INTRODUCTION

In response to global trends and the increasing need for the regulation of Virtual Assets Service Providers (VASPs), including cryptocurrencies and crypto assets, the Central Bank of Nigeria (CBN) issued its "Guidelines on Operations of Bank Accounts for Virtual Assets Service Providers" on December 22, 2023. This marks a significant shift from the CBN's previous stance in its February 2021 circular, where it restricted banks and financial institutions from operating accounts for cryptocurrency service providers due to potential risks and the absence of regulations and consumer protection measures.

In this newsletter, we summarise the key provisions of the Guidelines and their implications.

BACKGROUND

The journey towards regulating virtual assets in Nigeria has been dynamic. To provide context, it is important to highlight the various events leading up to the issuance of the Guidelines. These events are highlighted below:

  1. On the 12th of January 2017, the CBN issued its initial circular on virtual currency operations in Nigeria. This circular outlines the risks associated with crypto transactions, emphasizing concerns about money laundering and illicit activities.
  2. Some three years later, the Securities and Exchange Commission ("SEC"), on September 14, 2020, issued a "Statement on Digital Assets and their Classification and Treatment," recognizing cryptocurrencies, and digital assets as securities, bringing them under SEC's regulatory purview via Section 13 of the Investment and Securities Act, 2007.
  3. In February 2021, through a circular, the CBN restricted banks from facilitating crypto transactions due to identified risks and vulnerabilities associated with virtual assets.
  4. Recognizing VASPs, the Money Laundering (Prevention and Prohibition) Act, 2022 included VASPs as part of the definition of "Financial Institutions".
  5. In 2022, SEC released the New Rules on Issuance, Offering Platforms, and Custody of Digital Assets (the "SEC New Rules"), providing a regulatory framework for the sector.
  6. In May 2023, the Federal Executive Council (FEC) approved the National Blockchain Policy, indicating a broader acknowledgment of the significance of blockchain technology.
  7. In June 2023, the Capital Gains Tax Act was amended to include digital assets in the list of chargeable assets.

THE GUIDELINES: KEY PROVISIONS AND IMPLICATIONS

The primary implications of the Guidelines is to effectively lift the ban on banks and other financial institutions from facilitating crypto transactions on the one hand, and provide a framework for banking relationships and account opening for SEC-licensed VASPs in Nigeria, on the other hand. Some of the key provisions of the Guidelines include:

  1. SCOPE AND APPLICATION: As stated in paragraph 3.0 of the Guidelines, the Guidelines applies to banks and other financial institutions which are within the regulatory purview of the CBN. Specifically, the Guidelines applies to banks, payment service providers licensed by the CBN, and entities registered by the SEC for digital/virtual assets services. It also encompasses SEC-registered Virtual Assets Service Providers, Digital Asset Custodians, Digital Asset Offering Platforms, and more.

The importance of synergy among regulators within the virtual assets space cannot be overemphasized. To this end, the Guidelines seeks to complement the other relevant provisions in the Money Laundering (Prevention and Prohibition) Act, Central Bank of Nigeria (Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT) and Countering Proliferation Financing of Weapons of Mass Destruction in Financial Institutions(CPF)) Regulations, Customer Due Diligence Regulations and other relevant and regulations issued by competent authorities like SEC.

  1. PERMISSIBLE ACTIVITIES: In their operation of accounts for VASPs, financial institutions are permitted to carry out activities which include opening designated accounts, providing settlement services, acting as channels for foreign exchange flows, among others. Please note, however, that financial institutions are prohibited from holding, trading, or transacting in virtual currencies on their own account.
  2. OPERATION OF BANK ACCOUNT BY VASPs: In line with the Guidelines, VASPs can operate designated accounts for virtual/digital assets. It is important to note that these accounts may only be validly opened with the approval of the senior management of the financial institution. Furthermore, an application for the opening of any such account should be accompanied by the documents listed in paragraph 7.3 of the Guidelines which includes SEC license, corporate documents, AML policies, amongst others.
  3. CONSUMER PROTECTION: Further to the Guidelines, financial institutions are required to establish consumer protection systems, complaint channels, and redress mechanisms. Please note that adherence to CBN circulars on consumer complaints management is a major requirement.
  4. SANCTIONS: In addition to the powers of the CBN to penalize license-holders for non-compliance with laws and regulations, the Guidelines provides that the CBN may in the event of non-compliance, issue any or all of the following sanctions against a financial institution, its board of directors, officers or staff:
    1. Prohibition from opening any further designated account.
    2. Monetary penalty not below the sum of N2,000,000.00 (Two Million Naira) against the financial institutions, members of its board, senior management, and any staff, for any infraction.
    3. Suspension of operating licence of a financial institution.

CONCLUSION

In conclusion, it is pertinent to note that the Guidelines activate the SEC New Rules and participants in the sector must comply with both the SEC New Rules and the Guidelines. While blending tradition with innovation might be a daunting task for regulators, we note that collaboration and cooperation among regulators is essential to the successful implementation of the Guidelines and other relevant virtual assets related laws, regulations and strategies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.