Nigerian Regulators Closer in Crypto Adoption

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Recent rulings from Nigerias Securities and Exchange Commission (SEC) suggest that the country may be ready to liberalize its approach to digital assets. In early May, the SEC announced that it would allow digital exchanges to apply for licenses on a trial basis. These licenses would allow exchanges to offer token coin offerings, a form of fundraising that allows investors to purchase tokens that are digital representations of a given financial asset.

While these offerings are usually closely associated with or backed by cryptocurrencies, the SEC only allows token offerings backed by more traditional financial assets such as stocks, debt, and property.

Additionally, as the SEC prepares to offer fintech firms the ability to apply for an array of licenses potentially allowing them to act as sub-brokers, robo-advisors, fund managers and more, the regulator is not will not allow crypto exchanges to do the same.

However, while maintaining restrictions on crypto activity for now, this step towards tokenization suggests that Nigerian regulators are considering regulating the world of digital assets in a more accommodating manner.

Nigeria’s love affair with crypto

Chuta Chimezie, founder of the Blockchain Nigeria User Group in Lagos, told African Business that what the Nigerian SEC is trying to do is akin to a sandbox. [] startups will test in controlled environments before going mainstream.

While noting that cryptocurrency-backed tokens are not part of the initial commitment, Chimezie says this is a good development as it means we have moved forward from what we were.

Currently, cryptocurrencies remain in a legally ambiguous position. In February 2021, the Central Bank of Nigeria declared that the use of cryptocurrencies is a direct violation of applicable law and banned commercial banks from using them. Despite this, the use of cryptos has exploded, with Nigeria being one of the world’s leading markets for digital assets.

Up to 22 million people, or more than 20% of the adult population, are believed to own some form of cryptocurrency. Nigeria has the highest volume of crypto transactions conducted on peer-to-peer (P2P) platforms outside of the United States. These platforms are informal marketplaces that exist between individuals, eliminating any financial institutions or centralized authorities.

Nigerians have been widely drawn to crypto amid soaring inflation, prices are currently rising at over 22% per year which is rapidly eroding cash savings. A poor financial infrastructure that shuts millions out of the mainstream financial system has further boosted the appeal of decentralized alternatives. Crypto is seen by many as a cheaper and faster alternative to fiat currency for cross-border payments or transfers.

Amid a widespread shortage of US dollars and hard currencies, many companies are also using greenback-backed crypto assets, such as the stablecoin Tether, as an alternative. All of these reasons, and the extent to which Nigerians have embraced crypto, might suggest that outright bans on its use would be doomed to failure, hence the SEC taking its first baby steps towards a potential easing of restrictions .

The government’s attitude is “self-destructive”

Indeed, Adedeji Owonibi, Founder and COO of Convexity, an Abuja-based blockchain consultancy, believes that the current restrictive approach is doomed for government, central bank and regulators. He tells African Business that crypto trading volumes will likely only increase, but if conditions don’t improve, everything will be P2P [peer-to-peer trading], and regulators will have little authority. Better, he thinks, to encourage exchanges under the supervision of financial regulators.

Owonibi points out that informal P2P trading means authorities can’t see who is doing what, what the volumes are, you cut yourself off from granular data and that raises understandable regulatory concerns. He adds that we need to look for a way to ensure that crypto activity can still take place, but under the supervision of regulators.

Both Owonibi and Chimezie are optimistic the government recognizes the need to change course and believe the SEC’s decision is a step in the right direction. Owonibi, for his part, recently worked with the Nigerian government on its blockchain strategy and served on the drafting committee of the SEC’s regulatory framework, where he says he had fruitful discussions.

Owonibi suggests that the Nigerian government is already open to the potential of blockchain, a digital database that records transactions between different entities. Blockchain technology underpins the use of cryptocurrencies, but can also be used in non-cryptographic contexts. The government would explore these uses, but may ultimately be open to cryptocurrencies themselves.

Owonibi tells African Business that the government is trying to connect the whole economy and drive digital transformation in different sectors, using blockchain solutions to increase efficiency. He says we want to mainstream blockchain into the National Digital Economy Policy and Strategy for 2030, and also suggests that blockchain technology could be part of the National IT Policy, Nigerian Cloud Policy, electronic governance. [] we want to see how blockchain can help with all of these things.

Of course, there is still work to be done if Nigeria is to take decisive steps to regulate digital assets. The regulatory framework still does not exist and will need to be carefully crafted, taking into account the risks associated with cryptocurrencies and crypto-related malpractices. Owonibi also points out that tax authorities will need to find new and innovative ways to ensure that crypto transactions are subject to the same taxes as any regular commercial activity.

That said, most agree that the recent SEC decision suggests that Nigerian authorities are more open to the idea of ​​crypto than they have often indicated. Even if it is at a snail’s pace, in the words of Chimezies, it looks like Nigeria could change its approach to digital assets and cryptocurrencies.

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