Virtual Reality: Bitcoin in Nigeria | by Olalekan F. Ojo & Maduka Onwukeme

“… as a direct result of the CBN’s current monetary policy, the legality of Bitcoin in Nigeria is becoming a serious issue that is raising pertinent regulatory questions.”

Photo Credit: Zach Copley
Photo Credit: Zach Copley

Invented by Satoshi Nakamoto, Bitcoin is a form of digital currency. It is not printed ‘flat’ money, not as naira, nor as dollars, or euros. The principal and best known example of a crypto-currency, bitcoin transactions and payments are always made and held electronically. In the current climate of Nigeria’s currency insecurity, bitcoin is presenting something of a legal problem to the Central Bank of Nigeria (CBN). Indeed, as a direct result of the CBN’s current monetary policy, the legality of Bitcoin in Nigeria is becoming a serious issue that is raising pertinent regulatory questions.

Seemingly unbeknownst to the financial powers that be, and with the use of mobile phone technology –  as of 2014, there were nearly 137 million active mobile phone lines in Nigeria – many Nigerians are using the newly introduced bitcoin to bypass the CBN’s restrictions on foreign exchange.

In a technical sense, we may say that the use of bitcoin in Nigeria is not legal under current legislation, but only because the CBN has not yet taken up its duty to regulate the virtual currency

Although Nigeria has not, many countries have already taken various steps to regulate the use of bitcoin. Ahead of the game, Luxembourg was among the first to begin bitcoin regulation in 2014, and it issued its first BitLicense in October 2015.  In Germany, bitcoins are regarded as legally binding financial instruments that fall into the category of units of account, which are not classified as foreign currency but as ‘private money’. Bitcoin businesses are subject to anti-money laundering regulations and in some instances may even need to obtain a banking license in Switzerland. Private individuals are allowed to trade in bitcoins in China but financial institutions are barred from handling bitcoin transactions.

In Australia, where bitcoin is classified as property and several official bitcoin exchanges have been established, trade in the digital currency is booming. So much so, leaders in Australia’s digital currency business have recently come together to establish a Digital Currency Industry Code of Conduct.

In mid 2015, the South African bitcoin exchange ICE3X was reported to have launched bitcoin trading in Nigeria for the first time. The launch’s timing cannot have been a coincidence. Since 2015, Nigeria has been reeling from severe government restrictions on foreign exchange. Following a drastic slump in crude oil prices – on which the country’s economy is heavily dependent for foreign cash– the CBN has consistently maintained a monetary policy of artificially propping up the naira at N199 to the dollar; official access to which is being limited. As such, the parallel market, continues to reflect the real exchange rate of nearly N400 to the dollar. Nigeria is running dangerously low on foreign reserves; and bitcoin is cashing in.

It should be noted that cash, credit cards and current banking systems widely surpass bitcoin in terms of the potential for their use to finance crime and illegal activity.

Though Nigeria has not got round to regulating bitcoin, it is clear that some officials are, at least, aware of its exitence. Speaking at the second Anti Money Laundering/Combating Financial Terrorism Stakeholders Consultative Workshop in Abuja in August 2015, Dr Okwu Nnanna, Deputy Governor of Financial System Stability at the Central Bank, said: “virtual currency was dangerous because it was not a legal tender of any country hence it has a borderless nature without jurisdiction which makes it a channel for money laundering.”

Apart from Dr Nnanna’s statement, the CBN has not begun to formally regulate bitcoin; though many Nigerians are using and accepting bitcoins in the face of severe foreign exchange restrictions. It is, further, difficult to gauge the precise number of Nigerians engaged in bitcoin transactions or to assess the size of ICE3X’s operations in Nigeria because neither the National Bureau of Statistics, nor the CBN, has begun to collect any data about the size of the bitcoin market in Nigeria. Nevertheless, this relatively new phenomenon in the Nigerian financial space can only be expected to grow.

Ahead of the game, Luxembourg was among the first to begin bitcoin regulation in 2014, and it issued its first BitLicence in October 2015

Despite the CBN’s August 2015 statement, the lack of formal regulations that specifically regard bitcoin means that it would be wrong to conclude that bitcoin use is, in fact, illegal in Nigeria. Based on currently existing legislation, the use of bitcoin in Nigeria is neither legal nor illegal.

On the one hand, there is currently no Nigerian legislation that makes bitcoin illegal. Although section 15 of the Central Bank of Nigeria Act 2007 defines Nigeria’s currency as “the Naira which shall be divided into one hundred Kobo”; section 2 of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act CAP F34, Laws of the Federation, 2004 provides that “transactions in the Market shall be conducted in any convertible foreign currency,” which includes foreign bank notes and “foreign coins”.

But it would be tricky to define bitcoin as a “convertible foreign currency” since Section 41 of the Foreign Exchange Act defines foreign currency as “any currency, other than Nigerian currency, and includes any note which is or has at any time been legal tender in any territory outside Nigeria, and where reference is made to foreign currency, the reference includes the right to receive foreign currency in respect of any credit or balance at a bank.” Legally speaking, currencies require legal backing and designation as units of exchange. It thus requires a statutory body/institution charged with its issue and regulation i.e. the Central, Reserve or National Bank as the case may be.

As far as the law in Nigeria is concerned, however, the naira is the only statutory unit of currency in Nigeria under section 15 of the CBN Act. Section 20 of the CBN Act further states that the Naira is the only legal tender that may be used at face value for the payment of any amount of goods and services within the Nigerian territories. The law also states that the designation of a unit of transactional exchange as ‘money’ is to be made by the government through the appropriate regulating institution.

in the absence of any specific legislation against Bitcoin use in Nigeria, the cryto currency is also not illegal.

In a technical sense, we may say that the use of bitcoin in Nigeria is not legal under current legislation, but only because the CBN has not yet taken up its duty to regulate the virtual currency, and by so doing accord it the value of ‘money’. Under Nigerian law, Bitcoins and other crypto-currencies are neither legal tender nor foreign currencies under the Foreign Exchange Act.

The latter legislation empowers the CBN, with the approval of the Minister for Finance, to allow such money market instruments as the CBN may determine for trade in the foreign exchange market. In the absence of such approval by the CBN, however, bitcoins are not recognized, under law, as foreign currency permissible for use in Nigeria as ‘foreign exchange’. But in the absence of any specific legislation against Bitcoin use in Nigeria, the crypto-currency is also not illegal.

Whether or not the CBN begins to regulate the use of bitcoin in Nigeria by recognizing it as a form of foreign exchange is not merely as matter of technical legalese. The concerns raised by Dr Okwu Nnanna about the dangers of a virtual currency are real enough. It is these concerns that have troubled some regulators in the United States, for instance, where unified regulation for bitcoin still does not exist. The US Treasury classified bitcoins as a “convertible decentralized virtual currency” in 2013. However in the 2013 case of SEC v. Trendon T. Shavers and Bitcoin Savings and Trust, a Texas US District Court classified bitcoins as a currency. The State of New York’s Department of Financial Services granted its first ever BitLicense to a bitcoin exchange in May, 2015.

It should be noted, however, that cash, credit cards and current banking systems widely surpass bitcoin in terms of the potential for their use to finance crime and illegal activity. In fact, bitcoin appears to bring significant innovation in payment systems and the benefits of such innovation are often considered to far outweigh their potential setbacks. For instance, bitcoins are impossible to counterfeit. Users are in full control of their payments and cannot receive unapproved charges such as with credit card fraud. Bitcoin transactions are irreversible and immune to fraudulent chargebacks. Bitcoin seems to allow money to be secured against theft and loss using very strong and useful mechanisms such as backups, encryption, and multiple signatures. Admittedly, these in-built security mechanisms are precisely why bitcoin could be more attractive to criminals.

What is evident is that with its recent entrance into Nigerian financial markets, the CBN needs to commence regulatory action. It is the CBN’s monetary policy, particularly its restrictions on foreign exchange, that have led Nigerians to innovate by using bitcoin to access foreign exchange. Although banning the currency would be short-sighted and unworthy of a country that aims to encourage domestic industry and innovation, it would behove this government to follow in the footsteps of others by managing the mode of bitcoin operations.

Olalekan F. Ojo is a Nigerian citizen. He is a lawyer at FRA Williams Chambers, one of Nigeria’s most senior law firms. Maduka Onwukeme is a Nigerian citizen. He is also a lawyer at FRA Williams Chambers.

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