Global Courant 2023-05-11 04:40:49
Recent moves by the Nigerian Securities and Exchange Commission (SEC) suggest that the country may be ready to liberalize its approach to digital assets. In early May, the SEC announced that it would allow digital exchanges to apply for trial licenses. These licenses would allow exchanges to offer tokenized coin offerings, a form of fundraising that allows investors to purchase tokens that are digital representations of a particular financial asset.
While such offerings are usually closely related to or backed by cryptocurrencies, the SEC only allows offerings of tokens backed by more traditional financial assets such as stocks, debt, and property.
Further, as the SEC prepares to allow fintech companies to apply for a range of licenses — potentially allowing them to act as subbrokers, robo-advisors, fund managers, and more — the regulator will not allow crypto exchanges. for the same.
While restrictions on crypto activity remain in place for now, this move toward tokenization suggests Nigerian regulators are considering how to regulate the world of digital assets in a more accommodating way.
Nigeria’s love affair with crypto
Chuta Chimezie, founder of the Blockchain Nigeria User Group in Lagos, tells African Business that “what the Nigerian SEC is trying to do looks like a sandbox (…) will test startups in controlled environments before going mainstream.”
While noting that tokens backed by cryptocurrencies are not part of the original commitment, Chimezie says “this is a good development because it means we’ve moved forward from where we used to be.”
Currently, cryptocurrencies are in a legally ambiguous position. In February 2021, the Central Bank of Nigeria declared that the use of cryptocurrencies is “a direct violation of existing law” and banned commercial banks from using them. Despite this, the use of cryptos has skyrocketed with Nigeria being one of the world’s leading markets for digital assets.
Up to 22 million people — more than 20% of the adult population — reportedly own some form of cryptocurrency. Nigeria has the largest number of crypto transactions conducted on peer-to-peer (P2P) platforms, apart from the US. These platforms are informal markets that exist between individuals, completely excluding any financial institutions or centralized authorities.
Nigerians are massively drawn to crypto amid rampant inflation – prices are currently rising at more than 22% a year – quickly eroding cash savings. A poor financial infrastructure that excludes millions from the traditional financial system has further increased the appeal of decentralized alternatives. Crypto is seen by many as a cheaper and faster alternative to crypto fiat money for cross-border payments or transfers.
Amid a widespread shortage of US dollars and hard foreign exchange, many companies are also using dollar-backed crypto assets, such as the stable currency Tether – alternatively. All of these reasons, and the extent to which Nigerians have embraced crypto, could indicate that an outright ban on its use is doomed to fail, hence the SEC taking its first small steps toward potentially easing restrictions.
Government attitude is ‘self-defeating’
Indeed, Adedeji Owonibi, founder and chief operating officer of Convexity, a blockchain consultancy based in Abuja, believes that the current restrictive approach is self-defeating for the government, central bank and regulators. He tells African Business that crypto trading volumes will likely only increase, but if conditions don’t improve, “it will all be on P2P (Pear to pear act) and regulators will have little authority.” It is much better, he thinks, to encourage trading under the supervision of financial regulators.
Owonibi points out that informal P2P trading means authorities “can’t see who’s doing what, what the volumes are – you cut yourself off from granular data and that raises understandable regulatory concerns.” He adds that “we need to find a way to ensure that crypto activity can still take place, but under the supervision of the regulators.”
Both Owonibi and Chimezie are optimistic that the government recognizes the need to change course — and believe the SEC’s move is a step in the right direction. Owonibi has recently worked with the Nigerian government on their blockchain strategy and was part of the SEC’s Regulatory Framework Drafting Committee, where he said he had fruitful discussions.
Owonibi suggests that the Nigerian government is already open to the potential of blockchain, a digital database that records transactions between different entities. Blockchain technology supports the use of cryptocurrencies, but can also be used in non-crypto contexts. The government is reportedly looking into these uses, but could eventually open up to cryptocurrencies itself.
Owonibi tells African Business that the government is “trying to connect the entire economy and drive digital transformation across sectors, using blockchain solutions to increase efficiency.” He says that “we want to embed blockchain in national policy and digital economy strategy for 2030”, also suggesting that blockchain technology could be part of “national IT policy, Nigerian cloud policy, e-governance plan (…) we want to see how blockchain can help with all of these things.”
Of course, there is still work to be done if Nigeria is to take decisive steps towards digital asset regulation. The regulatory framework still does not exist and will need to be carefully crafted taking into account the risks associated with cryptocurrencies and crypto-related malpractice. Owonibi also points out that the tax authorities will need to find innovative new ways to ensure that crypto transactions are subject to the same taxes as any usual business activity.
That said, most agree that the SEC’s recent move suggests that Nigerian authorities are more open to the idea of crypto than they’ve often indicated. “Even at a snail’s pace,” in the words of Chimezie, it seems that Nigeria could change its approach to digital assets and cryptocurrencies.
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