Introduction
It may have been impossible to imagine that, at any time in our history, the world would be accustom to dealing and transacting in non-physical currencies, i.e, a virtual currency. This virtual currency also known as ‘crypto currency’ has gained global relevance in the financial sector over the last 2 decades, relevance which has threatened the stability of the traditional modus operandi.
Crypto currencies are digital or virtual currencies protected by cryptography[1], rather than by a centralized authority[2]. That means transacting parties do not need to exchange physical cash as it is all online. Individuals can transfer crypto currency to other individuals online without a go-between (banks). Bitcoin and Ethereum are some of the stalwarts of the crypto revolution, however, due to the artificial and decentralized nature of these virtual currencies, there are innumerable crypto currencies in circulation. You can buy crypto with a credit card or, in some cases, get it through a system called “Mining”. Crypto is stored in digital wallets, either online, on your computer, or on any other hardware.[3]
Brief history of crypto
David Chaum, an American Cryptographer, invented the first-ever internet based currency called DigiCash in the Netherlands[4]. The currency garnered tremendous media coverage and even attracted the attention of Microsoft who wanted to put DigiCash on every Windows PC in exchange for $180 million. However, this offer was declined and DigiCash continued making a few other lethal mistakes leading to its eventual bankruptcy in 1998[5]. Cybercash was another such attempt, but unfortunately, it also ultimately failed[6].
In 1998, Wei Dai published a proposal for ‘b-money’. This was a practical method to enforce contractual agreements between two anonymous individuals or groups. In his proposal, he described two different methods of maintaining the transaction data – first, every participant on the network would keep a separate database of how much money belongs to the users and second; all the records are maintained by a specific set of users[7]. In the second method, the users who have custody over the records of the transactions are incentivized to remain honest since they have their own money in a special account and they could lose it if they are dishonest. This method came to be known as ‘proof of stake’, and while Bitcoin uses the first method, many other cryptocurrencies, Ethereum being one of the most popular, use the proof of stake method due to its efficiency. In 2005, Nick Szabo, a computer scientist and cryptographer, published a proposal for Bit Gold which built on the ideas developed by other cryptographers[8].
Regulation of Crypto currency in Nigeria
Crypto currency is developed with the principle of decentralization, which means that it eliminates the need to manage it from a central authority in a way that traditional currencies are accustomed. However, some states have managed to regulate the nature and use of crypto currencies, the fact is there are different opinions about what crypto currency can be called per time. This and many others contribute to and hinder its regulatory frame work.
The few rules that will now be available in some areas are slowly becoming more and more popular as many governments try to get specific technical considerations before they start trying to apply certain standards for its use and operation. However, its rules depend on the efforts of each country.
The Securities and Exchange Commission of Nigeria (SEC) in an attempt to regulate crypto on 14th September, 2020, released their Statement on Digital Assets and their design and treatment (“Statement”) based on the authority granted by the Investment and Securities Act 2007 (“ISA”)[9]. Before the release of the regulators warned citizens about the consequences of investing in crypto and warned the general public to tread cautiously[10]. The statement aimed at creating standards that encourage ethical practice that will ultimately make for a fair and efficient market.
THE BAN OF CRYPTO CURRENCY IN NIGERIA
Recently, the Central Bank of Nigeria (CBN) has written to all banks and other financial institutions stating that it is prohibited to trade in crypto and to support payments for crypto exchanges. The CBN in its circular dated January 12, 2017, cautioned Deposit Money Banks (DMBs), Non-Bank Financial Institutions (NBFIs) and other financial Institutions (OFIs) as well as members of the public on the risk associated with transactions in crypto currency.[11]
The CBN stressed that dealing in crypto currencies or facilitating payments for crypto currency exchanges is prohibited. It further directed all DMBs, OFIs and NBFIs to identify persons, entities transacting in or operating crypto currency exchanges within their system and ensure that such accounts are closed immediately.
This directive attracted agitation from major economic stakeholders and members of the public which necessitated another press release by the CBN were it further consolidated its initial publication and explained the reasons for its restrictions on crypto related transactions by banks and financial institutions[12]. The CBN stated, in the press release, that crypto currencies are issued by unregulated and unlicensed entities and as such, the use of crypto in Nigeria contravened existing law as they have not attained the status of a legal tender. It also identified the anonymity of individuals transacting in crypto currency as an issue. It stated that anonymity and the lack of Know Your Customer (KYC) made it susceptible to illegal use such as money laundering and the financing of terrorism. Another justification was the volatility of crypto which it said has threatened the stability of financial systems in other countries[13].
The general public begun contesting the right of banks to block its customers’ accounts without a court order, bearing in mind the fact that bankers owe its customers a duty to care and protection when it relates to the operation and management of their account.
In view of the above position taken by the CBN, we will now examine the legality of the rights of banks and financial institutions to block customers account without a court order.
The legality of placing restrictions on the accounts suspected to be used to facilitate trade in crypto currency
It is a well-known fact that a bank owes its customers a duty of confidentiality. This means that the details of the bank account should not be revealed or disclosed to a third party, transactions conducted through the bank account must be confidential and authorized. This privacy policy is the foundation of modern banking practices. Through this regulatory service, the bank is expected to protect the interests of its customers. However, this privilege enjoyed by its customers can be avoided legally where the court issues an order mandating a bank to disclose the details of a customer or any transaction on the subject account it deems fit.
In the recent case of Guaranty Trust Bank v. Mr Akinsiku Adedamola[14] the court of Appeal held that:
“By the provisions of section 34(1) of the Economic and Financial Crimes Commission Act, 2004 the Economic and Financial Crime Commission has no power to give direct instructions to Banks to freeze the account of a customer without an order of court, so doing constitutes flagrant disregard and violation of the right of a customer.”
Section 97 of the Banks and other Financial Institutions Act, 2020[15] vest on the Governor of the CBN, the power to make an ex-parte application for an order of the Federal High Court to freeze any account with any bank, specialized bank or other financial institutions where he has reason to believe that transactions undertaken in that account may involve the commission of any crime under any law. Continuing, the Governor is to refer the matter to the necessary law enforcement agency for investigation of the suspected crime and where it is not possible for the appropriate law enforcement agency to conclude investigations, the Governor may again apply to the Federal High Court for the continued freezing of the account concerned.
In spite of the position of the law on this issue, some legislations such as Section 6(5)(b) of the Money Laundering Act, LFN, 2004 permits anti- graft agencies to freeze an account for up to 72 hours[16] and also the case of Katah Investment Property Limited v GTbank[i], were Justice Dimgba recognized the extent of such powers albeit, should not extend beyond 72 hours.
The position of the law is clear on the requirement to obtain a court order before restraining the access of a customer to his/her account. Despite the fact that the CBN is vested with regulatory and oversight powers over DMBs and other financial intermediaries, we must recognize that where a “Post No Debit” order negatively affects an individual, it could bear some legal consequences for the MDAs, especially where it was done without a court order.
The Ripple Effect of the Ban on Nigeria’s Economy
The global economy is now embracing the digital currency as not only a medium of exchange but also a source of risk and store of value.
The price of Bitcoin recently skyrocketed to a record high of $58,000, up 5566.67% from its value four years ago before falling to $56,000. In Nigeria, the crypto market expanded so much that the volume of Bitcoin traded monthly is estimated at $200mn according to Buy Coins, one of Nigeria’s largest crypto currency exchanges[17].
Sometime in 2020, 3 major technology driven disruptors in the transportation sector had their multi-million-dollar business crashed through a Lagos state government ban directive on motorcycles in Lagos[18], this exposed the volatile nature of doing business within Nigeria.
The ban on crypto will also clearly reduce the confidence of investors in the Nigerian market. It increases the legal risks associated with doing business in Nigeria and reduces the rate at which investors are ready to get new money into Nigeria.
Two days after the Nigerian government banned crypto, Tesla reportedly invested USD$1.5 Billion in Bitcoins and plans to accept the same payment in the future[19]. This suggests that the world is becoming more and more global and technology is a key factor for the future. Money is a German segment of any economy and yet it is understandable that governments seek to create a balance in the development of the financial sector by way of regulations.
P2P trading in crypto currency
P2P (peer to peer) trading became the most prevalent alternative to the exchange of crypto currency following the ban by the CBN.
The P2P trading allows market participants to interact with each other without third parties, the transactions between counterparties on peer-to-peer exchanges are directed exclusively by pre-programmed software.
This alternative approach has a number of comparative advantages, as well as downsides. Overall, the peer-to-peer crypto currency exchanges are vivid examples of the decentralization philosophy.
Recommendation
As an alternative to placing a ban on crypto, Nigerian regulators should try to explore this new technology and channel same into benefitting the public. CBN’s drive has always been financial inclusion for the unbanked through digitization[20], perhaps it should borrow a leaf from the strategy of SEC on trying to understand the complex infrastructure of the crypto market worldwide and eventually, turn it into a tool for trade and investment especially with international economic players.
Conclusion
The CBN decision on crypto currency has attracted a lot of unpleasant reactions from stakeholders and the general public. In February, Nigerian lawmakers debated the CBN directive, with some senators expressing outrage over the ban on crypto trading.
The enforcement of the CBN ban on crypto may leave Nigerian banks unprepared for the global crypto economy as we continue to see evidence that crypto is no longer a fad but a growing form of payment that is rapidly accepted worldwide.
One way or another, the future of crypto currency and its importance to the global economy in the next few years will tell whether the CBN has lost a golden opportunity for Nigerian banks to connect Nigeria as the biggest market for crypto currency in Africa.
EDITORIAL TEAM
1. Ikechukwu Nwakanma
(Partner)
ikechukwu.nwakanma@nakudulawpartners.com
2. Emmanuel Omole
(Senior Associate)
emmanuel.omole@nakudulawpartners.com
3. Isimeme Andrew
(Associate)
Isimeme.andrew@nakudulawpartners.com
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[1] Cryptography is a method of encrypting and hiding codes that prevent oversight, accountability, and regulation. While there are a number of cryptocurrencies now in circulation, bitcoin was the first to be introduced in 2009 and now accounts for about 6% of all cryptocurrencies.
[2] https://www.lexico.com/definition/cryptocurrency
[3] https://www.investopedia.com/news/bitcoin-safe-storage-cold-wallet/
[4]https://www.digit.in/features/tech/digit-mag-the-origins-of-cryptocurrency-53723.html
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8]Ibid.
[9] Section 13 of the Investment and Securities Act, 2007
[10] [10] https://sec.gov.ng/statement-on-digital-assets-and-thier-classification-and-treatment/
[11]https://www.cbn.gov.ng/Out/2021/CCD/Letter%20on%20Crypto.pdf
[12]https://www.cbn.gov.ng/Out/2021/CCD/CBN%20Press%20Release%20Crypto%2007022021.pdf (The CBN Press Release February 7th 2021
[13] www.cbn.gov.ngcentralbankofnigeriapressrelease
[14] (2019) 5 NWLR @ PG 30
[15] The Banks and other Financial Institution Act 2020.
[16] Section 6(5) (b) of the Money Laundering (prohibition) Act 2011 as amended: Notwithstanding the provisions of paragraph (a) of this subsection, the chairman of the EFCC or his authorized representatives shall place a stop order not exceeding 72 hours on any account or transaction if it is discovered in the course of their duties that such account or transaction is suspected to be involved in any crime.
[17] https://www.bloomberg.com/news/articles/2021-02-17/bitcoin-jumps-to-all-time-high-as-cryptocurrency-fever-continues
[18] https://techcabal.com/2020/01/27/oride-maxng-gokada-banned-in-lagos
[19] https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html
[20]https://www.cbn.gov.ng/Out/2019/CCD/Q2%202019%20Financial%20Inclusion%20Newsletter_Final_08.08.19.pdf.
