CBN CIRCULAR ON CRYPTOCURRENCY: CBN AND SEC SINGING DISCORDANT TUNES

By a Circular dated 5 February 2021 believed to have emanated from the the Central Bank of Nigeria (CBN), the apex Bank directs banks and other financial institutions to disscoatiate themselves from cryptocurrency transactions on the basis that it is prohibited. The CBN also directs that all accounts of persons transacting in cryptocurrency be closed.

SEC’s earlier Statement

The CBN’s directive is coming at the heels of the recent Statement issued by the Securities and Exchange Commission (SEC) regarding digital assets.

As we already know, SEC placed virtual/digital assets into four different categories:

1. Crypto Assets – Crypto Asset- e.g non-fiat virtual currency.

2. Utility tokens or “Non-Security Tokens”
(e.g., virtual tokens). These tokens simply provide users with a product
and/or service.

3. Security Tokens (e.g., virtual tokens that
have the features and characteristics of a security).

4. Derivatives and Collective Investment Funds involving crypto assets would be regulated as Specified Investments under the Investments and Security Act and the Regulations.

The Commission also defined Crypto Assets as:

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.

Therefore, clearly, the SEC categorized cryptocurrency as some kind of security but not having the status of a legal tender. Only the CBN has the powers to regulate legal tenders; and can also regulate other securities or assets touching on money and the economy.  Categorization of digital assets is still a problem. The SEC’s categorization does not pretend to be watertight in comprehension.

The categoric statement by SEC was to the effect that All Digital Assets Token Offerings (“DATOs”), Initial Coin Offerings (“ICOs”), Security Token ICOs and any offering of digital assets on a blockchain; within Nigeria or;
by Nigerian Issuers or; foreign Issuers targeting Nigerians, will be regulated by SEC.

All virtual assets will now be registered by SEC as the Commission opts to treat them as securities unless proven otherwise by the promoters. The registration may be through an Initial Assessment Filing to determine whether the assets are securities and to satisfy the burden of proof on the sponsor. Or there may be direct registration of the virtual assets with SEC without the Initial Assessment Filing.

While business promoters who try to raise funds from the investing public through token offerings and the more popular initial coin offerings are caught by SEC’s regulatory web, those who engage in purely providing platforms for cryptocurrency exchanges are not. However, they may come under the watch of CBN.

And here we are with the current CBN’s directives to banks and other financial institutions mandating them to distance themselves from cryptocurrency in every way. The Circular of 5 February 2021 was said to be in furtherance of the earlier one issued on 12 January 2017.

It does appear that the CBN and SEC are singing discordant tunes within the space. And this may not augur well in the overall interest of the nation’s economy. 

Notes to banks and other financial institutions

While stakeholders in the digital assets space are looking to further engage the CBN and other regulators like the SEC, it is important that banks and other financial institutions should endeavour to observe the CBN directives responsibly. There is nothing in the directive that empowers the banks to close the accounts and keep the money. Banks and other financial institutions must account for all funds in their custody. No person whose account is affected in one way or the other should be made to suffer any acts of victimization. Up till date, dealings in cryptocurrency is not illegal any Nigeria. There is no law which expressly states so. An act or omission can only be illegal or criminal if it so provided for in a written law by way of legislation. A CBN circular lacks the capacity to criminalize any act or omission. That would be unconstitutional by virtue of Section 36(12) of the 1999 Constitution (as amended).

Conclusion

Oftentimes, we are told that the Government is not interested in stifling innovation. But it appears we are facing strangulation in the form of regulation. We need to be seen as moving forward in a fast moving world. 



Stephen Azubuike
Author: Stephen Azubuike
Stephen is a lawyer with expertise in Commercial Dispute Resolution and Technology Law practice. He is a Partner at Infusion Lawyers. He has successfully argued cases from the High Courts of various jurisdictions to the Appellate Courts on behalf of financial institutions, other corporate bodies and multinationals. He has worked with a number of startup tech companies. He tweets @siazubuike.
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