Bitcoin in Nigeria

Regulatory challenges and the ingrained fraud factor

Cryptocurrency trading in Nigeria presents challenges to regulators, and conventional banking and fraud risks to potential investors.

While the Central Bank of Nigeria (CBN) is the primary financial body that regulates banks and other financial institutions in the country, the Securities and Exchange Commission (SEC) regulates Nigeria’s capital markets, including trading in securities (such as shares of publicly quoted companies incorporated in Nigeria) on Nigeria’s Stock Exchange.

In Nigeria, bitcoin and other cryptocurrencies are neither classified as currencies nor as securities, and there is no law or any regulation yet on bitcoin and other cryptocurrencies.

CBN does not recognise bitcoin and other cryptocurrencies as a legal tender.

Instead, it views cryptocurrencies with suspicion. Consequently, in 2017 it issued a circular warning that criminals could take advantage of the anonymity trading in cryptocurrency offers to launder the proceeds of crime and also finance terrorism.

Concerned that the risk associated with cryptocurrencies could undermine the integrity of the Nigerian financial system, CBN prohibited banks and other financial institutions from dealing in cryptocurrencies in any way.

It also required banks and other financial institutions to ensure that existing customers that exchange cryptocurrencies have effective anti-money laundering (AML)/ counter terrorism financing (CFT) controls that enable them to comply with customer due diligence requirements.

Where they are not satisfied with the controls the cryptocurrency exchangers put in place, banks must sever the bank-customer relationship with those cryptocurrency exchangers.

Finally, banks and other financial institutions are required to immediately report any suspicious transactions by these customers to the Nigerian Financial Intelligence Unit.

Uncontrollable?

Although banning Nigerian banks from dealing in cryptocurrencies in any way would slow down the proliferation of cryptocurrency trading in Nigeria, thereby reducing the risk of money laundering, financing of terrorism and fraud, it does not bring such trading under government control.

Thus, possibly the most effective way (at least for now) of bringing cryptocurrencies under government control is to classify them as securities, which will bring them within the regulatory framework of the Nigerian SEC.

Two British Overseas Territories – Gibraltar and Bermuda – are moving in this direction.

Already, cryptocurrency exchangers hold themselves out as a vehicle for investment.

The exchangers use various channels of communication, including social media, to market bitcoin and other cryptocurrencies in Nigeria. For example, in a bid to penetrate the Nigerian market, a South African company, GTExchanger Group, organised the 8th Africa Financial Expo in the city of Port Harcourt, Nigeria on the 30 and 31 of March 2018.

The aim was to provide guidance on penetrating African markets and opportunities for brokers from around the world to promote their platforms and get direct access to Nigeria’s market.

Locally, different companies and individuals operate trading platforms for buying and selling cryptocurrencies.

They use radio and other modes of advertisement, email and social media to solicit the public to invest in cryptocurrencies.

However, it appears that SEC views investment in cryptocurrencies as a ponzi scheme, probably because companies that deal in cryptocurrencies ask the unsuspecting public to exchange cash for bitcoins and other cryptocurrencies by depositing money into the exchangers’ bank accounts.

To attract customers, these companies issue certificates to the investors similar to share certificates and promise a quick periodic return on investment.

Asking for cash in exchange for bitcoin and promising quick returns presents a very high risk of fraud as ‘wonder banks’ and other investment scams use similar tricks to dupe Nigerians of their hard-earned savings.

’Tread carefully’

In response to such advertisements and in a bid to protect the public, SEC advised the public to exercise extreme caution when considering cryptocurrencies as a vehicle for investment because neither SEC nor any other regulator in Nigeria recognises cryptocurrencies as a legal tender or any form of security.

SEC added that no individual or company promoting cryptocurrencies had been authorised to receive deposits from the public or to provide any investment or other financial services in or from Nigeria.

As fraud risk is very high in Nigeria – mostly as a result of a scam popularly known as 419 – this advice is important.

Besides, cryptocurrency exchanges have no deposit with any government regulator out of which their clients could be indemnified where the exchanges default.

Thus, investors and dealers in cryptocurrencies are operating at their own risk, as CBN has warned that investors may not have any redress in the event of losing their money to fraudsters since trading in cryptocurrencies is not regulated in Nigeria.

As a follow-up to their 2017 circular, the central bank issued another circular on the 28th February 2018 explicitly advising the public that it does not license or regulate any forms of cryptocurrencies, including bitcoin, and cryptocurrency exchanges such as NairaEx.

Crypto dimensions

An earlier report indicated that CNB is contemplating taking steps to set up an industry committee to advise on policies and operational framework to guide blockchain technology regulation in Nigeria.

However, the apparent difficulty in regulating dealings in cryptocurrencies appears to be hindering the efforts of the central bank in developing such policies and regulatory framework.

A third dimension is the suspicion of some bankers as they view blockchain technology as a challenge to conventional banking.

They suspect that the use of cryptocurrencies as a means of storing and moving money could see people lose their jobs, the same way computers have taken over some tasks/jobs in the banking industry worldwide.

However, it is highly unlikely that cryptocurrencies will phase out conventional banking in Nigeria: because of a fear of fraud, the majority of people would not be favourably disposed to the use of cryptocurrencies as a means of storing and moving money.

Even kleptocrats and other criminals may prefer conventional banking to launder their proceeds of crime, despite the risk of detection, rather than risking losing their criminal proceeds to fraudsters.

Dr. Sirajo Yakubu is a researcher and consultant in the areas of Economic Crime, and International and Commercial Law (World Trade Specialist).