In a significant policy reversal, the Central Bank of Nigeria (CBN) has lifted its ban on banks and financial institutions engaging in Cryptocurrency transactions. The decision, communicated through a note distributed to financial institutions last month by Haruna Mustafa, the CBN’s director of financial policy and regulation, marks a pivotal moment in Africa’s largest economy, signaling a more liberalized stance toward digital assets. The initial ban, imposed in February 2021, was driven by concerns over money laundering, Terrorism Financing risks, and the absence of adequate regulations and Consumer Protection measures within the cryptocurrency space.
Mustafa, in his note, acknowledged a global shift in regulatory attitudes towards cryptocurrencies, emphasizing the need to regulate virtual asset service providers (VASPs), including cryptocurrencies and Crypto assets. This move comes amid a broader international trend, with regulatory bodies around the world reconsidering their strategies for overseeing the burgeoning $1 trillion cryptocurrency industry. The United States, for example, recently granted regulatory approval for a Bitcoin exchange-traded fund (ETF), suggesting a growing integration of the crypto sector into traditional financial systems.
CBN’s strategic shift to move to regulation instead of resistance.
However, Nigeria’s decision to lift restrictions also reflects an acknowledgment by the central bank that its previous attempts to curb cryptocurrency adoption were not effective. Despite stringent regulations, a KuCoin study revealed that 35% of Nigerians aged 18 to 60 are involved in cryptocurrency trading or investment. Moreover, from July 2022 to June 2023, Nigeria’s crypto transaction volume increased by 9% year-over-year to reach $56.7 billion. This surge in crypto adoption in Nigeria can be attributed, in part, to economic challenges such as high inflation, a depreciating national currency (naira), and foreign exchange shortages. The now-repealed restrictions led to a significant portion of crypto trading occurring on informal Peer-to-Peer (P2P) networks rather than formal exchanges, making Nigeria the global leader in P2P exchange volume, according to a 2023 report by Blockchain consultancy firm Chainalysis.
The CBN’s decision to liberalize crypto transactions represents a strategic shift, moving from resistance to regulation. Senator Ihenyen, lead partner and head of the blockchain and virtual assets practice at Infusion Lawyers in Lagos, asserts that the central bank’s recognition of virtual assets signals a more practical, risk-based approach to ensure the stability and safety of the financial system. By embracing Regulation over resistance, the CBN aims to encourage a shift towards regulated crypto exchanges and formal oversight. Ihenyen emphasizes the importance of avoiding underground adoption, which could lead to regulatory blind spots and increased financial risks. He contends that a regulated environment provides a safer foundation for the virtual asset sector.
Approach could leverage advantages of crypto to address banking issues.
Rume Ophi, a crypto and blockchain analyst in Lagos, adds that these regulatory changes could empower authorities to address Fraud and Financial Crimes more effectively. Implementing these changes allows for better tracking of illicit activities, sharing information on fraudulent transactions among exchange platforms, and promoting a more secure crypto environment aligned with government regulations. These developments align with commitments made by President Bola Tinubu during his election campaign in 2023. Tinubu pledged to leverage innovations such as blockchain technology, emphasizing a need for a more crypto-friendly regulatory framework.
This forward-thinking approach seeks to harness the potential benefits associated with cryptocurrencies, addressing issues related to limited access to formal banking systems and facilitating quicker, cheaper cross-border capital transfers. While the CBN’s decision is a positive step for the crypto industry, several obstacles remain. The Nigerian SEC, for instance, has not overturned regulations requiring an upfront capital requirement of 500 million Naira ($520,000) for crypto exchanges to obtain a virtual asset service provider (VASP) license. Ophi highlights that such barriers could favor larger foreign players over domestic companies, urging the SEC to reconsider its decision and foster a more competitive crypto landscape.
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Ihenyen remains optimistic about the future growth of Nigeria’s crypto industry, emphasizing the importance of continued stakeholder engagement between regulators and innovators. He envisions a sector that builds trust, attracts foreign direct investment, and creates economic opportunities for the country. However, he acknowledges that there is still substantial work to be done to achieve these goals. In conclusion, Nigeria’s shift towards a more liberalized regulatory approach for cryptocurrencies signifies a significant turning point for the nation’s economy. Embracing rather than resisting digital assets, the CBN aims to strike a balance between fostering Innovation and ensuring financial stability, laying the groundwork for a promising future in the rapidly evolving world of cryptocurrencies.