By Lucky Kiine Esq. (Associate)
With well over 160 companies accepting bitcoins for both offline and online transactions, the world over, it is easy to figure out the disruptive capability of the Blockchain technology. These companies include Microsoft, Overstock, Newegg, Purse.io, Namecheap, Hosterbox, Wikipedia, CheapAir, Gyft, BMW, ExpressVPN, AT&T, Etsy, Shopify, bitcoin.travel, NordVPN, Rakuten, Egifter to name a few. The big tech companies have not only embraced bitcoin, they are now advocating for its general acceptability through their various platforms and services such as Facebook’s Libra Coin and Visa Card’s announcement to begin accepting settlements in crytocurrency and the Central Bank of China, introducing its digital currency (the Reminbi).
Countries are also developing their own fiscal policy regimes for cryptocurrency. For instance, countries such as Israel, United Kingdom, Denmark, Argentina, Spain and Bulgaria have placed taxes on cryptocurrencies based on each respective country’s categorization. In most countries of the world, including Nigeria, the Central Bank is the sole authority responsible for the issuance or the designation of any currency as the legal tender. So, it is important for the Central Bank of Nigeria and other regulatory authorities to begin to think about the future currency of Nigeria. Whether as a country, we would be better-off, launching our own digital currency or developing investor-friendly legislation to drive investments and growths in the Nigerian digital currency space. It is these developments that underscore the need for this paper to stimulate the increasing need for discussions on the applicability of Blockchain in Nigeria around its identified issues and the policy landscape.
THE BLOCKCHAIN TECHNOLOGY
Marc Andreesen, describing the innovation of Blockchain puts forth the following statement:
‘…for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.’
Nakamoto’s Bitcoin Protocol, the first and most popularized example of a Blockchain Technology, described it as a combination of three powerful technologies:
- A distributed Ledger: A database shared between multiple actors with ‘read’ and ‘write’ permissions;
- Immutable Storage: Where changes to the ledger, or transactions, are stored in ‘blocks’ and where each copy of the database retains every block in the ‘chain’ as an immutable history; and
- Consensus Algorithms: Which are protocols for trustless actors in the network to verify the transactions made on the Blockchain, and which achieve secure and shared consensus about the state of the database.
Most famously, these three core features have supported cryptocurrencies, primarily Bitcoin. However, recent developments have seen a proliferation of blockchain-based applications.
Blockchain serves as a digital and decentralised ledger of transactions across a peer-to-peer network. With Blockchain, someone can transfer currency, data, assets and certificates in a single transaction to another person, with no single third party involvement. Before its invention, such transaction will often involve intermediaries such as Governments, Banks and other Financial Institutions. This technology is what drives cryptocurrency.
WHAT IS CRYPTOCURRENCY?
Although the various coins and security tokens that form what is today known as cryptocurrency have different and distinct applications, they are based primarily on the same type of decentralized technology known as Blockchain. The terminology used to describe them varies from one jurisdiction to another. For instance, in Nigeria, cryptocurrency is called “Crypto Assets” and defined by the Securities and Exchange Commission thus:
“… a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction…”
The Commission went further to state that, “A Crypto Asset is – neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the Crypto Asset; and Distinguished from Fiat Currency and E-money.”
The Securities and Exchange Commission is empowered by Section 13 of the Investment and Securities Act, 2007 as the apex regulator of the financial market, investments and securities business in Nigeria and it is within their powers to define what constitute investments and securities. However, in light of recent developments in China and other jurisdictions, the view that:
“Crypto Asset is – neither issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users…”
is no longer correct. The power of the Blockchain Technology is disruptive and the Cryptocurrencies hosted on it are fast gaining general acceptance like every other legal tender; it is being issued and guaranteed by jurisdictions around the world and Nigeria, indeed, other African countries must tab into this, early enough.
Cryptocurrency is a secure and transparent digital currency, encrypted using cryptography. It is a store of value, created and stored electronically in Blockchain, using encryption techniques to control how its monetary units are created and to verify transactions carried out with it.
It could be said to be self-regulatory because it is secure, transparent and decentralized. Perhaps, regulation is justified against anonymity which may fetter the ground for money laundering frauds, its use by terrorist organisations and for tax purposes. These concerns are even worse where the government through its agencies like the Central Bank of Nigeria decides to withdraw all facilitating services. Government stands to lose more doing so because cryptocurrency exchanges were traditionally designed on a peer-to-peer network and can survive without intermediaries.
Is Cryptocurrency a Coin or a Security Token?
Irrespective of the terminologies used, whether coin or security token is used, they all refer to cryptocurrency. However, a coin is a unit of value, a digital asset, native to the Blockchain technology. It is a medium of exchange used within Blockchain to enable the exchange of value. To illustrate, Bitcoin is a cryptocurrency and it operates and functions within the Bitcoin Blockchain as a unit of Value. A Security token on its part does not have its own Blockchain. It is an asset built on an existing Blockchain with the ability to replicate such functionality or assets. However, while a token can not be used for payments and used as a unit of value. Thus, when one creates a token on a Blockchain, the asset or the functionality will usually be exchanged, sold or bought with the native coin of the Blockchain that the token resides in. Startups and companies have decided to take advantage of the creation of tokens on Blockchains and are generating their own assets. An example of such is Ethereum’s Smart Contract functionality. By building decentralized applications on top of Ethereum, companies are create heir own tokens for various purposes.
THE APPLICABILITY OF THE BLOCKCHAIN TECNOLOGY IN NIGERIA
As a follow up to an earlier circular by the Central Bank of Nigeria (CBN) on January 12, 2017, on perceived risks associated with cryptocurrency use and adoption in Nigeria, the apex Nigerian bank issued a circular on February 5, 2021, directing all Money Deposit Banks (MDBs) and other financial institutions who have been involved or facilitated any cryptocurrency related transaction to discontinue and to identify and close all such accounts with immediate effect.
This move by the apex Bank in Nigeria generated lots of reactions, including the one from the countries current serving Vice President and former a governor of the CBN (the same institution that has issued the directive). The Vice President, Prof. Yemi Osibanjo in his intervention noted that the only sensible approach to the issue is a robust regulation, rather than withdrawal and frankly, regulation rather than prohibition is the solution.
In a 2018 survey published by the Association for Computing Machinery (ACM), titled: ‘Making Sense of Blockchain Applications: A typology for HCI’, it was revealed after a thematic analysis and qualitative survey of more than 200 emerging Blockchain startups, projects and applications, that there are seven high-level themes or typology of Blockchain applications that should orient researchers, policy makers, regulatory authorities and stakeholders in the Blockchain industry. To wit, these classes of Blockchain applications include:
- Underlying infrastructure
- Financial services
- Proof as a service
- Property and ownership
- Identity management
- Governance (these would be dealt with in a follow up article)
In Nigeria, after a long period of silence and indifference toward Blockchain related activities, the Securities and Exchange Commission (SEC), in September 14, 2020, issued a regulatory guideline for digital currencies and crypto-based companies or startups. The aim, according to the capital market and investment regulatory agency is to protect investors and create standards for ethical practices. And in outlining the scope of the regulatory guideline, the Commission mentioned that all Digital Assets Token Offerings (DATO), Initial Coins Offerings (ICOs), Security Token ICOs and other Blockchain-based offers within Nigeria, by Nigerian issuers or by foreign issuers targeting Nigerian investors will be regulated.
The Commission also stated that it will regulate crypto-token or crypto-coin investments when the character of the investments qualifies as securities transactions and for this basis, it presumed that every crypto asset in Nigeria will be treated as securities unless it is proven otherwise. That where a crypto token or asset has been so qualified, that such will be registered or regulated.
In any case, this paper is not to determine what constitute a financial security. It is enough for purposes of determining the extent of applicability of blockchain in Nigeria that SEC treats every Crypto Asset or token as securities, which is a welcomed development.
The question however is whether Nigeria in her efforts at regulating Blockchain applicability will do no more than just regulating the financial services part, out of the seven, high-level typologies of the Blockchain technology; which clearly, involves more than financial services. Going by the survey already alluded to, a comprehensive body of law is needed to provide a holistic legal framework for blockchain applicability in Nigeria. The guideline from SEC is merely an attempt at regulation. But more is needed to tackle the issues and human challenges associated with the blockchain technology.
Why Should Nigeria have a Comprehensive Legal Framework on Blockchain?
Recent times have met with a global adoption of cryptocurrency and Nigeria is not innocent. In Q1, 2020, it is reported that Nigerian youths led the rest of the world in crypto adoption, and according to a report by ‘Chainalysis’, Nigeria was eight overall in Crypto adoption in Q2, 2020. This adoption, together with the rapid proliferation and the obvious lack of a definite regulation has seen the entry of several Crypto-based startups into the Nigerian market with no regard for market sanity- all looking to grab what they can grab from Africa’s most populous nation.
Hanu Fejiro Agbodje, the CEO of Patricia, elucidating this point at the ‘Techpoint Build, 2020’ stated during a session on: ‘Securing Africa’s Future with Digital Currencies’ that the introduction of specific guidelines for the Crypto space becomes relevant in order to improve safety for Crypto users in Nigeria and to build trust in the system. He added, that while this is welcomed, care should be taken so as not to unnecessarily stifle activities in the space.
According to Bitcoin.com, 11% of connected Nigerians use cryptocurrencies. Also, Coinmarketcap, a platform for tracking the price of cryptocurrencies, reports that the tracking of the prices of cryptocurrency in Nigeria grew to 211%. Binance research also highlights that there has been an increase in interest in cryptocurrency and Nigeria leads the pack of the countries who are showing interest in cryptocurrency. Also, cryptocurrency exchange platforms and apps are on the rise in Nigeria. Buycoins, an exchange platform for cryptocurrency processed over N500,000,000 (Five Hundred Million Naira) worth of cryptocurrency in the space of 3 months, while other platforms such as Patricia, Binance and Quidax record cryptocurrency transactions daily in Nigeria.
The introduction of cryptocurrency has made it easier to exchange values during transnational transactions with minimal level of involvement by the traditional financial institutions. Just as easy as it has made exchange of values during legal transactions, so also has it made cross-border illegal transactions and money laundering easy with no fear for culpability; because cryptocurrency transactions are almost untraceable and anonymous without proper KYC.
However, some stakeholders have argued that despite recent rapid adoption of cryptocurrency, the time for government involvement or regulation is not ripe. For instance, in 2019, SEC released a draft document to regulate digital assets, but some industry players insisted that though it was a good move, it was much too early for a regulation. That Crypto activities in Nigeria involve mainly peer-to-peer (P2P) exchanges, and a very minimal number of merchants accepting Crypto Assets for our local fiat. They also encouraged government to concentrate more yet, on contributing to the development of the Blockchain technology in Nigeria before moving to regulate it. These calls are in good faith. So far, the government have shown no interest or commitment to drive investment in this space and the numerous circulars both from the SEC and CBN point to this fact.
The Blockchain technology has developed beyond imaginations and becoming increasingly accepted worldwide. This level of development is also possible in Nigeria. It is agreed that there is need for regulation, there is also no denying that regulation should be holistic in approach, covering all seven high-level themes or typologies of the Blockchain industry.
From the guideline released by the SEC, it can be said that the SEC is only concerned with parts of blockchain currently gaining traction in Nigeria. They cannot be faulted on that because law making is not their call. It is therefore, a direct call on the authorities concerned to come up with a holistic document that takes care of all conceivable issues and challenges posed by Blockchain adoption in Nigeria.
Government is also encouraged to be more involved in driving investments in the space rather than prohibiting activities in the space. Regulation is not all there is to be done in the space, the need to build supportive infrastructures to drive growth and acceptance also requires government.