Introduction
If the Supreme Court of Nigeria is not infallible, how much more the Central Bank of Nigeria (CBN)?
Over the last one year, CBN has been obsessed with cryptocurrencies. Obviously troubled by the increasing adoption of cryptocurrencies in Nigeria and the rate of cryptocurrency transactions completed with the use of bank accounts, CBN issued its 5 February 2021 circular. Crypto regulation? Maybe. I call it regulation on steroids. Steroids—just CBN-made hormones for treating the inflammations often associated with cryptocurrencies, whether fact or myth.
With CBN, the myths around cryptocurrencies abound. From cryptocurrency being “a product that is embedded in high level of illegality” to “a substantial portion of cryptocurrency” being illegal; from cryptocurrency being “created out of thin air” to cryptocurrency “being used to describe the activities of players in an electronic dark world where transactions are extremely opaque (black, not white), not visible, and not transparent”, cryptocurrency is nothing but criminality. Caught up in the danger of the single story, CBN, in the defense of its 5 February 2021 circular, defined cryptography as “a method of encrypting and hiding codes that prevent oversight, accountability, and regulation”. You may resist the temptation of asking if CBN did not realize that its own digital currency, the eNaira, would be secured by the same cryptography over a year later. I call it the dangers of CBN’s single story about crypto.
In the year CBN prohibited cryptocurrency in Nigeria’s banking and financial system, over 99% of total cryptocurrency transactions constitute legitimate transactions. According to Crypto Crime Report 2022, total cryptocurrency transactions in 2021 grew to $15.8 trillion, up by 567% compared to 2020. Though illicit cryptocurrency transactions by volume increased by 79%, transactions involving illicit addresses represented just 0.15% of total cryptocurrency transaction volume in 2021. As put by Chainalysis, “with the growth of legitimate cryptocurrency usage far outpacing the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower”. In 2020, transactions involving illicit addresses represented 0.62%.
Never mind that many things CBN has told Nigerians about cryptocurrencies are largely inaccurate. Whether through Governor Godwin Emefiele’s often self-evident unenlightened remarks and unsupported claims about cryptocurrency or through the often poorly researched written communications of the central bank about cryptocurrency, you will take them to the bank at your own risk. And this is putting it mildly and with due respect. Obsessed with cryptocurrencies—and yes, forex too—the CBN hardly gets anything right in the fast-growing crypto space. Hardly. Whenever the CBN makes a move on crypto, it is always either an attack or a defense. It is hardly regulation. Little wonder the Vice President, Yemi Osinbajo SAN, once told CBN and other regulators that “we must act with knowledge and not fear”. We must develop a robust regulatory regime that is thoughtful and knowledge-based. I agree. But those words may have been received wrongly. If the Vice President was not in government, his advice could have been considered ‘anti-government’. Yes. That’s the medal you get when you ask your regulators to stop meandering in myths fed by fear and start facing facts anchored on knowledge. Having allowed its fears to spread wild jaws around its knowledge, CBN badly needs a rethink on cryptocurrency in Nigeria. The capacity to do so may be there, but more importantly, a clear mind is lacking. CBN needs to think clearly, again.
From a proactive CBN in 2017 to a reactive CBN in 2021
The last time CBN thought clearly about cryptocurrencies in Nigeria was over 5 years ago. It was also the first time. On 12 January 2017, CBN released a circular to banks and other financial institutions on virtual currency operations in Nigeria. In that circular, CBN observed that because virtual currencies are largely untraceable and anonymous, they are “susceptible to abuse by criminals, especially in money laundering and financing of terrorism”. But rather than restrict cryptocurrencies in Nigeria’s banking and financial system—which would have made CBN a Commando and a Terminator wrapped into one —CBN chose to focus on its statutory duty as a regulator. This is by ensuring that banks and financial institutions put adequate controls in place in order to continue to provide banking and financial services to customers involved in cryptocurrency, but in a safe and secure manner. CBN was brilliant. Knowledge swallowed fear.
According to CBN in that circular, “pending substantive regulation or decision by the CBN”, banks and other financial institutions were required to take the following measures:
- Ensure that they do not use, hold, trade, and/or transact in anyway in virtual currencies;
- Ensure that existing customers who are virtual currency exchangers have effective AML/CFT controls that enable them to comply with customer identification, verification, and transaction-monitoring requirements;
- Ensure that in the absence of required controls, they are to discontinue customer relationship immediately; and
- Ensure that they immediately report any suspicious transactions by customers to the Nigeria Financial Intelligence Unit (NFIU).
In addition, CBN also thought clearly when it reiterated in the closing paragraph of that circular that any bank or institution that transacts in virtual assets such as bitcoin, Litecoin, Ripple, etc. “does so at its own risk”. Two vital points must be emphasized from the directive above.
One, banks and other financial institutions may continue to provide banking and financial services to customers who are involved in cryptocurrency but there must be anti-money laundering and combating the financing of terrorism (AML-CFT) controls. It is when these AML-CFT controls are absent or inadequate that banks and other financial institutions must discontinue customer relationships immediately. This is regulation. And it is compliant with the global standards on AML-CFT set by the Financial Action Task Force (FATF) on virtual assets.
Two, CBN did not think itself an autocratic agency that had the power to impose fines on banks and financial institutions who transact in cryptocurrencies without a written law that made this an offense. No. CBN understood, at the time, that under Nigerian laws, including the supreme Constitution of the Federal Republic of Nigeria, nobody has the power to penalize or sanction any person over an offense that does not exist in a written law. CBN knew this. And this is why CBN legally and rightfully took an advisory posture when it said that “any bank or institution that transacts in such business does so at its own risks”. In other words, if transacting in cryptocurrencies ends up harmful, it will be the bank’s or institution’s responsibility. A bank’s or institution’s responsibility must be understood to mean its responsibilities under relevant laws and regulations, as well as its bank-customer contract. Speaking of relevant laws and regulations, they include Nigeria’s Money Laundering Prohibition Act 2011 (as amended) and the Terrorism (Prevention) Act 2011 (as amended). So money laundering and terrorism financing matters are not responsibilities that are left to the discretion or imagination of the CBN. Particularly when offenses and sanctions are concerned, our public institutions, including regulators, must learn to apply and adhere to the written laws of this country. The rule of law is paramount. No financial system can be safe or sound without it. Without the rule of law, engendering public trust and confidence in the financial system will be a mirage.
CBN’s regulatory approach to cryptocurrency in Nigeria’s banking and financial system: The road to a safe and sound financial system is not paved with good intentions only.
The good intentions of the CBN towards ensuring a safe and sound financial system in Nigeria is acknowledged. Particularly at a time the Nigerian economy is going through tough times, CBN’s efforts to ensure a safe and sound financial system where public trust and confidence in financial services is not (completely) eroded must be appreciated. That said, the CBN must carry out its good intentions according to the provisions of the law establishing it and other relevant laws at all times. Where the CBN becomes law unto itself, the constitutionally guaranteed freedom and liberty of citizens will be under threat. An ugly case in point is the blanket denial of access to banking and financial services to the entire virtual assets sector providers (VASPs) sector in the country without any specific violation of the provisions of a written law. This is one of those good intentions that pave the way to hell, especially when not timeously admitted and corrected.
Today not only has the CBN denied Nigerian citizens who deal in cryptocurrencies access to banking and financial services in the country but the CBN has also restricted banks or financial institutions in the country from facilitating cryptocurrency transactions. Consequently, not only have bank customers had their accounts frozen, blocked, or closed because they are involved in cryptocurrency transactions simpliciter but a number of banks have also been fined because cryptocurrency transactions were facilitated through them. At the time of writing this piece, a whopping sum of N1.315 billion (about $2.1million) has been imposed on banks, namely Access Bank, FCMB, Fidelity Bank, Stanbic-IBTC, UBA, and Wema Bank. Their offense—offenses created by the CBN without a written law creating these offenses—is that these banks contravened the CBN circular on cryptocurrency. That circular—a mere circular with no force of law—is the CBN circular of 5 February 2021 with reference number BSD/DIR/GEN/LAB/14/001. With no force of law? Absolutely. A judge of the Federal High Court (Abuja division) that must be so good he was named twice, Justice Taiwo O. Taiwo, also thinks so. In a recent ruling, Justice Taiwo Taiwo did not agree with the CBN that an ex parte freezing order of the court over involvement in cryptocurrency transactions was sustainable after the court determined that the 5 February 2021 circular the CBN relied on was a mere circular without the force of law.
In a democratic state and modern economy with a globally acclaimed FinTech market such as Nigeria, the arbitrary and lawless circular of 5 February 2021 should not exist. Its existence is unfortunate. And the fact that this circular remains in existence till date and CBN continues to wield it like a big cane in Nigeria’s banking and financial system is more unfortunate. While the risks associated with cryptocurrency transactions in the banking and financial system is not denied, the circular is not the solution. If it was a solution in February 2021, it is no longer and can no longer be the solution in April 2022. At best, the circular has succeeded in pushing cryptocurrency transactions underground where not only CBN but also other public agencies, including law-enforcement agencies, have been left groping in the dark. In the year 2022, why would the central bank of one of the most innovative and advanced FinTech industries in the world decide to lock itself and others in a dark room, hoping the ray from the key hole would be adequate until it finds the switch! Not only is the switch right before CBN; CBN has the key in its pocket.
Fear is a terrible thing.
Now this is not throwing a question mark on the power of CBN under the Banks and Other Financial Institutions Act 2020 (BOFIA) and other relevant laws. I acknowledge that section 29 of BOFIA empowers the CBN to regulate and supervise banks and other financial institutions in Nigeria. Of course this power is not for the exercise of discretion, or worse still, the exercise of legislative powers where the existing law does not contemplate the issue under question. Under BOFIA, the power of the CBN Governor to issue regulations, guidelines, and policies to banks, specialized banks, and other financial institutions in Nigeria is not disputed. But as stipulated in section 29, that power is given to CBN to (i) ensure responsible conduct, (ii) consumer protection, (iii) promote competition in the financial system, and (iv) engender public trust and confidence in the use of financial services in Nigeria. From a crypto innovation point of view, I will now comment on these four statutory duties.
A blanket denial of access to banking and financial services to the entire VASPs sector cannot ensure responsible conduct.
First, on ensuring responsible conduct, denying access to banking and financial services to the VASPs sector because the sector is considered by CBN to be highly risky to the banking and financial system is not responsible conduct. Why? Such blanket restriction in fact exposes the banking and financial system to the same or even higher level of risks as AML-CFT controls are effectively tossed out the window. There is nothing darker and more opaque—to borrow the words of Governor Emefiele—than that.
So it is no surprise that a little over one year after the CBN directive, regulators (as well as law-enforcement agencies) have been considerably impaired by the directive. This avoidable situation has also contributed to Nigeria facing the threat of sanction by the FATF if by October 2022 the country fails to become compliant with the global standards on AML-CFT regulations.
Consumer protection is not achieved where cryptocurrency transactions are simply flagged and sanctioned without any incident of fraud, scam, or illicit transactions in relation to the flagged cryptocurrency transactions.
On ensuring consumer protection, it is difficult to see which consumer the CBN directive is protecting where the cryptocurrency transactions are carried out by a bank customer who deals in cryptocurrencies legitimately. In the absence of any complaint by any person about a fraud or scam allegedly perpetuated by a bank customer who has carried out a cryptocurrency transaction or in the absence of any red flag by a bank or other financial institution in respect of a cryptocurrency transaction conducted through the banking and financial system, where does consumer protection really come in?
If CBN’s concern is that Nigerian households are adopting highly volatile cryptocurrencies as a means of investment, this is with due respect not the CBN’s headache. That headache is within the regulatory purview of the Securities and Exchange Commission (SEC). In fact, the SEC already indicated its intention to regulate ‘digital assets’ before it suddenly caught cold after the CBN sneezed a few days before Valentine’s Day last year. And if the CBN’s concern is that these cryptocurrency transactions may be used by money launderers who use the banking and financial system to aid their illicit transactions, it is the more reason why CBN should direct banks to adopt AML-CFT controls for efficient and effective transaction monitoring and reporting. Same with terrorism financing.
Competition in the financial system is hurt by CBN’s present prohibitive posture on cryptocurrency in Nigeria’s banking and financial system.
On engendering competition in the financial system, CBN’s present prohibitive posture on cryptocurrency transactions in Nigeria’s banking and financial system is sure to achieve the opposite. How? Cryptocurrency—whether CBN admits it or not—is a FinTech innovation. The same way AI, Big Data, Internet of Things, virtual reality, and other emerging technologies are applied across various sectors, including the financial sector, it is the same way cryptography (or more broadly blockchain) will be applied. This is unstoppable.
Cryptocurrency is a private sector-driven innovation to which CBN’s statutory role, both under the Central Bank of Nigeria Act 2007 (CBN Act) and BOFIA, is not to resist crypto innovations and their adoption in the banking and financial system. No. CBN’s role is to regulate, not resist or annihilate innovation. It is to manage risks, not dip its head in the sand like Ostriches do, hoping the risks will go away. They won’t, but either get bigger or out of control. CBN’s role is to support innovation in a safe and sound financial system, not compete with innovation.
With the data and resources at CBN’s disposal, knowledge-based regulation is well within CBN’s reach. Research comprehensively, engage widely, and discuss transparently with all stakeholders, including VASPs. Defy myths. Resist preconceptions. Repel secrecy. Nigeria belongs to us all. Identified risks can be minimized while opportunities can be maximized. Cryptocurrency cannot all be evil. It will be evil to conclude so. And this must be why even CBN is leveraging cryptography—one of cryptocurrencies’ strengths—to secure its own digital currency, the eNaira. Besides, even the eNaira will not come without its own risks, from money laundering to terrorism financing risks; from cybersecurity to privacy risks. Even the International Money Fund (IMF) recently brought CBN’s attention to these concerns. According to the IMF, using eNaira for cross-border payments and agency banking may boost money laundering and terrorism financing.
So the proper answer to cryptocurrency is regulation, not strangulation. The answer is a risk-based approach, not resistance. Resistance—the natural and understandable reaction by most, if not all, central banks in the world—must be resisted. In an unstoppable decentralized global economy, only with adaptive, collaborative, innovative, inclusive, and risk-based regulation will the CBN be able to engender competition in the financial system. Whether CBN welcomes it or not, traditional finance or centralized finance (CeFi) can never remain the same again—not in the era of decentralized finance (DeFi). DeFi is unstoppable. The regulatory approach therefore should be about being at the center of convergence between CeFi and DeFi, before it is too late.
Prohibiting cryptocurrency in Nigeria’s banking and financial system—particularly without any engagement with industry players or publicly available, well-researched paper on the threats of cryptocurrencies—does not engender public trust and confidence in the financial system.
On engendering public trust and confidence in the use of financial services, CBN will not achieve this by prohibiting cryptocurrency in Nigeria’s banking and financial system. As a matter of fact, by issuing the 5 February 2021 circular, CBN effectively suspended AML-CFT regulation for a fast-growing VASPs sector in the country. This arbitrary and singular move portends considerable danger and risk to the financial system.
Blocking, freezing, or closing bank accounts of persons involved in legitimate transactions is inconsistent with global best practices. A cryptocurrency transaction is and remains a legitimate transaction in Nigeria, except the transaction involves a criminal or illegal use. Therefore, directing banks and other financial institutions for (knowingly or unknowingly) granting access to banking and financial services to persons involved in legitimate cryptocurrency transactions is discriminatory and consequently unconstitutional. Fining banks millions of Naira for (allegedly) contravening the provisions of a circular which has purportedly illegalized or prohibited cryptocurrency transactions in Nigeria’s banking and financial system without provision in any written law in a democratic state will erode public trust and confidence in the financial system.
The same way shutting down AbokiFX will not and cannot bring back the value of the Naira without first addressing fundamentals, it is the same way CBN’s many reactionary sanctions will not engender public trust and confidence in the financial system. The same way freezing the bank accounts of Bamboo, Chaka, Rise Vest, Trove, and other FinTech companies over (alleged) involvement in cryptocurrency transactions (or forex, as the case may be) because the CBN has the power to do so through an ex parte order of the Federal High Court, it is the same way CBN cannot engender public trust and confidence in the financial system by warning, sanctioning, and fining banks and other financial institutions without identifying and bridging the growing disconnect between what the market wants and what CBN headquarters wants. Yes. These sanctions and tensions hardly scare and discourage bad actors, but local & foreign investors and innovators. All the time. And CBN repeatedly proves these investors right. No thanks to CBN’s more-often-than-not prohibitory regulatory approach, CBN is eroding the public trust and confidence it should be engendering in financial services through regulation. Mention ‘CBN’ in a room full of young and innovative people. It is becoming more uncommon to not think you have just heard ‘SSS’. While the SSS is our friend, no one exactly welcomes nor enjoys its friendly visits.
Public trust and confidence, even in the economy, is badly waning. The financial sector under CBN’s often nervy supervision considerably contributes to this. And this waning public trust and confidence is arguably one of the reasons why the Nigerian Naira has been on a free fall. Of course you may disagree. To my understanding, without intrinsic value but the trust and confidence the public has in them, fiat currencies badly need the trust and confidence of the public in order to retain their value. While Covid-19 with the recession that followed it has generally affected the value of fiat currencies globally (including the United States Dollar) a number of foreign investors and the Nigerian public have been losing trust and confidence in the Nigerian Naira over the years. True regulation in the age of innovation is much more about continual, inclusive, and transparent stakeholder collaboration, consultation, and engagement than it is about warnings and sanctions. Public trust and confidence is earned, not enacted.
Why CBN’s 5 February 2021 circular should be withdrawn by CBN or declared null and void by a competent court
Whenever a military government takes over power, it immediately suspends the law-making powers of the legislature. The military government then becomes supreme. By its 5 February 2021 circular, CBN effectively suspended two relevant laws of the National Assembly without flinching an eye: the Money Laundering (Prohibition) Act 2011 and the Terrorism (Prohibition) Act 2013. Specifically, both laws regulate money laundering and terrorism (financing) in the country.
First, by its 5 February 2021 circular, CBN arbitrarily replaced relevant legislation that required AML-CFT compliance with a mere circular that effectively and purportedly declared cryptocurrencies illegal in Nigeria’s banking and financial system. Consequently, without any allegation of violating the written laws of the Federal Republic of Nigeria, any bank or financial institution under the supervision of CBN is mandated to terminate a bank-customer relationship—a contractual relationship that even the Supreme Court of Nigeria does not have the constitutional power to bring to an unconsented end without support by a written law of the land.
In other words, by its 5 February 2021 circular, CBN became the legislature, the executive, and the judiciary at the same time. It created the offense of involving in cryptocurrency transaction with the use of a bank account—an offense written into law by CBN, enforced by the CBN, and adjudicated upon by CBN. And the National Assembly did not even notice that its legislative powers had been usurped by CBN. Till date. The way CBN succeeded in selling this plague to the National Assembly as a plaque was simple: Cryptocurrencies are dark and opaque, therefore they are predominantly used to launder money and finance terrorism, and consequently cryptocurrencies do not have a place in Nigeria’s banking and financial system. Period.
Second, by its 5 February 2021 circular, CBN violated and has misdirected the banks, specialized banks, and other financial institutions it is supposed to supervise in accordance with the provisions of BOFIA to violate the provision of section 66 of the BOFIA Act. Section 66 requires all banks, specialized banks, and other financial institutions to have AML-CFT controls. First, as required by section 66(1) and (2) of the BOFIA Act 2020, they must comply with AML-CFT obligations under subsisting laws, regulations, and directives; implement internal control measures to prevent any transaction that facilitates criminal activities, money laundering, or terrorism. Second, the CBN Governor is charged with the responsibility of making regulations, guidelines, and policies, from time to time, to fight money laundering and combat the financing of terrorism for banks and other financial institutions in line with international best practices and standards. Section 68 includes the power to make cybersecurity regulations. Today—no thanks to CBN—our banks, specialized banks, and other financial institutions not only lack AML-CFT policies and controls for virtual assets, including cryptocurrencies, but also have no cybersecurity infrastructure for cryptocurrency transactions. Our banking and financial system is not being adequately prepared for the future of finance; yet that future is already here.
Third, the Federal High Court (Abuja division), a court of competent jurisdiction over CBN, recently took a position that CBN’s 5 February 2021 circular is a mere circular that creates an infraction or offense “which is not written or passed into law”. I reproduce below, as excerpts, the words of the court per Justice Taiwo O. Taiwo in that ruling in Governor CBN v Rise Vest Technologies Ltd & Others [suit no. FHC/ABJ/CS/822/2021]:
- “There is no reference by [CBN] to any law on which the allegation [of dealing in cryptocurrency being an offence] is based or that it is illegal in Nigeria to deal with cryptocurrency as at now”.
- “I see that the reason for freezing the account of the applicant is based on the alleged infraction of the circular of the Central Bank of Nigeria which I have referred to above.”
- “Being unknown to law, circulars cannot create an offence because it was [sic] not shown to have been issued under an order, Act, Law, or Statute”.
- “The law is trite that any conduct that must be sanctioned must be expressly stated in a written law. It is trite law that the principle of fairness is sacrosanct in our judicial system and it must as a matter of constitutional obligation be observed by a judicial umpire.”
- “The court will not back any alleged infraction of the law which is not written or passed into law. There is no doubt that section 97(3) BOFIA or any other enactment which tend to freeze accounts of citizens of Nigeria or Companies or as regards to their person or property generally is an expropriation legislation which must be construed strictly by the courts”.
Meanwhile, 6 months later, CBN has been reported to have fined a number of banks for contravening the cryptocurency directive. The invincibility of CBN.
Conclusion
Cryptocurrency has been demonized and stigmatized in Nigeria, particularly over the last one year. Law enforcement agencies in the country—particularly the Nigeria Police—believe that cryptocurrency is a tool for criminals. Having a crypto mobile app is an (unwritten) offense. Cryptocurrency as a FinTech innovation is a fairy tale. We are back on the Silk Road.
This should not be so.
Rather than mimicking the Chinese government’s prohibitory posture on cryptocurrencies in a country like Nigeria where cryptocurrency adoption is predominantly for legitimate uses, CBN should take a cue from the Office of the Comptroller of the Currency (OCC), United States, where the Acting Comptroller, Michael J. Hsu, reaffirmed the primacy of safety and soundness in the banking and financial system shortly after taking office in November 2021:
“Because many of these technologies and products present novel risks, banks must be able to demonstrate that they have appropriate risk management systems and controls in place to conduct them safely. This will provide assurance that crypto-asset activities taking place inside of the federal regulatory perimeter are being conducted responsibly.”
Rather than issue circulars prohibiting cryptocurrencies in the banking and financial system, CBN is effectively required under BOFIA to ensure that banks, specialized banks, and other institutions demonstrate that they have adequate AML-CFT controls in place as a condition for facilitating cryptocurrency transactions. As this evolves, the CBN should be equally prepared to regulate how these institutions engage in distributed ledger and stablecoin activities.
As I recommended to CBN last year, rather than drive centralized exchanges underground as CBN has done so far, CBN should engage these exchanges. Exchanges are the gateway to the crypto world for most users. By requiring these exchanges (and other VASPs) to have AML-CFT policies and controls, CBN would have significantly addressed money laundering and terrorism financing risks involving cryptocurrency transactions in Nigeria’s banking and financial system. Besides, pending CBN’s readiness to embrace the idea of cryptocurrency transactions in Nigeria’s banking and financial system, statutory agencies such as the Economic and Financial Crimes Commission (EFCC) and the NFIU should be able to invoke their powers to ensure AML-CFT controls for VASPs.
Should CBN continue to maintain its present posture on cryptocurrencies, not only will it gradually lose the very control it is trying hard to keep but will also fail to prepare the banks, specialized banks, and other financial institutions it supervises for the future of finance. That that future is already here should not be lost on us. If in good faith CBN has made errors of judgment in the course of exercising its supervisory powers, it should not and must not continue to hold on to it. The twig may break. Besides, our future must not become the opportunity cost for the past.
If the Supreme Court of Nigeria is not infallible, how much more CBN?
Senator Ihenyen is Lead Partner at Infusion Lawyers where he heads the Blockchain & Virtual Assets Group. He is the President of Stakeholders in Blockchain Technology Association of Nigeria (SiBAN), and the General Secretary of Blockchain Industry Coordinating Committee of Nigeria (BICCoN) and Fintech Alliance Coordinating Team (FACT). Founding Editor of CAB, Senator writes and advises on blockchain & crypto law, policy, and regulations. senator@infusionlawyers.com
