CBN: Embracing the Evolution of Nigeria’s Digital Currency Landscape, by Abdulrahman Abdulraheem
The fact that change is the only constant thing in life is a time-tested fact which has passed through generation after generation and no one has been able to dispute it.
Almost all individuals, nations and organisations have come to the realisation that nothing is static; that nothing is cast in stone. No law, principle, tradition or convention is meant to last forever as they may be tampered with when there is a need to alter them so that humans can live and interact better. After all, laws are made for the convenience of humans and for the orderliness and growth of society. This is why even in very serious countries, constitutions are amended periodically to reflect a change in the dynamics of how society is governed.
Since it was ratified in 1789, the oldest national body of laws in the world, the Constitution of the United States of America, has been amended 27 times. The first 10 amendments, known as the Bill of Rights, took place in 1791 and the most recent one happened in 1992.
Every other country, local and international organisation or entity on earth has gone through similar evolution or transition in its laws, policies, principles or even mandates. The Central Bank of Nigeria (CBN) is definitely not an exception.
Established by the CBN Act of 1958, the apex monetary authority commenced operations on the 1st of July 1959. The major regulatory objectives of the bank as stated in the CBN Act are to: maintain the external reserves of the country, promote monetary stability and a sound financial environment, and act as a banker of last resort and financial adviser to the federal government.
As the apex promoter of monetary stability and sound financial environment, the CBN has over the years warned Nigerians against dabbling into investments that are likely to make their monies disappear without trace. Nigerians are no doubt a resilient and an extremely optimistic race. Despite the huge amount of money lost many years ago to series of commercial bank collapses – a problem that the apex bank has now found a permanent solution to -, Nigerians still trooped out enmasse years later to invest in all manners of fraudulent schemes like the MMM to gain quick profits. Despite the repeated warnings of the CBN, Nigerians kept on building non-existent wealth on quicksand until it eventually crashed.
Over the years, the policy of the CBN on any kind of investment without credible source or history and no proper regulatory framework is to warn Nigerians not to touch it with the longest pole. And that has been the issue with cryptocurrency (which is gradually becoming a credible source of investment which Nigerians at home and in the Diaspora are cashing out from legitimately) or any other digital currency for that matter.
The apex bank however began to gradually embrace change when in 2021 it introduced eNaira and launched it with pomp and pageantry. eNaira is another digital currency, a store of value, which is equivalent to the physical cash. It was introduced as part of the need to promote a cashless system even though internet banking, ATM machines and USSD codes were not doing badly. The CBN however made it abundantly clear that eNaira is its product and it can’t be said to be unregulated or compared to cryptocurrencies.
Despite the acceptance gained by cryptocurrencies worldwide, the CBN has over the years refused to put an official stamp on it in Nigeria due to its unregulated nature, vulnerability to abuse and the likelihood of causing major financial losses to individuals and families. The CBN also didn’t allow Nigerian banks to deal in cryptocurrencies or open accounts for their dealers.
The CBN issued a circular in February 2021, imposing restrictions on banks and other financial institutions from managing accounts belonging to cryptocurrency service providers.
This action according to the apex bank was taken in light of the risks and vulnerabilities associated with money laundering and terrorism financing (ML/TF) prevalent in the operations of such providers, compounded by the lack of regulatory frameworks and consumer protection measures.
A Necessary Change
Since change is permanent and the apex bank is now convinced of the value cryptocurrencies can add to the country’s economy if adequately regulated, the CBN under Mr Olayemi Cardoso, a fortnight ago, released guidelines that will allow virtual assets service providers (VASPs) which include cryptocurrencies and crypto assets organisations to now open accounts with Nigerian banks.
The regulation titled, “GUIDELINES ON OPERATIONS OF BANK ACCOUNTS FOR VIRTUAL ASSETS SERVICE PROVIDERS (VASPs)” were issued to all banks and other financial institutions via a circular dated Friday, December 22, 2023. The guidelines stipulate conditions for opening an account by virtual assets providers.
The CBN, however, emphasised that banks and other financial institutions are still prohibited from holding, trading, and/or transacting in virtual currencies on their account.
According to the CBN circular, virtual asset means a digital representation of value that can be transferred, digitally traded, and can be used for payment or investment purposes. “It shall not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATE recommendations.”
This suggests cryptocurrencies such as Bitcoin, which are not digital representations of fiat currencies or traditional financial assets, fall under a different category.
They are not covered by the traditional financial regulations that apply to fiat currencies and securities.
The apex bank said the issuance of the guidelines was prompted by the current global trends pointing to the need to regulate the activities of VASPs.
The guidelines
Under the guidelines, the CBN said the banks and OFIs are permitted to undertake the following activities in their operations of accounts for VASPs:
Opening of designated accounts;
Provide designated settlement accounts and settlement services;
Act as channels for FX flows and trade; and
Any other activity that may be permitted by the CBN from time to time.
“From the commencement of these Regulations, Fl shall not open or permit the operation of any account by any person or entity to conduct the business of virtual/digital assets unless that account is designated for that purpose and opened in line with the requirement of these Guidelines,” the apex bank stated.
As part of the conditions to open an account for a VASP, the Guidelines stipulate that a designated account can only be opened with the approval of senior management of the financial institution and necessary documents on certification and registration.
The implication of the most recent Guidelines is that it takes precedence over the circular of February 2021.
The new guidelines signal a move towards regulating cryptocurrency service providers. This means that these businesses will need to follow specific rules set by the Nigerian authorities, which could include measures to prevent money laundering and terrorism financing.
By recognising VASPs as part of the financial system, the government is providing more legitimacy to cryptocurrency businesses.
This formal recognition could pave the way for more structured and legally acknowledged operations.
The broader context of the regulation indicates that while there is a regulatory framework being developed for cryptocurrencies, which includes Bitcoin and other similar digital assets, it aims to establish clear rules for their operation to prevent misuse for money laundering and financing terrorism.
This does not necessarily mean that Bitcoin and other cryptocurrencies are disallowed; rather, it means they are subject to regulation to ensure they are used in a compliant and legally acceptable manner.
The circular suggests that cryptocurrency service providers are to be regulated, which means that while they can operate, they must follow strict rules and guidelines set by the Nigerian authorities.
Banks and financial institutions are still prohibited from holding, trading, or transacting in cryptocurrencies directly, but the guidelines provide a way for these institutions to engage with cryptocurrency service providers under certain regulatory conditions.
The CBN’s guidelines take a cue from the 2019 recommendations of the Financial Action Task Force (FATF), an independent inter-governmental body that develops and promotes policies to protect the global financial system against threats such as money laundering and terrorist financing,
At the end of its Plenary Week in Orlando, Florida on June 22, 2019, the FATF announced that it had adopted and issued “an Interpretive Note to Recommendation 15 on New Technologies,” which clarifies the amendments to the international standards relating to crypto assets and describes how countries must comply with relevant recommendations.
The body advised countries to assess and mitigate the risks associated with virtual asset activities and service providers and implement sanctions and other enforcement measures when service providers fail to comply with their AML/CFT obligations.
They are also required to “license or register service providers and subject them to supervision or monitoring by competent national authorities,” and “will not be permitted to rely on a self-regulatory body for supervision or monitoring.”
Naira Stablecoin: Another Revolution
The CBN also recently approved the launch of the Nigerian naira (cNGN) stablecoin.
The cNGN, which will be launched on February 27, 2024, is powered by the Africa Stablecoin Consortium (ASC), a consortium of Nigerian financial institutions, fintechs, and blockchain experts.
Stablecoins are cryptocurrencies specifically designed to maintain a constant value. They are often pegged or tied to another currency, commodity or financial instrument.
The ASC said the cNGN stablecoin has met the regulatory standards and requirements as established by the CBN, the Nigerian Securities and Exchange Commission (SEC), and the Nigerian Financial Intelligence Unit (NFIU).
The ASC said it is committed to enhancing secure and compliant financial interactions, revolutionising the way people transact and engage with their money securely and seamlessly.
“This ushers in a new era of financial fluidity, bridging the Nigerian Naira with the global market through blockchain technology,” the statement read.
“Backed 1:1 by Naira reserves held in designated commercial banks, the cNGN Stablecoin transforms the Naira into a dynamic tool for worldwide remittances, commerce, trade, and investment.
“More than just a currency, cNGN shortens settlement times, enabling payments that traverse the globe swiftly, mirroring the speed of a text message and at a fraction of the cost.
“This breakthrough paves the way for instantaneous financial transactions, seamlessly connecting Nigeria’s vibrant economy with international markets and offering unprecedented efficiency in both domestic and global financial interactions,” the statement added.
According to the ASC, people can pay for anything, anywhere, and at any time. With a seamless tap, users can shop the world and pay in naira without the traditional challenges of currency conversion and hefty international transaction fees.
The consortium also said “supporting your loved ones back home becomes as simple as a quick tap on your phone” with the new innovation.
“No more standing in lines. With cNGN, funds land directly in their wallets within seconds, ready to fuel their dreams and brighten their days. No more distance, no more delays, just the magic of compliant virtual assets bridging the gap between hearts,” the ASC added.
While stakeholders look forward to the February 27 launch, it is obvious that the CBN under the stewardship of Mr Cardoso will not toe the traditional path. He would go digital as quickly as possible because he knows the gains therein. But Mr Cardoso would not go digital and ignore the need to protect our financial system from internet scam, money laundering and terrorism financing.
Abdulrahman Abdulraheem is the author of “eNaira Revolution: A Peep into Nigeria’s Cashless Future.”
