Introduction
The digital assets regulatory landscape in Nigeria has been marked by significant shifts and developments over the past years. The Central Bank of Nigeria (CBN) imposed a ban on digital assets transactions in 2021[1] prohibiting financial institutions from providing services to digital assets exchanges or facilitating digital asset or cryptocurrency transactions.
However, in December 2023, the CBN issued the Guidelines on Operations of Bank Accounts for Virtual Asset Service Providers (the “CBN Guidelines”) which signaled a shift in its stance towards virtual assets transactions. Particularly, the CBN Guidelines lifted the ban on digital assets transactions, marking a pivotal moment in the regulatory environment.
Further to this, the Securities and Exchange Commission (SEC) of Nigeria (which has been actively involved in shaping the regulatory framework for digital assets) on March 15, 2024, released proposed amendments to its Rules on Digital Assets Issuance, Offering Platforms, Exchange and Custody (the “Proposed SEC Amendments”), addressing some gaps in the existing regulations vis-à-vis recent market developments especially such as the devaluation of naira, etc.
This Newsletter analyses the CBN Guidelines and the Proposed SEC Amendments and the implications on the digital assets industry in Nigeria.
Overview of the CBN Guidelines
Scope and Definition
The CBN Guidelines establish minimum standards and requirements for banking business relationships and account opening for Virtual Asset Service Providers (VASPs), facilitating effective monitoring of banks and Other Financial Institutions (OFIs) engaged in servicing Securities and Exchange Commission (SEC) licensed VASPs/Digital Assets (DA) entities within the country.
It applies to regulators such as the SEC, banks, and all financial institutions to ensure compliance with anti-money laundering laws and customer due diligence regulations.
The CBN Guidelines define a ‘digital asset’ as a digital token that represents assets such as a debt or equity claim on an issuer.[2] This definition is also consistent with the SEC’s definition of digital assets.
Restriction on Activities, Operational & Transactional Limits
The CBN Guidelines introduce a more permissive approach, allowing banks and other financial institutions to open designated bank accounts for VASPs. This enables VASPs to (i) settle transactions with clients in naira; and (ii) facilitate trade and foreign exchange (FX) flows per approved regulations.
To ensure adequate oversight, the CBN imposes certain restrictions on accounts opened according to the CBN guidelines; these include limitations on the use of accounts solely for virtual/digital asset transactions, with no cash withdrawals permitted. Third-party cheques are also prohibited, with withdrawals only allowed through Manager’s Cheques or transfers to designated accounts for virtual/digital asset transactions. Specifically, banks are still prohibited from holding, trading, or transacting in virtual assets themselves.
Financial institutions are mandated to establish transaction limits for designated accounts based on risk assessment criteria.[3] These limits must be prudent and commensurate with the volume of cash moved and associated risks. Additionally, designated accounts are prohibited from operating on concessions, ensuring consistent adherence to transaction charges outlined in the CBN Guide to Charges for Banks and Other Financial Institutions.[4]
Additionally, VASPs are required to comply with various regulations, including obtaining an operating license from the SEC[5] and adhering to Anti-Money Laundering/Know Your Customer (AML/KYC) rules. The CBN Guidelines primarily aim to enhance transparency, accountability, and compliance within the virtual asset ecosystem.[6]
Risk Management
By the provisions of the CBN Guidelines, Financial institutions (FIs) are required to implement appropriate risk management systems to determine whether designated accounts opened under the guidelines are being used or are likely to be used for money laundering, terrorist financing, or proliferation financing.[7]
Banks must also establish measures to ascertain the beneficial ownership, source of wealth, and source of funds for accounts created for virtual assets.
Customer Due Diligence and Continuous Verification
FIs are also saddled with the responsibility to conduct due diligence during the onboarding of VASPs, while processing transactions, in the event of substantial changes in customer information, material changes in account operations, or when insufficient information about an existing customer is identified.[8]
Due diligence must be applied to designated accounts based on materiality and risk, with ongoing due diligence conducted at appropriate intervals.[9] Further to this, transaction records must be maintained for at least five years after completion of the transaction, including customer and beneficial owner information, transaction details, account identifiers, and results of transaction analysis.[10]
Additionally, the CBN Guidelines require that all customer details and supporting documents evidence used to verify the customer’s identity must be retained for a minimum period of five years after the account is closed or 5 years after the end of the business relationship.
The CBN Guidelines highlight that records of virtual assets accounts and transactions must be available to the CBN upon request within 24 hours.[11]Importantly, any non-operational account for a consecutive period of 3 months must be declared dormant.[12]
Sanctions
Non-compliance with the CBN Guidelines will result in sanctions such as the prohibition from opening further designated accounts, monetary penalties, or suspension of operating licenses, in addition to remedial measures outlined in other CBN Guidelines.
Such monetary penalties (pegged at a minimum of N2,000,000[13]) may be imposed on the FI, members of its board, senior management, and any staff involved in the infraction.
Analysis of the Proposed SEC Amendments
Scope of the Proposed SEC Amendments and Definition of Digital Asset and Virtual (Crypto) Asset
The SEC has now amended the scope of the Proposed SEC Amendments and it is proposing that the regulations will inter alia govern; (i) VASPs; (ii) Digital Assets Offering Platform (DAOP), (iii) Digital Assets Exchange (DAX); and (iv) Digital Asset Custodian (DAC).
Also, per the Proposed SEC Amendments, the SEC has further clarified the distinction between ‘digital asset’ and ‘virtual asset’ through the addition of ‘crypto’ to the existing description of ‘virtual asset’. The foregoing implies that from the SEC’s perspective, a digital asset is a digital token that represents assets such as debt or equity claims on the issuer[14], while a virtual crypto asset (e.g. i.e. cryptocurrency) is a digital representation of value that can be transferred, digitally, traded and can be used for payment or investment purposes (which shall not include digital representations of fiat currencies, securities, and other financial assets).[15]
General Requirements for Virtual Assets Service Providers
According to the Proposed SEC Amendments, the SEC has created a licensing regime that prescribes that “no person or entity shall provide any virtual assets service unless registered with the Commission.”[16] The implication is that no VASP (whether local or foreign) is permitted to offer virtual asset service in Nigeria unless registered with the SEC. Thus, unlike other jurisdictions where the registration or licensing requirements are unclear, the stance of Nigeria’s SEC is that VASPs are regulated entities that must register or obtain the relevant license from the SEC.
More importantly, Section 3.2 of the Proposed SEC Amendments imposes a strict incorporation requirement on all companies seeking to operate as a VASP in Nigeria with an additional local residency requirement (in Nigeria) imposed on the Chief Executive Officer/Managing Director of such entity.
Recognizing that existing capital market operators (CMOs) may also provide services in the virtual asset industry, the SEC has proposed that existing CMOs registered to provide trading, offering platforms, and custodial services are now required to establish a subsidiary/separate entity to take up the function.[17]
Exemptions from Registration of Digital Assets and Changes to Registration Fees applicable to DAOPs and DAX
Pursuant to Section 13.1 of the Proposed SEC Amendments, securities structured to be exclusively offered through an SEC-registered crowdfunding portal or intermediary are exempt from registering as digital assets.
Furthermore, there are significant changes to the registration fees payable by market operators in the virtual assets industry; most of the fees have been increased, for instance, the application fee for registering as a Digital Asset Operating Platform (DAOP) and Digital Asset Exchange (DAX) has increased from N100,000 to N300,000, while the processing fee has increased to N1,000,000 from N300,000. Relatedly, the registration fee has significantly increased from N30,000,000 to N50,000,000,00, while the minimum paid-up capital has been significantly increased from N500,000,000 to N1,000,000,000.[18]
Worthy of mention is that the Proposed SEC Amendments state that investors can only invest or trade in virtual or digital assets hosted on its platform using naira. The rate for conversion of foreign currency-denominated assets shall be the official exchange rate as published by the CBN. This is an effort of the CBN to ensure that cryptocurrencies do not manipulate the foreign exchange market.[19]
Registration of Digital Assets Custodians (DAC)
Pursuant to Section 55.1 of the Proposed SEC Amendments, in addition to the general requirements applicable to VASPs, an applicant seeking to register as a DAC is required to demonstrate to the SEC its ability to effectively safeguard the custody of digital assets and meet other eligibility criteria as may be stipulated by the SEC from time to time.
Also, similar to the increased fees applicable to DAOPs and DAXs, the SEC has also increased the fees payable by entities seeking to register as DACs.[20]
Conclusion
The regulations introduced by the CBN and SEC represent a positive step towards a holistic regulation of the digital or virtual asset industry in Nigeria. This indicates a synergy and growing effort between the regulators which is important for addressing regulatory gaps, mitigating risks, and ensuring consistent regulations for digital or virtual asset transactions.
[1] Central Bank of Nigeria, Cryptocurrency Trading: CBN Orders Banks To Close Operating Accounts, Accessed 18 March 2024, https://www.cbn.gov.ng/out/2021/ccd/volume%203%20number%202%20cbn%20update%20february%202021.pdf
[2] Section 4.0 of the CBN Guidelines
[3] Section 7.6 of the CBN Guidelines
[4] Central Bank of Nigeria, Re: Guide to Charges for Banks, Other Financial and Non-Bank Financial Institutions https://www.cbn.gov.ng/out/2019/ccd/guide%20to%20charges%20by%20banks%20other%20financial%20and%20non-financial%20institutions%20eff%20jan%201%202020.pdf
[5] Section 7.3 (a) of the CBN Guidelines
[6] Section 7.4 of the CBN Guidelines
[7] Section 8.0 of the CBN Guidelines
[8] Section 8.1 (i) of the CBN Guidelines
[9] Section 8.1 (ii) of the CBN Guidelines
[10] Section 8.3 (i) (ii) of the CBN Guidelines
[11] Section 8.3 (iii) of the CBN Guidelines
[12] Section 7.8 of the CBN Guidelines
[13] Section 10.0 of the CBN Guidelines
[14] Section 2.0 of the Proposed SEC Amendments
[15] Ib id.
[16] Section 3.1 of the Proposed SEC Amendments
[17] Section 3.4 of the Proposed SEC Amendments
[18] Sections 15.4 and 33.3 of the Proposed SEC Amendments
[19] Section 38.1 of the SEC Rules
[20] Section 55.3 of the Proposed SEC Amendments