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While banks and other financial institutions are prohibited from dealing in cryptocurrencies in Nigeria, cryptocurrency has not been termed illegal, but it is unregulated. Engaging in cryptocurrency transactions does not constitute illegal activities, but what the user does with the cryptocurrency in the transaction determines whether it is unlawful or not. No specific regulation in Nigeria has declared cryptocurrency trading illegal or criminalized it.
The Central Bank of Nigeria (CBN), Nigeria's financial market's regulator, does not recognize cryptocurrencies and hence does not have a regulatory framework or licensing regime in place for cryptocurrency operators. According to CBN in a circular issued to banks and other financial institutions on January 2017 about cryptocurrencies or virtual currency operations in Nigeria, cryptocurrencies are largely untraceable and anonymous, and they are vulnerable to abuse by criminals, particularly in money laundering and terrorism financing.
The Central Bank of Nigeria (CBN) has recently sent a letter to banks and other financial institutions in February 2021, stating that trading in cryptocurrencies and enabling payment for cryptocurrency exchanges are banned. The CBN also directed all banks and other financial institutions to identify and cancel the accounts of individuals or businesses who deal in cryptocurrencies or run cryptocurrency exchanges.
The CBN claimed that cryptocurrencies are created by unregulated and unregistered companies, and hence usage in Nigeria violated existing laws since they are not legal money. CBN also recognized cryptocurrency anonymity as a problem. It said that the anonymity and absence of KYC rendered cryptocurency vulnerable to illicit usage, such as money laundering and terrorism funding. Another rationale was the volatility of cryptocurrencies, which it claimed jeopardized the stability of other countries' financial systems.
In response to the CBN's instruction, banks have begun to identify and deactivate accounts of people having cryptocurrency exchange inflows/outflows. It is unclear if impacted customers will be able to reestablish accounts with their banks in the future.
The Securities and Exchange Commission (SEC), which initially announced its intention to regulate “digital assets such as cryptocurrencies,” recently stated that it would collaborate with the CBN to analyze and better understand the identified risks of cryptocurrency in order to ensure that appropriate regulations are in place if cryptocurrency transactions are permitted in the future.
It has been discovered that the link between anonymity, cryptocurrency, and criminality stems from the fact that the usage of cryptocurrency exposes users to cyber-attacks such as Denial of Service (DoS) assaults, theft, release, or modification of sensitive data. Furthermore, the anonymity offered by cyberspace allows for a lack of self-regulation, which may result in unethical conduct.
There are a number of criticisms leveled at cryptocurrencies, the most common is the link to criminal activities associated with its use. It has also been shown that the nature of cryptocurrencies makes them ideal for a variety of criminal operations such as money laundering, tax evasion, drug trafficking, and so on.
Unfortunately for regulators, cryptocurrencies are built on the idea of decentralization, which means that they are intentionally designed in a way that prevents them from being controlled by a central authority in the same way that traditional currencies are. At present, there is no standard worldwide framework to regulate virtual currencies. Its regulation is largely dependent on the efforts of individual countries.
In response to cybercrime, the usage of cryptocurrency has generated global concerns about consumer data protection. The “Cybercrimes (Prohibition and Prevention) Act, 2015” has a significant impact on cyber law in Nigeria. This Act creates a comprehensive legal, regulatory, and institutional framework in Nigeria to prohibit, prevent, detect, prosecute, and punish cybercrime. The Act also encourages cybersecurity and protection of computer systems and networks, electronic communications, data and computer programs, intellectual property, and privacy rights, as well as the protection of important national information infrastructure.
According to the Nigerian Cyber Crime (Prohibition, Prevention) Act 2015, all financial institutions, including Fintech companies, must verify the identity of customers involved in electronic transactions, integrate and implement know-your-customer (KYC) processes, and keep all subscriber data safe for two (2) years.
Furthermore, the Consumer Protection Framework of the Central Bank of Nigeria (CBN) mandates all financial institutions regulated by the CBN to preserve private consumer data and adopt measures to prevent unlawful disclosure of such data. However, there is a distinction to be made between data protection and untraceable data.
Globally, data protection regulations are designed to protect consumers' personally identifiable information. This implies that the information may be traced back to specific individuals, and the financial institutions concerned are obligated to make this information accessible when requested to do so by a law enforcement agency.
The use of crypto-currency extends beyond data protection and into the world of untraceable data. Several governments have prohibited the use of crypto-currencies inside their borders, while others have warned the public against it, claiming that crypto-currencies cannot be controlled, while yet others have approved the usage of these digital currencies and subjected their use to Fintech laws.
The Securities and Exchange Commission (SEC), the main regulatory body for the Nigerian capital market, issued a statement on Digital Assets, their classification and handling, with primary concern on cryptocurrency regulation in Nigeria. The Commission stated that it would regulate innovation in the crypto currency sector in three ways: safety, market deepening, and providing solutions to issues that will lead its regulations, strategy, and interactions with innovators seeking legitimacy and relevance in this growing industry.
As a result, the SEC published regulatory guidelines for digital currencies and crypto-based companies or startups, indicating that they will supervise crypto-token or crypto-coin investments where the nature of the investments qualifies as securities transactions.
According to the Commission's statement, the regulations' goal is not to impede technology or innovation, but to establish norms that encourage ethical behavior. In a previous statement, the SEC warned stakeholders and the investing public against dealing with fraudulent, unregistered investment schemes and capital market operators, particularly those making bogus investment and unjustifiable return claims, and advised the public to tread carefully to avoid being swindled.
Despite repeated warnings, the CBN took significant measures by forming a committee to examine and define a road map for blockchain and cryptocurrency regulation, as well as the potential safety when utilized as a valuable asset in accordance with global practices.
Nigeria is yet to establish a legal framework or legislation for cryptocurrencies or crypto exchanges; nevertheless, there is a strong desire to do so very soon. Following the actions of the CBN and SEC, Nigerian lawmakers have asked the regulatory bodies to expedite efforts to establish a legal framework for crypto currencies in the country.
Almost every financial transaction in the world has legal ramifications, and cryptocurrency is no exception. The uniqueness of the currency has undoubtedly contributed to the problems connected with its global regulation.
With these changing global financial trend, Nigeria's financial regulatory agencies should take the lead in building a solid financial system and regulation that would accept contemporary technology. And, despite the potential for abuse connected with crypto currency trade, it should not be rejected in its entirety; rather, rigorous regulations should be put in place to limit its misuse.
Meanwhile, by claiming that cryptocurrencies are not legal tender in Nigeria, the Central Bank of Nigeria (CBN) is essentially indicating that cryptocurrencies are not officially recognised as money in Nigeria, but that they are not unlawful.
Aside from the influence of the Cyber Crime Act 2015, the Securities and Exchange Commission (SEC) cooperating with the Central Bank of Nigeria (CBN) to regulate cryptocurrency trading is a laudable effort toward building a legal framework for cryptocurrencies in Nigeria. More regulatory action is required.
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.
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