Despite the Nigerian Security and Exchange Commission (SEC) recently releasing new regulations for digital assets and the country’s continued significant adoption and use of Bitcoin, an order from the Central Bank of Nigeria (CBN) barring financial institutions from servicing cryptocurrency transactions, effectively “banning Bitcoin” in the country, remains in effect more than 16 months later.
HOW WILL NIGERIA’S LATEST REGULATION AFFECT BITCOIN?
The Nigerian Securities and Exchange Commission (SEC) issued a set of regulations last month to govern the issuance, exchange, and custody of digital assets in the country. These new sets of digital asset regulations are a follow-up to a September 14, 2020 commitment to work on regulation that would address many of the perceived issues with Nigeria’s cryptocurrency market.
The long-awaited regulation was ostensibly intended to govern the use of digital assets in the country. The term “Bitcoin” does not appear in the rules document, and the regulatory guide outlines rules for cryptocurrencies other than BTC, such as the issuance of new digital assets.
Some of the new rules, however, would apply to businesses that presumably provide Bitcoin services to customers, though they may also provide other cryptocurrency services. The regulation defines digital asset actors as entities such as digital asset offering platforms (DAOPs), digital asset custodians (DACs), virtual asset service providers (VASPs), and digital asset exchanges (DAX). The SEC also stated that it would accept DAOP operators if they provided evidence of a “minimum paid up capital” of 500 million naira and a current fidelity bond covering at least 25% of the minimum paid up capital.
The SEC also stated that it may reject an application for digital asset registration if its operation is contrary to public policy, harmful to investors, or violates any of its laws, rules, and regulations. The commission also stated that the rules could be reviewed on a regular basis to achieve the necessary regulatory fluidity of digital assets or security.
While the regulation may pave the way for a gradual loosening of CBN restrictions, it also raises concerns about the impact it will have once it gains traction, particularly given the country’s growing use of BTC. One possible outcome is the stifling of bitcoin transactions, such as know-your-customer rules and the tracking of transactions made on exchange platforms. As a result, Bitcoin enthusiasts may be discouraged from using regulated cryptocurrency exchanges, as it contradicts the essence of decentralization and anonymity that draws many to Bitcoin in the first place.
BITCOIN AND THE PERMANENT CBN BAN
More than a year has passed since the CBN prohibited financial institutions from facilitating cryptocurrency-related transactions and ordered that accounts serving cryptocurrency operations be closed. This move occurred at a time when bitcoin was experiencing massive price increases and the country’s population was flocking to it in droves.
As the CBN explained at the time, the ban did not prohibit cryptocurrency-related activity in the country, but rather financial institutions’ participation in the cryptocurrency market. Many interpreted this move as the CBN’s attempt to avoid a systemic failure if financial institutions began to invest heavily in the volatile cryptocurrency market.
While the SEC has now fulfilled its promise to introduce regulatory guidelines for the treatment of digital assets, the new regulation does not lift the prohibition on financial institutions facilitating cryptocurrency-related transactions. This explains the mixed reactions expressed by several industry experts, who believe that the CBN’s authority as the country’s chief financial regulator makes the SEC vulnerable to its rules and regulations.
In order to promote the digital use of the naira, Nigeria launched the eNaira, a central bank digital currency (CBDC), in October 2021. While the eNaira is based on blockchain technology, it differs from bitcoin in several ways, including the fact that it is not a financial asset in and of itself, but rather a digital representation of the naira from which it derives its value.
The CBN’s continued ban and facilitation of the eNaira indicate that the country’s official stance on Bitcoin is not changing, despite its widespread adoption in Nigeria.
REGARDLESS OF REGULATION, BITCOIN HAS THRIVED IN NIGERIA.
Despite the fact that the ban on financial institutions made it difficult for individuals and entities to facilitate cryptocurrency transactions, Bitcoin has thrived in Nigeria.
Data from Paxful and LocalBitcoins show that Nigeria has a high number of peer-to-peer (P2P) transactions. Data also show that after the central bank ban, P2P bitcoin trading in Nigeria increased by 15% year on year.
Despite the bearish state of the bitcoin price, it has managed to stay afloat and appears to be on the mend. This has fueled public pressure in Nigeria for the formal legalization of bitcoin use by the country’s financial institutions.
With Bitcoin proving to be a technological innovation that will thrive well into the future, the CBN may reconsider and lift the ban on financial institutions in the country. However, until that happens, the SEC regulation is just a blueprint for achieving some sort of regulation and stability in Nigeria’s cryptocurrency space.