Kelvin Daminabo
Nigeria has risen steadily to become a global leader in the peer-to-peer (P2P) cryptocurrency market, with citizens increasingly turning to decentralized financial solutions and secure transactions through innovative exchanges. This trend is driven by the need for secure, autonomous financial tools amid ongoing restrictions by local authorities. Justice Okamgba reports on this significant transition.
The Central Bank of Nigeria (CBN) first raised alarms about cryptocurrencies on January 12, 2017, cautioning all Deposit Money Banks (DMBs) and non-bank financial institutions about the risks associated with digital currencies. The CBN’s concerns focused largely on the risks posed by cryptocurrencies, particularly Bitcoin, which then dominated the market. The regulator pointed to various threats such as potential investment losses, illicit transactions, money laundering, terrorism financing, and other criminal activities.
Despite this warning, Nigerian commercial banks continued to facilitate cryptocurrency transactions. Many ignored the risks highlighted by the CBN, a decision that led to an unprecedented transformation as more Nigerians, especially young people, began accumulating wealth through cryptocurrency investments. The lure of cryptocurrency became undeniable, with a booming interest in the sector across the nation.
This atmosphere shifted sharply in February 2021, when the CBN implemented a ban on financial institutions engaging in cryptocurrency transactions. Banks were instructed to identify and close accounts of individuals or businesses involved in cryptocurrency exchanges. Following this move, the Securities and Exchange Commission (SEC) also declared that anyone affected by the CBN’s directive would not be admitted into its Regulatory Incubation Framework for Fintech Firms.
In a statement, the SEC noted, “For the purpose of admittance into the SEC Regulatory Incubation Framework, assessment of all persons (and products) affected by the CBN Circular of February 5 is hereby put on hold until such persons are able to operate bank accounts within the Nigerian banking system.”
The Nigerian government cited examples of other countries that had imposed similar restrictions, such as Morocco, China, Iran, Bolivia, and Bangladesh. In support of the decision, Ari Aisen, the International Monetary Fund’s resident representative for Nigeria, highlighted that central banks worldwide shared similar concerns about cryptocurrency.
“Care must be taken with some of the activities associated with cryptocurrencies,” Aisen explained in February 2021, adding, “The use of cryptocurrencies is a concern.” He suggested that other central banks, including Nigeria’s, were concerned about how best to monitor these activities and the potential implications of digital currencies.
After the CBN directive, many banks complied, but some continued cryptocurrency-related transactions. The CBN launched investigations into these banks, leading to a major development in April 2022 when six commercial banks were fined a total of N1.314 billion for non-compliance with cryptocurrency regulations.
The banks penalized included First City Monument Bank, Access Bank, Stanbic IBTC, Wema Bank, Fidelity Bank, and United Bank for Africa. The fines varied, with Access Bank paying N500 million, UBA N100 million, Fidelity Bank N14.28 million, WEMA Bank N100 million, FCMB N400 million, and Stanbic IBTC N200 million.
Prior to Nigeria’s restrictions on cryptocurrency, European Central Bank President Christine Lagarde had called for global regulations on Bitcoin, emphasizing its use in activities such as money laundering. Speaking at the Reuters Next conference in January 2021, Lagarde remarked, “Bitcoin is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”
The crackdown by the CBN posed challenges for Nigerian crypto traders who depended on exchanges for their livelihood. In response, however, the Nigerian cryptocurrency community quickly adapted. P2P platforms powered by Binance, the world’s largest crypto platform, became popular as they allowed users to continue transactions without direct involvement from banks. On these platforms, users negotiate prices and payment methods directly with sellers, often using escrow services for added security.
The volume of cryptocurrency transactions in Nigeria surged, with a nine percent year-on-year increase reaching $56.7 billion between July 2022 and June 2023, according to Chainalysis’s 2023 Geography of Cryptocurrency Report. This growth further emphasized Nigeria’s significant position within the global crypto market.
In early 2022, a report by KuCoin, a prominent crypto exchange, stated that 33.4 million Nigerians (about 35 percent of the population aged 18 to 60) owned or had traded cryptocurrencies within the past six months, reflecting an impressive adoption rate despite regulatory challenges.
In a surprising turn of events, the Nigerian government eventually reconsidered its position on cryptocurrency. The CBN issued a circular dated December 22, 2023, advising banks to disregard its previous ban on crypto transactions. The circular, signed by the Director of the Financial Policy and Regulation Department, Haruna Mustafa, was titled “Guidelines on Operations of Bank Accounts for Virtual Assets Service Providers” and acknowledged the need for updated regulations amid global trends.
The circular read, “In February 2021, the CBN issued a circular restricting banks and other financial institutions from operating accounts for cryptocurrency service providers due to money laundering and terrorism financing (ML/TF) risks, and the lack of regulatory and consumer protection frameworks.”
The CBN noted that recent global developments highlighted the need to regulate virtual asset service providers (VASPs), which include cryptocurrency and other crypto assets. Additionally, the Financial Action Task Force (FATF) updated its Recommendation 15 in 2018 to require VASPs to be regulated in order to prevent the misuse of virtual assets for illicit activities, such as money laundering and terrorism financing.
The circular further cited Section 30 of the Money Laundering (Prevention and Prohibition) Act, 2022, which includes VASPs within the definition of a financial institution. In addition, the SEC released its “Rules on Issuance, Offering and Custody of Digital Assets and VASPs” in May 2022, providing a regulatory framework for crypto operations in Nigeria.
With these developments in mind, the CBN has issued this guideline to provide clear instructions for financial institutions in their dealings with VASPs in Nigeria, the circular conclusions.