Crypto will no longer land Nigerians in jail, but more policy reforms are urgent, operators stress

Two days before last Christmas, the Central Bank of Nigeria released a circular that cleared local banks to open accounts with crypto platforms, marking the end of two years that had crypto operators fighting for legitimacy amid fund seizures, account closures, and police arrests. “It was the best Christmas gift the CBN could give us,” is how Daniel Essien, CEO of tokenisation outfit Vank, put it in a NODO interview.

Essien’s elation was common to local crypto players, many of whom, finally, could see a future in which their startups were government-backed and thriving. Previously disinclined investors would pay founders more mind, and the crypto aversion could gradually wane to reveal a thriving local crypto market. Or so they thought.

A careful look at the CBN’s guidelines, however, reveals a different story: crypto platforms, including exchanges and trading desks, are going to get naked before the CBN’s searching eyes, hoping not to get suppressed under stringent regulatory requirements that are as unclear as they are operationally difficult.

Among other things, the CBN requires virtual asset service providers (VASPs) to provide details of every transaction done on their platforms, for regulatory scrutiny. This includes the volume, involved counterparties, and value of transactions, no matter how negligible. “The details of the transactions on the VASP platform leading to settlement on the designated settlement account shall be accessible online, on a real-time basis to the financial institutions at all times,” reads the document.

Meanwhile, all transactions on crypto platforms are mandated to be conducted in naira; cash withdrawals and cheque clearing remain prohibited; and commercial banks that fail to comply with the CBN’s guidelines are at risk of losing their licence. According to the regulations, VASPs will also limit users to two withdrawals in a quarter, and ensure that withdrawals flow only into the same naira accounts used to deposit money.

“We have shifted from our initial excitement about the CBN’s circular into a more cautious state,” Oluseyi Adebiyi, who heads business development at Yele Bademosi’s Onboard, said on a call with NODO. “The compliance burden is stringent, and now that it’s statutory, more operators may have to set up internal compliance and audit teams.”

Joel Adefidipe, an Associate at Udo Udoma & Belo-Osagie Chambers, believes that crypto companies are soon going to find themselves in the CBN’s chokehold if the current policies are not updated. “Some of the guidelines are still unclear, but it does seem like the CBN’s demand for naira-only transactions may be a means of localising the operations of crypto companies. This could be restrictive in the long run for local crypto startups and foreign ones expanding into the country.”

Rife regulatory uncertainty

Five industry players interviewed by NODO emphasized Adefidipe’s point about the guidelines lacking clarity. Timi Olagunju, a Partner at legal consulting firm, The Timeless Practice, described the policy as reflecting the CBN’s long-practised inconsistency with a crypto policy strategy. “The larger issue at hand is that Nigeria’s position to crypto has always been extractive. Last year it was a rule to tax crypto gains, and before that was the SEC putting its application fee for crypto platforms at a cut-throat ₦30,000,000 ($33,000).” Olagunju, who argues that the industry is moving too quickly from underregulation to overregulation, attributes the CBN’s latest moves to the banking inclinations of the apex bank’s latest governor, Olayemi Cardoso.

While the CBN requires crypto operators to obtain a licence from Nigeria’s Securities and Exchange Commission (SEC), which in May 2022 introduced guidelines on offering and holding digital assets, the apex bank conveniently overlooks the SEC’s reporting requirements for these companies.

According to the SEC, “DAX Operators shall submit to the Commission the following: (a) Weekly and monthly trading statistics and all reporting requirements. (b) quarterly and annual financial as well as compliance reports….” This raises important questions of who exactly Nigerian crypto platforms should report to—CBN-led banks, or the national licencing body for securities, which cryptocurrencies are currently classified as.

“This situation is a quandary for operators in the space who are proactive about regulations,” said Lasbery Oludimu, Vice President of Legal for pan-African exchange Yellow Card. “We continue to note unclear and conflicting provisions between the CBN and SEC’s guidelines, but we hope that with time, these policies can be harmonised and clarified.” Oludimu maintained that the CBN’s move was net positive overall, recalling how the 2021 secular that barred banks from touching VASPs drove Yellow Card’s focus to other African countries. “Now we are looking actively at Nigeria again, and are already in talks with SEC to obtain a licence.”

Another guideline that has seen differing interpretations so far is the “naira and FX positions” of VASPs’ users. The CBN mandates transactions on VASPs to be done in naira and assigns the banks-generated designated accounts as the warehouse of users’ naira positions. But what exactly is a naira position on a crypto exchange?

Currency positions are typical for forex trades that involve longing or shorting national currencies. Cryptocurrencies, on the other hand, are not seen as currencies but as blockchain-native assets mostly traded against a stablecoin—which is a digital asset on the blockchain that represents a dollar in the US financial system. The Nigerian naira is not the blockchain. An attempt to do so by private players has so far failed, while the cNGN, a recent CBN-backed attempt will not be on-chain till the middle of Q1, 2024. Even so, the chances that all VASPs within the SEC’s licencing perimeter would integrate the cNGN is slim—if not impossible.

Outside an on-chain naira, how does one estimate the naira position of users on a blockchain-based crypto exchange? Some players conclude it is what users’ naira wallets on crypto exchanges hold; others estimate it as the naira equivalent of the digital assets actively being traded on VASPs. While the former would require all VASPs to create off-chain naira wallets for their users, the latter argument creates a path to fluctuations in users’ naira positions.

“I honestly do not understand what that provision means,” a compliance lead at a Nigerian crypto exchange said on a call with NODO, choosing to be anonymous to avoid negative market perceptions. “We’re trying to talk to banks to tell us what they want from us while the CBN works on clarifying their guidelines. We have bigger fishes to fry now.”

The CBN likely estimates the naira and FX positions through off-chain wallets built within crypto exchanges—as those enable users to transfer funds to fiat accounts across traditional finance systems. But that is exactly how the CBN will maintain its policy of allowing two withdrawals in three months, and shut down any form of forex outflow from exchanges—two highly discouraging possibilities for crypto natives.

Wider crypto adoption awaits refined policies

Vank’s Daniel Essien, whose efforts at building a crypto-powered neobank crashed with the CBN’s 2021 crackdown policies, said he’s excited about how far the policy has come. They could get better, but “the CBN’s role is more about driving stability than innovation.” he said.

The reality with emerging technologies is their adoption and applications to industries grow exponentially, so inflexible or limiting policies set populations decades behind the global digital economy. For example, this year has seen nearly $4 billion flow into alternative ETFs that track Bitcoin’s spot price, powered mostly by traditional asset management companies. None of this talk is in our purview yet—and Nigerian banks, with all the trust they’ve built for decades, are still banned from introducing any form of crypto products to consumers, contrasting global adoption trends.

Buki Ogunsaki, Legal consultant at Blockchain infrastructure firm Interstellar, believes that Nigeria must deepen its regulatory frameworks to keep its crypto business investors. “We just don’t want to break the type of news that attracts crypto investors, only for them to come into the system and get frustrated out. We have our work cut out for us.”

Crypto may no longer be a Nigerian crime, but one thing’s clear: national adoption will require improved policy reforms.