CEM REPORT, FINANCE | The Central Bank of Nigeria (CBN) has issued a new guideline for banks and other financial institutions that provide services to crypto exchange, otherwise known as virtual assets service providers (VASPs). The guideline, which was released on December 22, 2023, imposes several restrictions and requirements on the VASPs and their bank accounts.
Mr. Olayemi Cardoso, CBN Governor
According to the guideline, VASPs are required to open designated accounts with banks or other financial institutions (FIs) for the sole purpose of virtual asset transactions. These accounts cannot be used for any other activities, and no third-party cheques can be cleared from them. Moreover, VASPs are prohibited from making cash withdrawals from their operational accounts, except for settling virtual asset transactions through transfers to other designated accounts. The withdrawal of funds from these accounts can only be done through managers’ cheques or transfers to other accounts.
The guideline also stipulates that the settlement cycle for transactions of VASPs shall be T+3, meaning that it will take three working days for the value of the transactions to be received. This is unlike the instant settlement enjoyed by other accounts.
“Except for settlement of a virtual/digital assets transaction which shall be done through a transfer to another designated account, the withdrawal shall be only through a managers’ cheque or transfer to an account,” the regulation said.
CBN Explains Need for Crypto Regulation
The CBN said that the guideline was issued in response to global trends and the need to regulate the activities of VASPs, which include cryptocurrencies and crypto assets. The CBN cited the Financial Action Task Force (FATF) recommendation 15, which requires VASPs to be regulated to prevent the misuse of virtual assets for money laundering, terrorism financing, and proliferation financing (ML/TF/PF).
The CBN also referred to the Money Laundering (Prevention and Prohibition) Act, 2022, which recognises VASPs as part of the definition of a financial institution, and the Securities and Exchange Commission (SEC) rules on issuance, offering, and custody of digital assets and VASPs, which provide a regulatory framework for their operations in Nigeria.
“However current trends globally have shown that there is a need to regulate the activities of virtual assets service providers (VASPs) which include cryptocurrencies and crypto assets. Following this development, the Financial Action Task Force (FATF) in 2018 also updated its Recommendation 15 to require VASPs to be regulated to prevent misuse of virtual assets for ML/TF/PF.
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“Furthermore, Section 30 of the Money Laundering (Prevention and Prohibition) Act, 2022 recognises VASPs as part of the definition of a financial institution. In addition, the Securities and Exchange Commission (SEC) in May 2022 issued Rules on Issuance, Offering and Custody of Digital Assets and VASPs to provide a regulatory framework for their operations in Nigeria,” CBN noted in a circular signed by the Director of Financial Policy and Regulation Department, Haruna Mustafa.
Banks Monitoring Role
The guideline is a reversal of an earlier circular issued by the CBN in February 2021, which banned FIs from offering services to crypto-related businesses. The ban was lifted by the CBN in December 2023, after nearly two years of controversy and criticism from the crypto community and stakeholders. The former CBN governor, Godwin Emefiele, had defended the ban as a measure to protect the Nigerian economy and financial system from the risks and volatility of cryptocurrencies.
Additionally, the new regulation stipulates that “FIs shall monitor, on a continuous basis, all activities conducted in designated accounts opened in accordance with these guidelines. FIs shall, at the end of every month and not later than the 10th day of the following month, submit to the relevant supervisory department of CBN, data and other information on the designated accounts.
“The content of the returns shall include but not limited to: the number of designated accounts opened within the reporting period; the value and volume of transactions conducted in each account within the reporting period; the details of the counterparty (ies) to the transactions; incidents of fraud or theft and number of customer complaints and remedial measures taken.”
VASP Regulation Meets Mixed Reactions
The new guideline, however, has also drawn mixed reactions from the crypto community and experts in Nigeria. Some have welcomed the move as a positive step towards regulating and legitimising the crypto industry in Nigeria, while others have expressed concerns over the stringent and restrictive conditions imposed by the CBN.
Some experts believe clarity is needed in the areas of definition and scope of VASPs, the criteria and process for opening and operating the designated accounts, the reporting and monitoring requirements for the FIs and the CBN, and the sanctions and penalties for non-compliance.
Many agree that the guideline was a good development that would boost the confidence and trust of crypto investors and users in Nigeria. They express concerns about certain drawbacks the regulation may pose, such as the T+3 settlement cycle, which they opine would affect the liquidity and efficiency of the crypto market in Nigeria. Another highlighted challenge is the prohibition of cash withdrawals from the operational accounts of VASPs, which experts believe would limit their flexibility and convenience in managing their funds.
The CBN guideline is expected to take effect from January 1, 2024, and all VASPs and FIs are required to comply with the provisions of the guideline. The CBN said that it would monitor and supervise the activities of the VASPs and their bank accounts, and enforce the guidelines in accordance with the relevant laws and regulations.
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Nigeria has one of the most active crypto markets in Africa, with an estimated trading volume of $20 billion per year. However, the CBN’s 2021 ban created significant uncertainty for businesses and investors. The new guidelines, while not a full embrace of crypto, suggest that the CBN is now willing to tolerate its existence under certain conditions.
The move is no surprise as the CBN has announced plans to launch its digital currency in February. The move which has been described as “a monumental shift in the financial landscape” of Nigeria, promises a range of benefits for Nigerians home and abroad.
Looking Ahead
The impact of the CBN’s new guidelines on Nigeria’s crypto market remains to be seen. It is likely that some smaller exchanges will struggle to comply with the requirements, while larger players may find ways to adapt. The CBN’s willingness to engage with the industry in the future will also be crucial to determining the long-term success of crypto in Nigeria.
