector, Nigerian's financial regulatory institutions have taken the initiative of developing a robust financial system and regulation that will accommodate the current tech. This paper concludes that in spite of the imminent abuse associated with trading in crypto currency, it should not be condemned in its totality; rather stringent national and global regulations should be put in place in curbing its misuse.
 PhD Candidate, University of Abuja, FCT, Abuja, Nigeria
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