By Tochukwu Onyiuke (SAN) and Oge Anene
In recent years, cryptocurrency has transformed from a niche digital asset into a significant component of the global financial system. As its use expands, countries like Nigeria have recognized the need for clear regulations to manage risks, protect investors, and foster innovation. However, Nigeria’s journey towards establishing a robust regulatory framework for cryptocurrencies has been challenging. The current regulatory landscape remains fragmented, with overlapping roles between regulatory bodies creating confusion.
This article provides an overview of Nigeria’s cryptocurrency regulatory framework, tracing its evolution, examining its strengths and weaknesses, comparing it with global practices, and proposing improvements for a more coherent and effective system, particularly in the area of dispute resolution.
Key Regulatory Milestones
Nigeria’s approach to regulating cryptocurrencies began on January 12, 2017, when the Central Bank of Nigeria (CBN) issued its first official caution. The CBN sent a circular to banks and financial institutions warning them about the risks associated with cryptocurrencies, including concerns about market volatility and potential use in money laundering and fraud. Although this circular did not impose a formal ban on cryptocurrency transactions, it urged financial institutions to exercise caution when dealing with digital assets.
Less than a month later, on February 6, 2017, the CBN took a stronger stance by prohibiting financial institutions from facilitating cryptocurrency transactions. This directive explicitly banned banks from converting cryptocurrencies into naira or facilitating crypto transactions, effectively pushing cryptocurrency activity into informal sectors, particularly peer-to-peer (P2P) platforms, which have since become dominant in Nigeria
In 2018, the Nigerian Securities and Exchange Commission (SEC) recognized digital assets and initial coin offerings (ICOs) as securities if used for investment purposes. However, the lack of detailed guidelines led to uncertainty about how digital assets should be treated.
On February 5, 2021, the CBN reiterated its ban on cryptocurrency dealings by financial institutions. This directive resulted in the closure of many crypto-related bank accounts and pushed more transactions onto P2P platforms. Later that year, in October 2021, the SEC released a position paper aimed at providing clearer guidelines for regulating ICOs and digital assets, but the regulatory framework remained fragmented due to the overlapping responsibilities between the CBN and SEC.
Recent developments
In 2023, the National Information Technology Development Agency (NITDA) launched the National Blockchain Adoption Strategy to promote blockchain technology across various sectors, including finance and healthcare. Although the focus is on blockchain innovation, this strategy indirectly supports the cryptocurrency ecosystem by encouraging the use of blockchain infrastructure.
As part of this strategy, NITDA introduced a regulatory sandbox, allowing startups to test blockchain applications in a controlled environment. This initiative fosters innovation while ensuring regulatory oversight, providing a safe space for blockchain experimentation.
Although specific regulations for cryptocurrency exchanges and wallet providers have not yet been implemented, ongoing discussions suggest that future rules will focus on consumer protection, market integrity, and preventing illicit activities. Stricter Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements are expected to be introduced, creating a more secure environment for Nigeria’s cryptocurrency market.
Analysis of current regulations
Nigeria’s current regulatory framework for cryptocurrency has notable strengths but also significant gaps. One of its key strengths is the recognition by both the CBN and SEC of the need to manage risks such as fraud, money laundering, and financial instability. The CBN’s prohibition on banks directly engaging with cryptocurrency transactions was intended to protect the naira and safeguard the financial system from potential risks posed by volatile digital assets.
However, the major weakness in the framework is its fragmentation. The CBN restricts financial institutions, while the SEC regulates ICOs and other digital assets, leading to confusion among businesses and investors about which regulatory body holds ultimate authority in certain areas.
Another gap is the limited scope of regulation. While the CBN focuses on banks, no comprehensive rules govern cryptocurrency exchanges, wallet providers, or P2P platforms, which dominate the Nigerian market. This lack of oversight increases the risks of fraud, security breaches, and consumer harm. Furthermore, the absence of formal regulations discourages foreign investment and limits the potential growth of Nigeria’s cryptocurrency ecosystem.
Dispute resolution in cross-border cryptocurrency transactions
As cryptocurrency transactions increasingly involve cross-border interactions, effective dispute resolution mechanisms are essential for ensuring investor confidence and legal recourse. Nigeria currently lacks a well-defined framework for resolving disputes, especially those involving cross-border transactions, leaving participants vulnerable in case of conflicts.
European Union (EU) approach
The EU’s Markets in Crypto-Assets (MiCA) regulation includes provisions for Alternative Dispute Resolution (ADR), which enables disputes to be resolved outside of courts through mediation or arbitration. The EU also offers an Online Dispute Resolution (ODR) platform, providing a user-friendly digital platform for resolving disputes across borders.
United States approach
In the United States, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regulate different aspects of cryptocurrency markets, and many cryptocurrency-related disputes are resolved through mandatory arbitration. Arbitration is commonly included in the terms of service for many cryptocurrency exchanges, ensuring that disputes are settled quickly and outside of court. Additionally, regulatory bodies like the SEC play a role in overseeing enforcement actions when necessary.
Lessons for Nigeria
Nigeria could benefit from adopting similar ADR and ODR mechanisms, ensuring quicker and fairer dispute resolution, especially for cross-border transactions. Setting up a local ADR platform for cryptocurrency-related disputes and ensuring mandatory participation from businesses would help improve trust in the market. Nigeria could also implement arbitration clauses in service agreements for cryptocurrency platforms, ensuring disputes are resolved efficiently.
Comparison with global practices
To improve its cryptocurrency regulations, Nigeria can learn from global best practices:
- United States: The U.S. employs a dual regulatory approach, with the Securities and Exchange Commission (SEC) regulating digital assets classified as securities and the Commodity Futures Trading Commission (CFTC) overseeing cryptocurrency derivatives. Nigeria could adopt a similar model where different types of digital assets are regulated based on their specific characteristics.
- European Union: The EU’s MiCA regulation creates a unified framework for regulating digital assets, ensuring transparency and consistency across member states. Nigeria could adopt a similar approach to eliminate confusion and create a cohesive regulatory environment for its cryptocurrency market.
- United Arab Emirates (UAE): The UAE’s Virtual Assets Regulatory Authority (VARA) offers a centralized regulatory framework for virtual assets, streamlining oversight and promoting innovation. Nigeria could reduce the overlap between the CBN and SEC by creating a unified regulatory body to oversee all digital assets and activities.
Recommendations for improving the regulatory framework
- Establish a Unified Regulatory Body: Nigeria could streamline its cryptocurrency regulation by creating a dedicated regulatory body, similar to the UAE’s VARA, to oversee all digital asset activities and reduce confusion caused by overlapping responsibilities between the CBN and SEC.
- Develop a Comprehensive Regulatory Framework: A unified framework covering exchanges, wallet providers, ICOs, and P2P platforms is essential to ensure that all participants in the ecosystem are regulated appropriately.
- Strengthen KYC and AML Measures: Enforcing stricter KYC and AML requirements across all cryptocurrency platforms would reduce the risks of fraud and money laundering while enhancing market security.
- Support Innovation with Regulatory Sandboxes: Introducing regulatory sandboxes would encourage innovation in the cryptocurrency and blockchain sectors while maintaining oversight from regulators.
- Enhance Public Awareness and Financial Literacy: Increasing public awareness about cryptocurrency risks and improving financial literacy would empower consumers to make informed decisions and avoid scams.
- Implement ADR and ODR Mechanisms: Nigeria should establish internal and cross-border dispute resolution mechanisms similar to the EU’s ADR and ODR systems, providing accessible and efficient avenues for resolving cryptocurrency-related disputes.
Conclusion
Nigeria’s cryptocurrency regulatory framework has evolved significantly since 2017, but there are still significant gaps that need to be addressed. The fragmentation between the CBN and SEC creates confusion, while the lack of a clear dispute resolution process hinders cross-border transactions. By adopting a unified regulatory framework, strengthening KYC and AML measures, supporting innovation, and introducing effective dispute-resolution mechanisms, Nigeria can create a more cohesive and effective regulatory environment. These reforms will not only protect investors but also foster the growth of the digital asset sector, positioning Nigeria as a leader in Africa’s cryptocurrency market.
Onyiuke is a Senior Advocate of Nigeria (SAN) and heads the dispute resolution team of Accendolaw LP, a commercial law firm in Lagos. Anene, a blockchain expert, is a Supervisory Associate Counsel in the firm.
Source: thenigerialawyer
