Nigeria to introduce rules for crypto and the virtual assets sector

Introduction

The Securities and Exchange Commission (SEC) and the Nigerian Financial Intelligence Unit (NFIU) are proposing new rules for the virtual assets service providers (VASPs), reported BusinessDay. The report revealed that in February 2022, an NFIU-led Virtual Assets Workstream invited stakeholders in Nigeria’s virtual assets sector over a National Risk Assessment (NRA) to be conducted by Nigeria. 

Although at the time of this report the CBN’s directive restricting cryptocurrency transactions in Nigeria’s banking and financial system is still subsisting, the SEC may have decided to proceed with its plan to regulate virtual assets in the country. The SEC’s plan to regulate virtual assets was officially made public in October 2020, but its plan was halted after the CBN directive was issued. The SEC had released a statement where it generally classified “virtual crypto assets” as securities, “unless proven otherwise” by the issuer or sponsor. It then categorized these virtual crypto assets into crypto assets, utility tokens, security tokens, and derivatives and collective investment funds. 

The proposed rules may have been necessitated by threats of Nigeria being blacklisted by the Financial Action Task Force (FATF), if the country fails to improve its anti-money laundering and combating the financing of terrorism (AML-CFT) regulations before October 2022. The three rules being proposed by the SEC are:

  1. the SEC Capital Market Operators and Virtual Asset Service Providers Anti-Money Laundering and Combating the Financing of Terrorism) Regulations 2022; 
  2. proposed Rules for Regulation of Virtual Asset Service Providers (VASPs); and 
  3. Rules on Issuance, Offering Platform and Custody of Digital Assets.

These proposed rules were circulated among some stakeholders in the industry in March 2022. According to the BusinessDay report, not all stakeholders have been opportuned to have a comprehensive review of the drafts and respond accordingly since the SEC is yet to  make the exposure drafts publicly available.

According to the BusinessDay report, the SEC’s regulation will mainly focus on crypto or digital assets as investments and securities under the Investments and Securities Act (ISA), while NFIU is expected to focus on AML-CFT compliance for VASPs. Noticeably, with the SEC’s proposed Capital Market Operators and Virtual Asset Service Providers Anti-Money Laundering and Combating the Financing of Terrorism) Regulations 2022, it is obvious that the SEC plans to adopt its own AML-CFT compliance framework for VASPs.

One of the representatives from the private sector, Senator Ihenyen, President of Stakeholders in Blockchain Technology Association of Nigeria (SiBAN) and General Secretary of Blockchain Industry Coordinating Committee of Nigeria (BICCoN) and Fintech Alliance Coordinating Team (FACT) has commended the SEC for picking things up from where it stopped. “I commend the SEC for finally deciding to proceed with its plans to regulate cryptocurrencies and other virtual assets in the country regardless of the subsisting CBN directive on cryptocurrency. As far as the adoption of cryptocurrencies and other virtual assets for the purpose of investments and securities is concerned, the SEC has a statutory duty to regulate activities in the virtual assets sector in order to ensure consumer protection; investor safety; and a fair, efficient, and transparent virtual assets market. The CBN also has a duty to play where these virtual assets are used for purposes CBN regulates, including payments, remittances, savings & loans.”

Ihenyen also said that he participated as a representative of SiBAN in a fintech industry review meeting organized by the Fintech Association of Nigeria (FintechNGR) in March 2022, where the proposed rules by SEC were reviewed by stakeholders present.

“There, stakeholders identified the provisions that SEC needs to review or reconsider in order to ensure that the proposed regulations do not stifle innovation. We also concluded that it is vital that the SEC accommodates local innovators in the VASPs sector as much as it can as we considered some of the licensing fees prohibitive and discouraging,” he said.

Presently in Nigeria, although the country has AML-CFT regulations, there is no specific AML-CFT policy for VASPs, which leaves the country prone to money laundering and terrorism financing. This, among other factors, is believed to be one of the reasons the CBN issued its cryptocurrency directive in February 2021 to keep Nigeria’s financial system safe from crypto-related illicit transactions. According to the CBN Governor, Godwin Emefiele,  “[t]he 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.” 

But Ihenyen thinks differently. “While cryptocurrencies or virtual assets are susceptible to fraud, money laundering, and terrorism financing, illicit transactions are not peculiar to cryptocurrencies or virtual assets. Cryptocurrencies or virtual assets are technological innovations with financial-services applications that, like the fiat currency innovation we know today, require risk-based regulation, not demonization and stigmatization. Reports show how fiat currencies are being used to perpetuate illicit transactions, but regulators understand that it would be ridiculous to ban or restrict fiat currencies in our financial system. In fact, contrary to myths about cryptocurrencies, less than 1% of global cryptocurrency transactions was linked to illicit transactions in 2020 and 2021, according to Chainalysis Crypto Crime Report.”

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