‘Resistance is futile’: Why Nigeria rolled back crypto restrictions

The Central Bank of Nigeria (CBN) has dropped its restrictions on banks and financial institutions facilitating cryptocurrency transactions, in a sign that Africa’s largest economy is liberalising its approach to digital assets.

In a note distributed to financial institutions last month, Haruna Mustafa, the CBN’s director of financial policy and regulation, explained that the central bank was reversing the ban it issued in February 2021, which forbade banks from engaging in crypto-related activities.

“The CBN in February 2021 issued a circular restricting banks and other financial institutions from operating accounts for cryptocurrency service providers in view of the money laundering and terrorism financing risks and vulnerabilities inherent in their operations, as well as the absence of regulations and consumer protection measures,” Mustafa wrote.

“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,” he said.

The new regulations outline how banks and financial institutions can open cryptocurrency accounts, provide settlement services, and facilitate foreign exchange inflows for firms transacting in crypto.

As Mustafa suggests, the CBN’s decision partly comes in light of a shift in attitude from regulators around the world in terms of how best to oversee what is already a $1tn industry. In the United States, the US Securities and Exchange Commission recently granted regulatory approval to a Bitcoin exchange-traded fund (ETF), in a move that analysts suggest could lead the industry to become more integrated with the traditional financial system in the years ahead.

However, the move is also potentially an admission on behalf of the Nigerian central bank that its previous attempt to stifle the use of cryptocurrencies has not worked. Indeed, while the central bank has previously taken a stringent approach to the regulation of cryptocurrencies, this has not stopped adoption levels steadily increasing in the West African country.

A study from the crypto exchange KuCoin last year found that 35% of Nigerians aged between 18 and 60 are investing or trading in cryptocurrencies. Furthermore, between July 2022 and June 2023, Nigeria’s volume of crypto transactions grew 9% year-over-year to $56.7bn.

These high levels of uptake are largely because high levels of inflation, a depreciating naira, and foreign exchange shortages have incentivised Nigerians to seek alternative stores of value. Partly as a result of the CBN’s now-abolished restrictions, large volumes of crypto trading in Nigeria are done on informal peer-to-peer (P2P) networks rather than formal crypto exchanges. In their 2023 report, the blockchain consultancy firm Chainalysis found that Nigeria had the highest P2P exchange volume in the world.

‘Resistance is futile’

Experts say that Nigeria’s move to liberalise its regulation of crypto transactions could encourage further adoption of digital assets and bring more P2P trading under the purview of formal regulators.

Senator Ihenyen, lead partner and head of the blockchain and virtual assets practice at Infusion Lawyers in Lagos, tells African Business that “the Central Bank of Nigeria has opened up Nigeria’s banking and financial system for interaction with virtual assets.”

“The CBN has officially recognised that rather than commit limited resources trying to resist the adoption of virtual assets in Nigeria, what it needs to do as a regulator is adopt a risk-based approach,” he adds.

“By regulating virtual assets rather than resisting them, the CBN and other regulators are now in a much better position to ensure the soundness and safety of the financial system.”

Ihenyen also suggests that the central bank’s more accommodative stance could encourage a shift among crypto traders and users in Nigeria – with more activity conducted on regulated cryptoexchanges that can be formally overseen by regulators.

“Especially when you are the number one country for crypto adoption in Africa, and a leading market in the globe, the last thing you want to do as a regulator is drive adoption underground. Underground crypto adoption only puts regulators in the dark,” he says.

“From a financial stability angle, this portends more risk. It is always safer to regulate – resistance is futile.”

Rume Ophi, a crypto and blockchain analyst in Lagos, similarly notes that these developments could empower regulators and law enforcement officials to clamp down on fraud and financial crimes.

“Implementing these changes will facilitate tracking bad actors in the industry, addressing past incidents of scams, and mitigating the impact of events like the FTX collapse,” Ophi tells African Business. “Exchange platforms will be able to share information on illicit transactions, promoting a more secure environment. P2P operations will also align with government regulations.”

Tinubu’s commitment

These changes from the Nigerian central bank reflect commitments made by President Bola Tinubu during his election campaign last year, in which he said that he would “ensure that Nigeria can take greater advantage of relatively recent innovations such as blockchain technology”.

Tinubu also pledged to review the regulations set by the Nigerian Securities and Exchange Commission (SEC) to make them more crypto-friendly.

“We will reform the policy to encourage the prudent use of blockchain technology in banking and finance… we will establish an advisory committee to review SEC regulation on digital assets, creating a more efficient and business-friendly regulatory framework,” he said in March last year.

Ophi says that Tinubu recognises the potential benefits associated with cryptocurrencies. Crypto advocates argue that digital assets can help solve the problems associated with limited access to the formal banking system and allow users to transfer capital across border in a much quicker and cheaper way.

“President Bola Tinubu’s administration fulfilled its promise to leverage crypto and blockchain technology for enhancing our financial infrastructure,” Ophi tells African Business.

“Industry leaders have echoed this sentiment. The focus is now on making sure regulations work for both local and international players entering the largest crypto market in Africa and ensuring the crypto industry contributes to our economic growth.”

While the central bank’s recent move is a step in the right direction for the crypto industry, several obstacles remain that could still act as a barrier to growth. For one, the Nigerian SEC has not overturned the regulations it set out in May 2022, which mandate an upfront capital requirement of 500m naira ($520,000) for cryptoexchanges seeking to obtain a virtual asset service provider (VASP) licence.

Ophi says that such obstacles could see the crypto market in Nigeria be dominated by larger foreign players rather than domestic companies.

“I would urge the Nigerian SEC to reconsider its May 2022 decision and allow local players to compete with international counterparts… with support from the regulators, we could foster a more vibrant and competitive crypto landscape in Nigeria.”

Ihenyen also believes that, with the right approach to regulation from the CBN and SEC, Nigeria’s crypto industry could see significant growth in the years ahead.

“With continual stakeholder engagement in the next few years, especially between regulators and innovators, I believe that Nigeria can achieve the level of trust and confidence needed to reposition the virtual assets sector as one of Nigeria’s fast-growing industries, boosting foreign direct investment and creating economic opportunities in the country,” he says.

“However, there is still serious work to do in this regard.”