In February 2022, the Israeli Securities Authority (ISA) unveiled its plans to regulate the crypto industry in Israel. As was observed in an earlier report on the ISA’s plans to regulate crypto, Israel as a nation has always taken the lead globally, in technology and innovation. In the blockchain and crypto space, although Israel is not among the first countries in the world that has regulated or introduced a plan to regulate the crypto industry, Israel’s current approach is promising. I think it will serve as a model for other countries to follow, especially those who have either not yet taken a clear stance regarding cryptocurrencies or have introduced varying degrees of restriction in order to resist cryptocurrency adoption in their banking and financial system, such as Nigeria for example.
There are five key lessons Nigeria and other crypto-unfriendly countries can learn from the ISA’s proposed regulation:
- Regulators need to be current in technological advancement.
One of the remarks made by Anat Guetta, the Chair of the ISA at the unveiling was that “regulators are lagging behind when it comes to the knowledge of technology.” This is true. Many regulators around the world today, especially in third world countries, lack adequate knowledge about the crypto industry. Although regulators mean well, emphasizing the need for consumer protection and investor safety, they generally tend to generalize, labelling cryptocurrencies as being predominantly a tool for criminals and scammers. Indeed, the occurrences of a number of fraudulent activity around crypto assets—although currently less than 1% of global cryptocurrency transactions—appear to affirm the wrongful assumption of these regulators. For instance, the Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, while justifying the CBN’s decision to prohibit deposit money banks, non-banking institutions and Other Financial Institutions from facilitating trading and dealings in cryptocurrency in February 2021 described the operations of cryptocurrencies as “dangerous and opaque”, stressing that “the anonymity, obscurity and concealment of cryptocurrencies made it suitable for those who indulge in illegal activities such as money laundering, terrorism financing, purchase of small arms and light weapons and tax evasion.” According to him, “[c]ryptocurrency is not legitimate money” because it is not created or backed by any central bank.
The CBN Governor’s limited knowledge of, and consequently the CBN’s current harsh approach towards crypto regulation is but one of the several other instances. Other countries, including Algeria, Egypt, and Kenya, also treat cryptocurrencies as illegal (in their banking and financial systems).
There is a need for regulators to study and understand the industry in order for them to adopt the right approach. They should also partner with the experts and experienced players in the industry to get this right. The regulators in countries such as the US, UK, Canada, South Africa, Mauritius, Brazil, and other crypto-friendly countries are relatively taking the appropriate steps in regulating cryptocurrencies.
Regulators should leverage what they already have to regulate the sector.
Another remarkable statement made by the ISA Chair was that regulators do not have to “reinvent the wheel each time that regulatory needs come up.” She further hinted that for the ISA, they “accept an entity that has a current license from regulators that are accepted by the ISA.” This is to say that the existing legal and regulatory framework that applies to the crypto industry should be adopted, and an entirely new one needs not be formulated or enacted. Basically, the laws that facilitate the operation of the cryptocurrency are not extraneous. These laws include the Know Your Customer (KYC), Anti-money Laundering (AML), Combating the Financing of Terrorism (CFT), investment and securities law, , and other relevant legislation, most of which are already in existence, locally or internationally. The essence of these legislation is to ensure legality, transparency, and compliance by cryptocurrency companies or entities, and enable regulatory oversight by the government.
Before the February 2021 Cryptocurrency Directive of the CBN, Nigerian commercial banks were already applying KYC to crypto exchanges and other virtual asset service providers (VASPs) operating in the country. They were being treated as customers alongside individuals and companies playing in sectors outside crypto. As a matter of fact, the Securities and Exchange Commission (SEC) Nigeria had already shown readiness to, and were making plans to regulate crypto, before the CBN’s sudden strike against the industry. This goes to show that even Nigeria as a country has—to some extent—the general legal framework to actually regulate the industry. There are also other regulatory bodies with existing legislation to regulate crypto. Examples: the National Information Technology Development Agency (NITDA), Corporate Affairs Commission (CAC), Nigerian Financial Intelligence Unit (NFIU), Economic and Financial Crimes Commission (EFCC), Federal Inland Revenue Services (FIRS), and so on. Where the regulatory frameworks administered by any of these regulators fall short of provisions that will sufficiently cover crypto regulation, then the Legislature comes into action. In the US for instance, the Congress—as well as the Senate—is very much in the limelight of crypto regulation. In 2021 only, it was reported that the US Congress had introduced 35 bills focused on U.S. crypto policy”.
There are also international best practices, standards, and regulations that can be adopted by the government to facilitate its policies regarding cryptocurrencies. The Financial Action Task Force (FATF) for instance sets the standards by which countries must comply in order to ensure that virtual assets, including cryptocurrencies, are not used for money laundering and terrorism financing. Currently, Nigeria is under pressure to meet the deadline given by the FATF to implement its recommendations. One of these recommendations involves an AML-CFT framework for virtual assets. Ironically, the current CBN cryptocurrency directive having effectively suspended AML-CFT for crypto is inconsistent with the FATF recommendation. It will be interesting to see how Nigeria resolves this.
Regulation should be aimed at enabling the government to gain control but not include stifling innovation.
As observed in a previous report, “[t]he aim of regulation is to get the power that the regulator needs in order to supervise and to build the market for new participants because regulation affects the market either positively or negatively, depending on the approach adopted. Nigeria is not in charge of the market, despite the harsh measures they have been taking.” The truth is that the regulatory authorities in Nigeria, especially the CBN, should realize that it is not in a war with the industry, if at all it is even a fight. The (seeming) antagonism and demonization of the crypto industry in the country by regulators is seriously stifling innovation, and making it unfavorable for investors to thrive. What regulators must realize however is that their harsh measures are not helping the regulators either—instead of giving them control over the market, it is rather expanding the regulatory gap. In fact, it is indirectly empowering the market more and weakening the government’s control over it.
The February 2021 cryptocurrency directive was made to stop transactions between deposit money banks (DMBs), non deposit money banks (NDMBs), and other financial institutions (OFIs) on the one hand and VASPs, including crypto exchanges or wallets, on the other hand. While at first it seemed it was the end for crypto adopters in Nigeria, the option of peer to peer (P2P) trading became more pronounced, being the only available medium for trading, over which the CBN has no direct control.
The blockchain technology upon which crypto is built, is an innovation and a disruptive one at that. It is not an invention of the government, and I dare say that the government cannot exterminate it, but can only try to stifle its development, where they fail, neglect, or refuse to properly regulate it. Regulation is the only way to give the government control over the industry. The Nigerian government is however failing to realize this fact so far. Consequently, the government is not taking advantage of the fast-growing crypto adoption in the country to maximize opportunities.
In December 2021, the Bank of Israel reportedly instructed local banks to accept profits from digital asset endeavors as long as the source of the money is not related to criminal affairs.. This is in stark contrast to the approach of CBN who in 2022 is busier policing banks and imposing fines on banks for facilitating crypto transactions than actually regulating cryptocurrencies. Access Bank Plc, Stanbic IBTC Bank, and United Bank for Africa (UBA) Plc were fined N800 million ($1.9million) while First City Monument Bank (FCMB), Fidelity Bank Plc, and Wema Bank were fined N514 million.
The CBN and other regulators should pay more attention to gaining control over the industry, through structured and strategic policies, rather than channeling their efforts into frustrating the cryptocurrency market. It is also high time the National Assembly came up with legislation that will regulate the industry, and perhaps more importantly put the CBN’s exercise of legislative powers, not only for having effectively created an offence by the CBN circular of February 2021 but also for imposing fines by virtue of the unwritten offence of facilitating cryptocurrency transactions in Nigeria.
Regulators should help the country take advantage of current legitimate opportunities in the crypto space.
The ISA Chair in her statement also decried the fact that “[o]pportunities are also going away from countries that cannot define ‘what is’ and ‘what is not’ about the market.” This shows the importance of clarity and certainty in terms of regulatory approach. Cryptocurrency is broad. It falls into different classifications and categories, based on certain considerations.
“Crypto can be classified into different categories, like DeFi, NFT, utility tokens, store of value tokens like bitcoin and litecoin, and yield farming tokens like Aave,” according to Sidharth Sogani, the CEO of Crebaco, a crypto research firm.
Outlook India has classified cryptocurrencies based on their utility, into four types: currency, asset, object, and meme or joke coin. Learng2.com has classified cryptocurrencies based on their origins, purpose, and the type of technology behind them: Proof of Work (PoW), Proof of Stake (PoS), Tokens, and Stablecoins.
Given this diverse classification of cryptocurrencies, it is important for the government to determine which category it wishes to adopt. This also determines the regulatory approach that can be adopted, as well as the particular regulatory authority to be in charge of it. In El Salvador for instance, bitcoin is treated as a legal tender. In the US, bitcoin and other cryptocurrencies are treated as virtual currency, but not legal tender, security, and stablecoin. The European Union also recognizes bitcoin and other cryptocurrencies as crypto-assets. There are also many other countries that have ascertained the status of cryptocurrency in their various jurisdictions. According to Investopedia, “[t]he Library of Congress (LOC) conducts periodic reviews of countries’ stances on Bitcoin and cryptocurrencies. In November 2021, it identified 103 countries whose governments directed their financial regulatory agencies to develop regulations and priorities for financial institutions regarding cryptocurrencies and their use in AML/CFT.”
Unfortunately for Nigeria—or should I say Nigerian crypto investors and potential investors—the country’s regulators have failed to create the risk-based regulation that is needed to help Nigeria minimize the risks while also maximizing opportunities provided by cryptocurrencies. This has adversely affected the crypto market in Nigeria as users and investors are practically being bullied, frustrated, and threatened by sanctions, and potential users and investors, being scared away. In 2019, Forbes reported about the #StopRobbingUs campaign by the Nigerian Tech Community, which was directed to the Police. Recently, Jason Marshall, Chief Operations Officer (COO) at Yellow Card Financial, a leading cryptocurrency trading platform, complained about the Nigerian Police “harassing and robbing” employees of the company. In his Tweet—which was in response to another user’s suggestion to file a complaint—, Jason expressed worry over the situation: “I am too scared as I am afraid any official complaints from me would result in a revocation of my visa, punitive measures against our business and dangerous personal retaliation against our employees. I probably should delete my tweets on this matter.”To remedy this sad situation, a leading self-regulatory association in Nigeria, the Stakeholders in Blockchain Association of Nigeria (SiBAN), has on several occasions attempted to engage the relevant regulatory authorities. This is to ensure that relevant regulators are rightly informed about the industry and encourage collaboration with them towards forging the way forward for the crypto market in Nigeria. Sadly, if the state of crypto regulation in Nigeria today is anything to go by, these efforts have not yet yielded any positive results. In Mid-April SiBAN issued a press release, “Blockchain Technology is Not Cryptocurrency and Cryptocurrency is Not Unlawful in Nigeria: To All Public Agencies, Law Enforcement Agencies, Banks, and Other Institutions in Nigeria“. In that press release, SiBAN made an effort to enlighten regulatory authorities and the general public about the blockchain industry and cryptocurrency.
Regulation should be holistic and engage all relevant stakeholders.
Finally, an important take-home from the ISA’s proposed regulation for cryptocurrency is that the industry needs a “holistic regulatory framework” and not a fractional approach. This means that there should be collaboration among the regulatory authorities, and between them and other players in the space—both individual experts and non-governmental entities.
In the US, there is a multi-sectoral and inter-agency approach toward crypto regulation. In March 2022, the President of the United States of America, Joe Biden released an Executive Order on Ensuring Responsible Development of Digital Assets in which he urged the relevant regulatory authorities to work together in achieving the State’s goal in developing digital assets. Particularly in Sec. 3 of the Order, “Coordination”, it reads:
“The interagency process shall include, as appropriate: the Secretary of State, the Secretary of the Treasury, the Secretary of Defense, the Attorney General, the Secretary of Commerce, the Secretary of Labor, the Secretary of Energy, the Secretary of Homeland Security, the Administrator of the Environmental Protection Agency, the Director of the Office of Management and Budget, the Director of National Intelligence, the Director of the Domestic Policy Council, the Chair of the Council of Economic Advisers, the Director of the Office of Science and Technology Policy, the Administrator of the Office of Information and Regulatory Affairs, the Director of the National Science Foundation, and the Administrator of the United States Agency for International Development. Representatives of other executive departments and agencies (agencies) and other senior officials may be invited to attend interagency meetings as appropriate, including, with due respect for their regulatory independence, representatives of the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and other Federal regulatory agencies.”
Sean Stein Smith, a professor at the City University of New York – Lehman College, has suggested in his article, “Crypto Regulation Is Coming – How Do Policymakers Get It Right?” that the government should “Engage market participants.” According to Sean, “[e]ven though there has been an unfortunate trend and pivot toward regulation by edict or lawsuit by some regulatory bodies, there are still open channels between policymakers and market participants. This is absolutely critical to the continued iterative developments that are going to be needed to accommodate new cryptoasset applications as they enter the marketplace”.
The International Monetary Fund (IMF) has also suggested that global crypto regulation should be comprehensive, consistent, and coordinated”.
Invariably, collaboration is indispensable in attaining a successful cryptocurrency regulation approach by any government. This is what the Nigerian government—and its other crypto-unfriendly counterparts—should most importantly take into consideration. They should engage industry experts, innovators, and other relevant stakeholders, both local and international, to ensure an effective crypto policy and regulation. In the same way that the CBN partnered Bitt.Inc for eNaira design, and also engaged Payment Service Providers (PSPs) and a community of fintech groups to ensure its adoption (even though it would have been more useful to have engaged them prior to the launching of the CBDC), CBN and other relevant regulatory authorities should also engage key stakeholders to come up with a policy for cryptocurrency in the country. CBN cannot do it alone. Hopefully, the SEC will no longer shy away from proceeding with its initial plan to regulate cryptocurrencies as digital assets in Nigeria. And law enforcement agencies will play a more active and proactive role here by implementing AML-CFT for virtual assets rather than demonizing cryptocurrencies and killing the future.
There is no success in isolation in any sphere of human endeavor. In any journey at all, it is an advantage for those who are only beginning to look up to those who have gone ahead. It is better to learn from the experiences of others than to try and fail. No doubt, Nigeria as a country is still developing in the area of technology among other areas. In blockchain, and particularly crypto, the country is quite behind in terms of policy and regulation. Except for her fast-growing, p2p-driven crypto adoption, Nigeria is in fact failing woefully in this regard! And I dare say that it is because the regulators have so far failed, refused, or neglected to learn the right lessons. As has been discussed from the ISA’s approach toward crypto regulation, Nigeria and other crypto-unfriendly countries should acquire more knowledge about the industry, collaborate, seek partnership, take advantage of the present opportunities, be strategic and intentional about gaining control, and leverage existing legal frameworks, in order to truly and properly regulate the crypto industry.
This publication is supported by Infusion Lawyers in partnership with CAB.
About the Author
Jude Ayua is Associate, Crypto Regulator at CAB. Currently interning at Infusion Lawyers where he is a member of the Blockchain & Virtual Assets Group, Jude is a member of the Policy & Regulations Committee of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN). Jude reports and writes on crypto policy and regulations. firstname.lastname@example.org