(Part 1) The Voice of Reason—What did Nigeria’s blockchain & crypto industry tell the Central Bank of Nigeria in February 2021?

“The essence of democracy is rational public conversation”- Prof. Pat Utomi

Introducing the Voice of Reason Series

The Voice of Reason draws deserving attention to key issues in Nigeria’s policy and regulatory environment, with focus on the emerging blockchain industry.

The Voice of Reason, we hope, will stimulate what we at CAB consider the missing rational public conversation on key issues affecting players and stakeholders in Nigeria’s emerging blockchain industry. With rational public conversation amongst all stakeholders, we believe that the current misconceptions,  misgivings, and misunderstandings—on both the innovators and regulators’ part—that often result in distrust, suspicion, and consequently hostility in Nigeria’s crypto space would be avoided or at least significantly minimized.

Every publication under The Voice of Reason Series is divided into four parts, namely the opener, the periscope, the microphone, and the desk.

The Opener

BICCoN is the intercommunity working group for Nigeria’s emerging blockchain industry. BICCoN was established by players and stakeholders in the industry in January 2021. 

Barely had BICCoN existed for a week when the Central Bank of Nigeria (CBN) issued its directive on cryptocurrency to deposit money banks (DMBs), non deposit financial institutions (NDFIs), and other financial institutions (OFIs) in Nigeria. According to the 5 February 2021 directive, all DMBs, NDFIs, and OFIs must immediately stop providing banking and financial services to persons and entities involved in cryptocurrencies. 

Ironically, one of the objectives for which BICCoN had been established was to “[c]ollaborate with relevant regulators on policies and regulatory frameworks in the digital assets space towards ensuring that regulation is applied as a tool for consumer and investment protection without stifling innovation in the development, application, and growth of digital assets in Nigeria”. Though BICCoN had started collaborating with the Securities and Exchange Commission (SEC) on an anti-scam taskforce for the purpose of checking scams in the crypto space, CBN had something else cooking in the kitchen.

Each week, CAB will be publishing six (6) excerpts from the press release issued by BICCoN on 13 February 2021. We call it The Voice of Reason Series: BICCoN Press Release. The press release was BICCoN’s reaction to the CBN directive on cryptocurrency and CBN’s response to the directive following strong reactions by stakeholders, including members of the Nigerian public and global blockchain industry.

Two fresh and major developments in the Nigeria crypto industry in the last few weeks inspired part 1 of the Voice of Reason Series:

  1. The Federal High Court decision in Governor, CBN v. Rise Vest Technologies Ltd & 5 Others [Suit No: FHC/ABJ/CS/822/2021]: The order of the Federal High Court (Abuja Division) in Rise Vest’s case is relevant and instructive here. This is because Rise Vest Technologies Ltd had its bank accounts frozen in August 2021 by virtue of the CBN circular of 5 February 2021 for using its bank accounts for cryptocurrency trading. Following Rise Vest Technologies Ltd’s challenge of the interim freezing order, the Federal High Court set aside its interim freezing order. Consequently, the Federal High Court directed Zenith Bank Plc and Guaranty Trust Bank Plc to immediately unfreeze Rise Vest Technologies Ltd’s bank accounts and grant it “unfettered access” to the banking accounts. In arriving at that decision, the Federal High Court stated that because the CBN directive on cryptocurrency is a mere circular and not a law of the National Assembly illegalizing cryptocurrency trading in Nigeria, it is invalid.
  2. The CBN latest clampdown on cryptocurrency traders who use their bank accounts for cryptocurrency trading: In what appears to be CBN’s fresh clampdown on both individuals and entities who use their bank accounts for cryptocurrency trading, CBN has directed banks to immediately close the accounts of certain individuals and entities involved in cryptocurrency trading. This is by a letter dated 4 November 2021 which CBN sent to all banks in Nigeria “Post No Debit (PND) Instruction”. In that letter, the CBN still relied on its now questionable circular of 5 February 2021. This is regardless of the position of the Federal High Court on the illegality of the CBN directive on cryptocurrency trading. This latest action by the CBN is currently causing serious concerns amongst the affected individuals and entities as well as stakeholders in Nigeria’s blockchain industry.

Interestingly, BICCoN had raised pertinent issues in its 13 February 2021 press release which—in view of the two developments above—may have become more relevant.

The Periscope

CBN does not have the statutory authority to order banks and other financial institutions to deny banking and financial services to persons and entities involved in cryptocurrency trading without legislation by the National Assembly criminalizing or illegalizing trade in cryptocurrency in Nigeria, BICCoN maintains. 

Excerpt:

Firstly, it is with shock that the emerging blockchain & crypto industry in Nigeria received the news of the directive in the CBN circular of 5 February 2021. Before the authenticity of the letter was eventually confirmed, a number of industry stakeholders were hoping that the letter was not by the CBN. Sadly, it turned out to be.

Secondly, contrary to the CBN’s claim in its follow-up 7 February 2021 letter that “the CBN circular of February 5, 2021 did not place any new [emphasis ours] restrictions on cryptocurrencies”, it in fact does. By the latest circular, the CBN has effectively banned DMBs, NBFIs, and OFIs from providing banking and other financial services to persons and/or entities transacting in cryptocurrency or operating cryptocurrency exchanges within their systems. This is not a mere reiteration of the CBN circular of 12 January 2017. In the 12 January 2017 letter which though prohibited DMBs, NBFIs, and OFIs from using, holding, trading and/or transacting in cryptocurrencies, the CBN permitted these DMBs, NBFIs, and OFIs to provide banking services and other financial services to virtual currency exchangers/customers subject to ensuring that these exchangers/customers have effective Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) controls that enable them comply with customer identification, verification, and transaction monitoring requirements. As required in that circular, it is only when banks and other financial institutions are dissatisfied with the controls put in place by the virtual currency exchangers/customers should the customer relationship be discontinued immediately. The CBN also required that any suspicious transactions should be immediately reported to the Nigerian Financial Intelligence Unit (NFIU). 

Thirdly, without any adequate notice or court order of any court of competent jurisdiction, the CBN directed all DMBs, NBFIs, and OFIs to identify persons and/or entities transacting in cryptocurrency or operating cryptocurrency exchanges within their systems and close such persons’ or entities’ accounts immediately. Since 5 February 2021, a number of persons and entities accounts have been closed. In one strange and exceptional case, the funds in the two corporate accounts of a cryptocurrency exchange were wiped out and then eventually closed. Though as the regulator, the CBN has the statutory authority to delimit banking operations, but ordering banks and other financial institutions to freeze accounts suspected to be in use for cryptocurrency may not be supported by law. This is because there is currently no legislation by the National Assembly criminalizing or illegalizing trade in cryptocurrency in Nigeria. Therefore, it is questionable whether the CBN has the statutory power to order the (permanent) freezing of these accounts. Besides, Nigeria’s money laundering and anti-terrorism laws contemplate the freezing of individual or specific accounts, not a blanket closure of the accounts of a set of persons, entities, or entire industry by virtue of their involvement in cryptocurrency trading or services, a lawful business. If the CBN’s circular is not reviewed, it will set a dangerous precedent in the country.

Ordinarily, the CBN circular—while shocking and disappointing—should have at least stipulated a reasonable period within which affected customers’ accounts should be closed. By the way, we are not unaware of the illegality and sharp practices of some service providers, including quite unfortunately so-called fintech platforms—that indefinitely freeze or deny customers access to their funds with flimsy reasons without authority, any notice, or explanation at all. We use this opportunity to appeal to the CBN, other regulatory authorities, law-enforcement agencies, and our courts to always address such cases, whenever reported to it, with dispatch.

Lastly, the CBN’s sudden and drastic directive was neither without any prior engagement with industry players nor notice. The CBN’s approach falls short of expectations and will not inspire confidence in our financial system.

The Microphone

Does CBN have the statutory authority to order banks and other financial institutions to deny banking and financial services to persons and entities involved in cryptocurrency trading without legislation by the National Assembly criminalizing or illegalizing trade in cryptocurrency in Nigeria?

In search of answers, CAB went to town to find out what three lawyers think. We share their thoughts below:

Olumide Babalola, a digital rights lawyer:

My intervention on this is predicated solely on the decision of the Federal High Court in CBN v Rise West Technologies (Suit No. it No: FHC/ABJ/CS/822/2021) where the court, per Taiwo, J. emphatically ruled that, there is no extant law criminalising dealing in cryptocurrency and the CBN cannot do that with the instrumentation of a circular or letter. From the foregoing, it is clear that, on the current state of Nigerian law as accentuated by the Federal High Court in August 2021, dealing in cryptocurrency is neither outlawed nor a crime.

Kue Barinor Paul ESQ, a lawyer in the fintech and blockchain space:

Section 51 of the Central Bank of Nigeria Act (2007) empowers the Board of the apex bank to make and alter rules and regulations for the good order and management of the bank. Section 56 (1) of the Banks and Other Financial Institutions Act 2020 empowers the Governor of the bank to make regulations, published in the Federal Gazette, to give effect to the objects and objectives of the Act. Subsection 2 extends the powers of the Governor, to make rules and regulations for the operation and control of all institutions under the supervision of the bank. The Supreme Court, in a decision published on Thisday Online (5th October 2021) with the title " Legal Status of the Rules, Regulations and Guidelines of CBN"; relying on the aforementioned sections and section 122(2) of the Evidence Act 2011, held that it is clear that the Central Bank has the statutory clout to make rules, regulations and guidelines with regards to monetary policy and control of the banking industry. Therefore, the courts are bound to take judicial notice of such subsidiary legislation.
Notwithstanding the extensive nature of the powers of the CBN in the financial industry, it can only act in accordance with the law. It may be permissible for the CBN to mandate banks and other financial institutions to avoid direct dealings in cryptocurrency. But that's where it ends. The CBN cannot, in the absence of legislation, activate the banks to deny banking and financial services to persons involved, on their own accord, in cryptocurrency. When the CBN Act and BOFIA were passed, cryptocurrency and the underlying technology was never in the contemplation of the law makers. So nobody doubts the power of the CBN to make regulations regarding monetary policy. Acting on its statutory mandate, the CBN often issues regulations and circulars. The issue is, is the power of the CBN limitless? Does the CBN have the power to declare that banks and other financial institutions should not allow customers to deal in real estate and other legitimate assets or properties? The answer is no. Such regulation will be running against citizens' rights to own assets and deal with the assets as they please. Cryptocurrency by definition could validly rank as digital assets. As it stands, the CBN Circular of 5 February 2021 particularly directing the banks to close all accounts of persons transacting in cryptocurrency has no strong legal plank to stand on, in the absence of legislation. If the Federal Government is confident about its convictions, the legal and ideal thing to do is for the National Assembly to pass legislation criminalizing dealings in digital assets.

The Desk

Interesting perspectives!

The issue under our periscope today is critical. Whatever it comes to at the end of the day, Nigeria must ensure that it does not lay a dangerous precedent that may result in negative ripple effects, whether now or in the future. Access to banking and financial services is vital. In some democracies, it is treated almost like a constitutional right. It is that vital. This is why denying any individual, group, or even an industry access to banking and financial service in a blanket fashion or without an express law by the legislature of any country is a threat in itself.  

That said, the part where BICCoN asserted that though “CBN has the statutory authority to delimit banking operations, but ordering banks and other financial institutions to freeze accounts suspected to be in use for cryptocurrency may not be supported by law” rings a loud bell. The same bell that rings in your ears after listening to the ruling of Justice Taiwo J. of the Federal High Court (Abuja Division) in Rise Vest’s case.

But as also pointed out by one of the interviewed lawyers in the microphone section above, the CBN “has the statutory clout to make rules, regulations and guidelines with regards to monetary policy and control of the banking industry”, thus “courts are bound to take judicial notice of such subsidiary legislation”. While this opinion may be valid, a closer study of the Supreme Court decision referred to would reveal that the decision is limited to taking judicial notice within the meaning of section 122(2) of the Evidence Act on presumption concerning due execution of documents not produced to a court of law. In other words, that a court takes judicial notice of a document does not automatically mean that the court agrees with the contents of the document. It only means that the court is aware of the document for evidential purposes.

Particularly considering that “there is currently no legislation by the National Assembly criminalizing or illegalizing trade in cryptocurrency in Nigeria” as maintained by BICCoN in its press release, it is difficult to miss the fact that BICCoN’s position in February 2021 is the same position taken by the Federal High Court (Abuja Division) in October 2021.

Since the legality of CBN’s 5 February 2021 circular has been questioned by the Federal High Court, the question on the lips of many Nigerians is this: Will CBN comply with the ruling of the Federal High Court in accordance with the tenets of the rule of law in Nigeria or will the CBN insist on its now legally questionable circular? Time will tell.

Next on Voice of Reason Series ....

In continuation of the Voice of Reason Series, we will publish next week, “The growth of Nigeria’s crypto industry to No. 1 in Africa and the crypto industry’s contributions to Nigeria’s economy and competitiveness on the global crypto map”. This will be the second excerpt from BICCoN’s press release.

Right of Reply: Any person, entity, or agency that wishes to reply to the issue or issues raised in the publication above may email its response to editorial@cryptoassetbuyer.com for our review and consideration for publication in accordance with our editorial and ethical policies.

NOTE: No part of the Voice of Reason Series is legal advice. CAB is only for educational and informational purposes. For legal advice, contact your lawyer or get one.

Update: Modified the series to become weekly instead of daily. This is an editorial decision to allow reasonable time for community engagement on each piece.

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