The Regulatory Frameworks Of Blockchain In Nigeria
By Rifkatu Ali
INTRODUCTION
One of the technologies that is rapidly advancing in the twenty-first century is the blockchain technology. For the past ten years, blockchain has acquired widespread adoption in a variety of sectors and nations. What is now the legal perspective on the blockchain industry given the development of cryptocurrencies, smart contracts, decentralized autonomous organizations (DAO), and currently Non Fungible Tokens (NFTs) and Metaverse, all built on the blockchain foundation and with adoptions, products, and services emerging from these novel areas? Do the blockchain industry’s legal and regulatory frameworks exist, especially in light of the disruptive technologies that are spawning from the parent, block chain?
Blockchain, which has grown in popularity among Nigerians, has been largely unregulated by the country’s governing laws. This can be attributed to the government’s official lack of acceptance of and effort to adopt blockchain technology and its ramifications, the most notable of which is cryptocurrency.
The CBN issued a circular on February 5, 2021, requiring banks to shut operating accounts used for cryptocurrency transactions. The CBN warned regulated institutions in the directive that accepting payments in cryptocurrencies and engaging in cryptocurrency trading are illegal. This instruction covered cryptocurrency trades. The CBN warned regulated institutions in the directive that accepting payments in cryptocurrencies and engaging in cryptocurrency trading are illegal. This directive was prompted by the Central Bank of Nigeria’s (CBN) claim that because of the anonymity and decentralized nature of virtual transactions, digital currencies like bitcoin, lite coin, dodge, and others are used to fund terrorism and money laundering.
Despite the existence of a number of laws and regulatory organizations established to oversee financial operations in Nigeria, such as the Investment and Securities Act, 2007, which created the Securities and Exchange Commission, the Banking and Other Financial Institutions Act, (BOFIA) 2007, the Finance Act 202, the NDIC Act, and regulatory organizations like the Central Bank of Nigeria, Nigerian Deposit and Insurance corporation, and the FIRS, etc, Nigeria has no specific legislations or regulatory framework on block chain.
With the rapidly expanding use of 21st-century emerging technologies like artificial intelligence, quantum computing, robotics, and the blockchain, it is important that adequate regulation be implemented to ensure that these technologies and the adoption of them adhere to international best practices and, from the perspective of consumer protection, that they do not harm the typical user of these technologies and the products that result from them. Therefore, rules, regulations, policies, and standards are the ideal tools to make sure that these technologies comply with the legal requirements. The central idea of this paper is to critically examine the regulatory frameworks of block chain in Nigeria.
WHAT IS BLOCKCHAIN ?
Blockchain is a decentralized public ledger that uses distributed ledger technology (DLT), often known as the blockchain system. Technically speaking, a blockchain is a network of blocks connected to one another in a precise order, each block containing specific data such as financial transactions, contract terms, medical information, and more. It’s also a system set up to record decentralized transactions, in contrast to banks and issuance houses, which are centralized authorities, in that these transactions are not controlled by one body or a group of people.
Blockchain, according to Euromoney Learning, is a method of storing data that makes it hard or impossible to alter, hack, or cheat the system. In essence, it is a copied and dispersed digital ledger of transactions that is shared among the whole network of computer systems on the blockchain. Every participant’s ledger receives a copy of every new transaction that occurs on the blockchain, adding that transaction to its history. There are several transactions in each block in the chain. Investopedia describes blockchain as a distributed database or ledger that is shared by a computer network’s nodes.
Beyond cryptocurrencies, the blockchain is a distributed digital ledger (a digital record of transactions or data stored in various locations on a computer network) that is immutable (unchangeable, meaning a transaction or file recorded cannot be changed).
A blockchain functions as a digital database for the storage of data. The most well-known use of blockchain technology is for preserving a secure and decentralized record of transactions in cryptocurrency systems like Bitcoin. A blockchain’s novelty is that by guaranteeing the accuracy and security of a data record, it promotes confidence without the need for a trustworthy third party. Information is gathered in blocks, which are collections of sets of data. Blocks have specific storage capacities, and when filled, they are sealed and connected to the block that came before them to create the data chain known as the block chain. Every additional piece of information that comes after that newly added block is combined into a brand-new block, which is then added to the chain once it is full.
Blockchain intends to enable unaltered sharing and recording of digital information. Immutable ledgers, or records of transactions that cannot be altered, deleted, or destroyed, are built on a blockchain. Because of this, blockchains are also known as distributed ledger technologies (DLT).
THE STATE OF NIGERAN LEGAL FRAMEWORK FOR BLOCKCHAIN IN NIGERIA
There are no specific blockchain or distributed ledger technology laws or regulations in Nigeria (DLT). However, a variety of blockchain/DLT applications across numerous industries are generally subject to certain current laws and regulations. The Investment and Securities Act of 2007, which created the SEC, is the main piece of legislation governing the financial markets in Nigeria. Currently, the SEC acknowledges virtual assets and instruments and provides for their handling in accordance with its regulations. For instance, if issued as an investment or traded on a recognized investment exchange, crypto assets are treated as commodities and are subject to Part E of the SEC rules as well as other applicable sections and subsequent rules.
The Securities and Exchange Commission (SEC), which has the authority to enforce the act, was established by the Investments and Securities Act 2007 to oversee investments and securities in Nigeria. The act controls securities, initial public offerings, and collective investment programs among other things. Initial coin offerings (ICOs), securities token offerings, token generation events, and comparable public offerings of securities may therefore be regulated by the SEC.
In addition, the following CBN regulatory frameworks and know-your-customer (KYC) and anti-money laundering/counter-terrorist financing (AML/CFT) policies are applicable: Consumer Protection for Banks and Other Financial Institutions 2016; Consumer Protection Regulations 2019; Three-Tier KYC Requirements 2013; Anti-Money Laundering/Combating the Financing of Terrorism (Administrative Sanctions) Regulations 2018; AML/CFT Policy and Procedure Manual 2018; Consumer Protection for Banks and Other Financial Institutions 2016; International Mobile Money Remittance Services Guidelines; and International Money Transfer Services Guidelines.
Other regulations that may apply include: the Nigeria Data Protection Regulation 2019; the National Health Act; the Cybercrimes (Prohibition, Prevention, etc) Act 2015;t, the National Identity Management Act 2017; the Companies Income Tax Act; the Capital Gains Tax Act; the Personal Income Tax Act; the Value Added Tax Act; the Companies and Allied Matters Act; the Finance Act 2019; the Statute of Frauds 1677; the Evidence Act 2011; the Money Laundering (Prohibition) Act, 2011 (as amended); the Terrorism Prevention Act, 2012 (as amended); the Terrorism Prevention (Freezing of International Terrorist Funds and other Related Matters) Regulations, 2013; the Economic and Financial Crime Commission (Establishment) Act 2004; and the Banks and Other Financial Institutions Act 1991.
There is some regulatory uncertainty in Nigeria, as there is in a large number of other nations. The CBN twice—in January 2017 and February 2018—warned both the general public and financial institutions that virtual currencies are not accepted as legal money in Nigeria. The SEC similarly forewarned Nigerians about the sizeable risks associated with investing in virtual assets, especially those that are unregulated or unlicensed. Lack of regulation may have fueled a number of scams in the industry, particularly through inflated initial coin offerings (ICOs).
According to Serah Sanni in her paper titled “ Cryptocurrency in Nigeria: Regulatory Frameworks and Related Issues”, the Nigerian government has taken a number of steps, one of which is issuing stern warnings about the risks associated with trading in cryptocurrencies. The Securities and Exchange Commission (SEC) and the Central Bank (CBN) both issued these cautions (SEC). The primary goal of the warnings is to inform the populace of the distinction between traditional currencies—which are issued and guaranteed by the government—and virtual currencies. The risk brought on by crypto currencies’ high volatility and the fact that many of the businesses that facilitate such transactions lack regulation was also added by the government. Additionally, it was emphasized that individuals who invest in cryptocurrencies do so at their own risk and peril and that they have no legal recourse if they suffer a loss.
The different warnings also highlight the prospects that cryptocurrencies present for illicit acts like money laundering and terrorism, trafficking in illegal drugs and people, and support for extremist movements. The CBN issued a statement in January 2017 outlawing all Bitcoin transactions. To implement this, the banks’ regulator distributed a statement to all banks in the nation cautioning them against facilitating Bitcoin trading in the nation. Trading in an unregulated currency, according to the CBN, exposes traders to the risk of losing everything they have. This risk is mostly related to how volatile cryptocurrencies are. However, as most cryptocurrency exchanges carried on as usual, many people did not heed this warning.
The SEC of Nigeria also issued a warning to Bitcoin traders in 2017 urging them to proceed with great caution. The CBN reaffirmed its position on cryptocurrencies in March 2018 and cautioned dealers that digital assets are nothing more than a gamble. The CBN took decisive action by forming a committee to review and outline a road map for blockchain and crypto currency regulation as well as the potential safety when used as an asset of value and in accordance with global practice. Despite the repeated warnings, the trade in cryptocurrency has not completely disappeared.
In 2018, the then DG, National Information Technology Development Agency (NITDA), in a paper delivered at The British Computer Society IT NOW conference asserted that the Nigerian government, working through NITDA, was attempting to set up frameworks, rules, standards, and laws for the implementation of blockchain technologies in the nation. However, this initiative is still in the early stages of development, and it is important to note that NITDA alone might not be able to provide the necessary regulatory document for blockchain technology in Nigeria given the multidisciplinary nature of its uses. Cooperative regulation therefore becomes more prominent.
In October 2017, a committee was formed by the Nigerian Central Bank (CBN) and the Nigeria Deposit Insurance Commission (NDIC) to look at the viability of regulating and accepting virtual currencies. This committee, however, only offered a warning to Nigerians to exercise caution when investing in cryptocurrencies, reiterating that digital money was not yet recognized as legal tender in Nigeria. The reason for this, according to CBN, is that virtual currencies are still traded on unregulated exchange platforms around the world and are largely untraceable, making them vulnerable to money laundering and terrorism financing.
Due to the cyber security threat or assault that could harm blockchain networks, the Cyber Crimes (prohibition and prevention) Act 2015 may help avoid such attacks. The Act establishes a thorough legal, regulatory, and institutional framework in Nigeria for cybercrime prevention, prohibition, detection, prosecution, and punishment. All financial institutions, including Fintech businesses, are required by the Nigerian Cyber Crime (Prohibition, Prevention) Act 2015 to confirm the identity of customers involved in electronic transactions, integrate and implement know-your-customer (KYC) processes, and safeguard all subscriber data for a period of two (2) years. Additionally, the Central Bank of Nigeria (CBN) Consumer Protection Framework mandates that all financial institutions subject to CBN regulation maintain the confidentiality of customer information and have security measures in place to prevent its unlawful disclosure. Data protection and untraceable data are not the same thing, though. The purpose of data protection laws is to safeguard consumers’ individually identifiable information. This indicates that the information can be linked to specific customers, and the concerned financial institutions are compelled to release these records upon request from a law enforcement agency.
Additionally, companies utilizing blockchain technology must adhere to general compliance standards like KYC (know your customer), anti-money laundering compliance, CFT, and other corporate compliance standards. For instance, blockchain businesses must abide by Nigerian laws and regulations governing intellectual property as well as data privacy.
Nigeria hasn’t yet established a legal framework or legislation for virtual currencies or virtual exchanges, like the majority of African nations, but there is a lot of interest in doing so very soon. Nigerian lawmakers have urged the regulatory bodies to expedite efforts to introduce a legal framework for cryptocurrencies in the country in response to the CBN and SEC’s actions.
THE NEED FOR A COMPREHENSIVE LEGAL FRAMEWORK FOR BLOCKCHAIN IN NIGERIA
Virtually every financial transaction in the world is accompanied by legal concerns, and cryptocurrency is no exception. Without a doubt, the special characteristics of the money have made it more challenging to regulate it internationally. Every new technology is destined to face legal difficulties, from adoption by the general public to misuse and abuse. According to reports, Europe saw the laundering of £4 billion in just 2018 alone. The crypto-market suffers when this particular type of money laundering and other cybercrimes increase because investors become less confident about investing in the market. Cryptocurrency is not covered by EU financial regulations, according to the European Banking Authority (EBA), making regulation nearly impossible.
Given the development of technology in the use of crypto currencies, a call for the government to introduce distinct anti-money laundering regulations and data recoverability regulations is therefore imminent. In the cryptosphere, being able to unmask transactions is essential for lowering the legal risks involved, ensuring accountability, and removing fraud. As was previously noted, some nations have taken notable steps to include crypto currency markets in their laws on money laundering, counterterrorism, and organized crime. As a result, banks and other financial institutions are now required to carry out all necessary due diligence requirements imposed under such laws.
Nigeria’s financial regulatory institutions have taken the effort to establish a strong financial system and regulations that will accommodate the current tech in light of these changing global trends in the financial industry. This article states that despite the impending abuse linked with cryptocurrency trading, it should not be completely condemned; instead, strict national and international restrictions should be put in place to prevent its abuse.
The lack of a legislation addressing cryptocurrencies or crypto assets explicitly worries Uche Uwalaka, head of the Association of Capital Market Academics of Nigeria. According to him, Nigeria’s treatment of virtual currencies and assets is going through an identity crisis. This partially explains why the CBN and the Securities and Exchange Commission seem to be claiming duplicative authority over market players that deal in virtual currencies or other digital assets. He further posits that the current financial laws are not sufficient to oversee and direct cryptocurrency activities in the financial system. They are also insufficient, according to Uwalaka, to safeguard the financial system against major dangers like fraud, money laundering, and the irreversibility of mistakes in transactions.
The creation of a flexible regulatory environment to allow experimentation, the use of targeted regulatory enforcement, and support for public sector use are all things the government should do more of, according to the speaker, in order to promote blockchain innovation and adoption. He stated that creating a blockchain and cryptocurrency policy for Nigeria required cross-jurisdictional coordination as well as industry-government interaction..
Vice-Chancellor of the University of Abuja Abdul-Rasheed Na’ Allah agreed that Nigerians needed greater education on the concerns surrounding cryptocurrencies. James Adefiranye, deputy director of the Center for Entrepreneurship Studies at the University of Abuja, spoke on Na’ Allah’s behalf and emphasized the significance of safeguarding bitcoin end users.
It is recommended that the Nigerian government re-evaluate its decision to adopt and recognize blockchain technology and cryptocurrencies. This analysis should be conducted with expertise, taking into account the possibilities and benefits that blockchain technology offers, as this will help form the necessary regulations for the blockchain industry and accelerate the nation’s economic growth.
CONCLUSON
Despite the technological advancement and increase in the use of block chain technology, yet Nigeria lacks a specific legal framework for block chain technology. Even though there as general legislation which is also applicable to blockchain as discussed above, however, the need for a specific legal framework is inevitable. It is time now that the government should look at the good aspect of block chain and promote it use by putting in place a favourable legislation for blockchain operation.
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