Tech founders suggest 6 policies to regulate Nigeria’s crypto market

Stakeholders in the Nigerian technology ecosystem have proffered six policies they hope will put an end to the impasse between the Central Bank of Nigeria (CBN) and the cryptocurrency market.

In a communiqué BusinessDay received on Monday, the stakeholders under the aegis of Young Nigerian Industry Leaders, said while the position of the CBN had some merit, the prohibition placed on the cryptocurrency market could deny Nigeria an opportunity to become a global leader in financial services.

The six-policy directions suggested include a) Formalise KYC, AML, and CFT processes for cryptocurrency providers; b) Monitor transactions on cryptocurrency providers; c) Ensure entities dealing with cryptocurrencies can be known and licensed accordingly; d) Regulate cryptocurrencies as digital commodities and implement a Capital Gains Tax (CGT); e) A six-month suspension of the CBN’s latest cryptocurrency exchange restriction, and f) Create an off-shore International Finance Centre to ensure consistency with Nigeria’s diversification and exchange rate policy.

“In furtherance of its compliance, representatives of the ecosystem wish to directly engage with the CBN on the concerns of operators, local ecosystem stakeholders, and foreign investors regarding its regulatory stance on cryptocurrency transactions.

“The submission of this document as attached is intended to succinctly present the position of these representatives, as well as make recommendations, based on global best practices, on how the CBN can achieve its regulatory objectives while continuing to champion the financial technology ecosystem that it has enabled over the past decade,” the stakeholders said.

Below are the details of the policies

Formalise KYC, AML, and CFT processes for cryptocurrency providers

The CBN, the stakeholders said, can work with cryptocurrency providers to formalise their Know Your Customer (KYC), combating the financing of terrorism (CFT), and Anti-Money Laundering (AML) processes. This can include the use of Bank Verification Numbers (BVN) and National Identity Numbers (NIN).

In a letter explaining its directive, the CBN had said cryptocurrencies aid the growth of terrorism financing and anti-money laundering.

However, cryptocurrency providers that have spoken with BusinessDay since the CBN order came into effect said they already implement these controls on their platforms. Hence, it would be easier for the CBN or any regulator to formalise these processes.

Monitor transactions on cryptocurrency providers

The stakeholders also suggested the CBN can mandate cryptocurrency providers to keep records of transactions for regulators like the CBN, Nigeria Financial Intelligence Unit (NFIU) or the Economic and Financial Crimes Commission (EFCC). The CBN can have access to domestic transactions and information on foreign inflows.

This suggestion can also be easily dealt with by the exchanges as many have a system in place that ensures record keeping.

Exchanges in Nigeria conduct periodic anti-money laundering (AML) and counter-terrorist financing (CTF) assessments to facilitate the management of risk and this goes into a risk register as is best practice. It is used to identify potential risks in a project or an organisation, sometimes to fulfil regulatory compliance but mostly to stay on top of potential issues that can derail intended outcomes.

The risk register is regularly assessed to help ensure that policies remain up-to-date (meet regulatory requirements) and that procedures are operated as prescribed including regular reviews of information technology (IT) security measures and risk management procedures to ensure efficacy and compliance. These are monitored on an ongoing basis and are frequently reviewed and audited (including external audits).

Ensure entities dealing with cryptocurrencies can be known and licensed accordingly.

Here, the stakeholders want the CBN and other regulatory bodies like Securities and Exchange Commission (SEC) and Federal Inland Revenue Service (FIRS), among others to regulate cryptocurrency exchanges with existing laws and licences. The CBN can add legal certifications for exchanges – for example, registration under the Special Control Unit on Money Laundering (SCUML).

SCUML was established as a specialised unit of the Federal Ministry of Commerce and Industry by the Federal Executive Council of Nigeria in September 2005. The mandate of SCUML is to monitor, supervise, and regulate the activities of all Designated Non-Financial Institutions (DNFIs) in Nigeria in consonance with the country’s Anti-Money Laundering and Combating of the Financing of Terrorism (AML/CFT) regime.

Regulate cryptocurrencies as digital commodities and implement a Capital Gains Tax (CGT)

The stakeholders say cryptocurrencies qualify to be classified as digital commodities with appropriate laws for regulation. The government would also benefit by adding crypto-assets to Nigeria’s Capital Gains Tax (CGT), earning significant revenues.

A capital gains tax is a tax on the growth in value of investments incurred when individuals and corporations sell those investments. When the assets are sold, the capital gains are referred to as having been “realised”.

The US Internal Revenue Service (IRS) treats all cryptocurrency as capital assets and taxes then when they are sold at a profit. That means when a user purchases goods or services with cryptocurrency, the user owes capital gains taxes if the crypto he or she spent has gained in value over what the user originally paid for it.

A six-month suspension of the CBN’s latest cryptocurrency exchange restriction

The stakeholders also want the CBN to partially suspend the restriction on the cryptocurrency market for six months. During the period, exchanges will continue to be restricted from receiving any further deposits from customers. However, exchanges will be allowed to make payouts and liquidate their accounts as the CBN deliberates the next cause of action.

BusinessDay reported that over 5 million customers are currently looking for means to liquidate their crypto-assets following restrictions placed on deposits and withdrawals by the exchanges due the CBN directive.

Create an off-shore International Finance Centre to ensure consistency with Nigeria’s diversification and exchange rate policy

The stakeholders suggest the establishment of a framework for an International Finance Centre in a Special Economic Zone. The Financial Centre will be an off-shore area that can spur foreign direct investment and increase dollar supply. It will also be a gateway for Nigeria and Nigerians to participate in the global economy through modern instruments, including but not limited to the regulated use of cryptocurrency and the blockchain.

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