Cryptocurrency and Government Regulation in Nigeria
First Published in by Bisi Akodu (Mrs.), February 2019
Cryptocurrency in Nigeria is one of the major offshoots of the Technology wave that has changed the Nigerian business landscape.
Technology has since, the last century seen a high permeation in all sectors of the global economy. To be seen as a cutting edge solution provider, individuals in the corporate world must be technology savvy or “techy”. Competition is now more than ever, based on the application of technology such that to move your business to the next level, you need to be tech-involved.
Advancement in technology has seen the birth of cryptocurrency as a major consideration in both the tech and financial worlds. cryptocurrency has been defined as a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Decentralized cryptocurrencies such as Bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation.
There has been a lot of positive and negative discourse on the value of cryptocurrency to fiscal systems. With all the hype about the Bitcoin, the bubble eventually burst in June last year and has left a lot of Bitcoin investors, including myself, sceptical as to whether there is a future for cryptocurrency independent of government regulation.
I was recently briefed by a client seeking legal advice regarding the use of cryptocurrency by way of an “Agri Coin” to unify farmers, farm products and product trading in the rural areas of Nigeria. The coin would be utilized to project, coordinate and monitor agricultural services. I was really interested in proffering legal advice in such a ‘techi’ area. I immediately, but with some help from my ‘techi’ sons embarked on research into this subject. I didn’t mention the fact that it was one of my ‘techi’ sons who urged me to invest a small amount of money in the Bitcoin, which unfortunately I lost and fortunately had the sense not to invest my entire life savings.
As a lawyer, my interest in new products and services remains constant. To enter a discussion on the value of cryptocurrency, it is important to learn about related things like blockchain, smart contracts and ICOs. It has been established that cryptocurrency springs from cryptography which is the process of converting plain text into unintelligible text and the reverse; it is entirely digital and relies on encryption that enhances secure transactions. In researching this topic I can say with some authority that cryptocurrency was devised as an alternative form of payment to cash and its equivalents such as credit/debit cards, cheques etc. Its use is independent of our traditional banks. In other words, the use of cryptocurrency dispenses with the need for intermediaries in the form of banks and other financial institutions.
Cryptocurrency is backed by a technology called Blockchain. To answer the question, “what is a Blockchain?” we first need to understand the meaning of “a ledger”, and then apply the same within the context of our discourse. In accounting, a ledger is a computer file or a book where you find a complete record of a company’s financial transactions throughout its life. Using this record, accounting officers can prepare the company’s financial statements. The ledger records financial information on liabilities, assets, expenses, revenues and owners’ equity.
With the above in mind and the understanding put in context, it is clear that Blockchain is simply a” decentralized ledger”. It contains records which can be verified autonomously without the need to have a central entity. It is not just a public ledger, but a real-time ledger that records practically anything that can be put on record, including but not limited to contracts, financial transactions, information on the supply chain, physical assets, etc.
One major feature characterizing Blockchain technology is the decentralized feature it possesses. There is no one organization or person who is in charge of keeping this ledger. Instead, the ledger is open for everyone in the chain who can see every detail of every record hence it is “public”. Each of the records in this chain of records is referred to as “a block”. In addition, a fundamental feature of Blockchain technology we need to consider is its immutable character. The records absolved by Blockchain technology are such that are fixed and cannot be edited by any person once it gets to the platform. This accounts for transparency in transactions.
So, in summary, think of Blockchain as a long chain of records (financial transactions or otherwise) made up of blocks, with each block being each of the records that make up the long chain. Each block is encrypted and has a time stamp which is immutable.
An affiliated subject matter which I had to get my head around to understand in my quest for knowledge is the “Smart Contract”. Smart contracts are computer protocols intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. These transactions are trackable and irreversible. Smart contracts have been touted as the true building blocks of Blockchain applications. At the core of smart contracts are self-execution, code write-ups and Blockchain enforcement (all technical terms which I am still trying to understand!).
A smart contract is designed using lines of code and executes itself without the intervention of a third party and after fulfilment of certain laid out conditions. In other words and put simply a smart contract is an agreement between two people in the form of computer code. It runs on the blockchain, so it can be stored on a public database and cannot be changed. The transactions that happen in a smart contract processed by the blockchain, which means they can be sent automatically without a third party. It has been argued that using smart contracts helps you eliminate both enforcement costs and ambiguity, making all business transactions instantaneous. Further, it lets you replace traditional contracts; which then saves time and money for your business. While this may be true, it is clear from practice that the orthodox manner of contractual evidencing still is the order of the day.
It is impossible to comment on the subject matter of cryptocurrency without making mentions of token offerings and initial coin offering. An initial coin offering, also commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for a cryptocurrency be it Bitcoin, Ethereum etc. An ICO is similar to an Initial Public Offering (IPO) in which investors purchase shares of a company, in the case of an ICO they are purchasing units of cryptocurrency. SureRemit a Nigerian start-up company raised $7 million through a Blockchain ICO aided by ‘Hashed’ one of the largest cryptocurrency funds domiciled in South Korea.
The exigencies of commerce rely to a large extent on the dissemination of information. Information is driven by technology which is the mainstay of daily commercial activity be it withdrawing or transferring money at an ATM point, opening letters of credit, operating credit cards, paying for goods and services, effecting a takeover bid the list is inexhaustible, what is clear is that technology and information remain the main drivers of commerce lack of which can lead to dire consequences. Technology promotes information and allows corporate business to consider imperatives to enhance efficiency and prevent losses.
Where am I going with all this? I am looking at the value of cryptocurrency in global financial systems and the need for government regulation. Some exponents believe that cryptocurrencies are ripe to compete with traditional financial systems and that “money is an asset with value meaning that money competes with money” therefore cryptocurrencies should be fully integrated into global financial systems. There is however a downside to this. Without government regulation, massive fraud and theft may be perpetrated through cryptocurrency as it can be used to promote money laundering activities, support radical movements and bad governments, finance illegal drug trafficking and human trafficking. Truth be told there will always be crime and criminals, therefore, the axiom “prevention is better than cure” comes in. This in my view begs the need for government regulation.
Money has always played a fundamental role in the development of global financial systems and historically paved the way for global trade and economic growth. Gradually, we are seeing a transition from physical currency to almost virtual currency. The fact that most economies have or are in the process of doing away with cash means that financial systems are still evolving. This notwithstanding, some sceptics are of the view that cryptocurrency can never be worth more than “zero” and therefore should be disregarded as a technological whim. I, therefore, believe that governments should start looking seriously at the advantages of promoting legislation and regulations in this regard as the value of digital assets is increasing with the world’s top five companies having data as a primary asset.
Trading in cryptocurrency in Nigeria is becoming very popular and can be a profitable idea for investment. These accounts for why we have full-time crypto traders who employ various strategies and methods of trading. As a result of its decentralized feature, trading in cryptocurrency requires no involvement from a central bank thus unlike regular cash and financial instruments, the pricing process is not affected and this aids trading transparency. While this may be so, one will question whether it will not affect the key issues of “predictability”.
There are at present 10 cryptocurrency exchange platforms in Nigeria otherwise termed e-currency exchanges as well as online training courses on how to buy trade and invest in cryptocurrency. The interest of individuals in this area is slowly but surely increasing. The Central Bank of Nigeria (CBN) and the Securities Exchange Commission (SEC) both regulators of the money market and capital market respectively have intermittently given warnings (somewhat of a buyer beware notice)to the public regarding investing in cryptocurrencies. This notwithstanding, cryptocurrency in Nigeria and its trading has not been prohibited. While it is trite that there is currently no legislation in this regard, the main issue seems to be the status of cryptocurrency. Different jurisdictions have stated cryptocurrency to have the status of either security, currency, property, cash equivalent, asset or commodity and this has made it easier to be legislated on, regulated and monitored. This is however not the position in Nigeria.
It is interesting to note that Nigerian Banks and other Financial Institutions, as well as capital market operators, are prohibited from investing in cryptocurrencies or carrying on business as a virtual currency exchange. Most authors on this topic including Chimezie Chuta, the coordinator of Blockchain Nigeria User Group, who has written extensively on this subject matter, are of the opinion that “government must seek out avenues and intelligent approaches to deal with Blockchain and cryptocurrency”.
With evolving global trends in the world’s financial sector, Nigeria is really lagging behind. The need for the Nigerian government to review the financial services sector and completely revolutionize institutions and soft structures cannot be overemphasized. If Nigeria wants to be part of the technology jet set, the time to do this is now. We have already seen a trend whereby Nigerian tech companies are operating through off-shore locations such as Mauritius. As a former member of “Financial Systems Strategy 20:20, a CBN initiative established in 2007 by CBN Governor, Professor Soludo aimed to provide a robust financial system that will power the Nigerian economy, I often wonder where we are with 2020 being just a year away!
In conclusion, I believe that cryptocurrency in Nigeria has come to stay and its advantages clearly outweigh the disadvantages. Consequently, I call on both the CBN and SEC to make an informed decision on how to provide regulations for this product so that it can gradually be integrated into our financial ecosystem.
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