AN ANALYSIS OF THE LEGAL STATUS OF CRYPTO-CURRENCY IN THE NIGERIAN FINANCIAL SYSTEM
By U. S. Odigbo
Crypto-currency in Nigeria is one of the major off shoots of the Technology wave that has changed the Nigerian business landscape. Advancement in technology has seen the birth of crypto-currency as a major consideration in both the tech and financial worlds.
Crypto-currency is a type of digital currency in which a record of transactions is maintained and new units of currency are generated by the computational solution of mathematical problems, and which operates independently of a central bank; A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
A crypto-currency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many crypto-currencies are decentralized networks based on block chain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of crypto-currencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. The crypto currency market has grown over the years and it keeps expanding as new crypto-currencies emerge more frequently. As at August 2018, records revealed the existence of over 1,600 crypto-currencies available on the internet. Currently, there are over 2000 crypto currency and virtual currencies, this goes to show the speed at which it grows.
Crypto-currency: Currency or Commodity
The question arises whether crypto-currencies satisfy the requirements or characteristics of money or a currency and whether crypto-currencies should be classed as currency or commodity. The answers to these posers have attendant legal implications. For instance, classifying crypto-currencies as currency would put them within the purview of currency laws whilst classifying them as commodity may exclude them from the currency laws. Also, classifying crypto-currencies as currency may qualify them as “assets” for capital gains tax purposes; whereas a classification as commodity should bring them within the ambit of goods under consumption tax. As with most concepts, currency has no generally-accepted definition; however, certain characteristics are essential. Currency should have intrinsic value, be a legal tender, ground claim against issuers, be a medium of exchange, a unit of account, and a store of value. To all these features of a currency, crypto-currency answers in the negative except that it is now rising as a medium of exchange in online retail and is also used as store of value (subject to high exchange rate risk and sudden confidence shock which may affect its very value). Also, it is decentralized, its supply source is private, the supply quantity is inflexible, the supply rule is based on computer program, and this supply rule can change with the notional agreement of majority miners.
Given their increasing use as a medium of exchange in Nigeria and globally, crypto-currencies are arguably currencies. In my opinion, crypto-currencies are more currency than they are commodities. They are used to trade and make payments despite the fact that they exist purely in a virtual form. Thus, despite the fact that crypto-currencies possess some attributes of commodities, they are more suitable to be classified as currency.
Crypto currency: Economic and Cyber crimes
Cyber-crimes exploit vulnerable infrastructural systems that progressively become interconnected on an almost daily basis. Jesse Bray made the connection between anonymity, crypto-currency and cyber-crime. He posited that the use of crypto-currency is open to cyber-attacks such as Denial of Service attacks, theft, release or manipulation of sensitive data. He argued that the anonymity created in cyberspace allows for the loss of self-regulation, which could amount to deviant behavior. In 2017 a ransom-ware attack affected over 200,000 computers in 150 countries. Sensitive data on these computers were encrypted and the owners were asked to pay ransom amounts to release the information back to them.
There have been a number of criticisms on crypto-currencies, and most have been associated to the criminal tendencies connected with its usage. The US president, Donald J. Trump stated, ”Crypto-currencies are not money given; they are highly volatile and tend to facilitate criminal behavior“. In a similar light he again stressed the potential for using crypto-currencies in other illegal activities such as drug trafficking. A US Senator, Charles Schumer, in another statement explicitly referred to Bitcoin as a “surrogate currency” that enabled criminal activities. These observations and a host of others goes to confirm the that the nature of cryptocurrencies make them well suited for a host of nefarious activities such as money laundering, tax evasion, drug trafficking etc.
Approach to Crypto-currencies in Nigeria
The global financial system is no doubt embracing the current transition from physical currency to almost virtual currencies through the medium of technology. This wave has ushered in the birth of crypto-currencies. In the light of this outbreak, there has been a lot of positive and negative discourse on the value of crypto-currencies to the Nigerian fiscal system. Investors have in their masses invested in crypto-currencies, the most common being Bitcoins all in a bid to some sort of recoup interests in the nearest future. Over time the awareness that bitcoins like most crypto-currencies operates independently and outside the control or regulation of any intermediaries such as banks, financial institutions, or the government triggered a wake-up call directed to the risks investors may be exposed to when involved in this venture.
Relatively, the Nigeria government has attempted to place a ban on crypto-currency, although its legal status remains ambiguous unlike in countries like Morocco and Algeria where there is a clear ban on trading in Bitcoins such that a breach attracts heavy fines.
One of the actions taken by the Nigerian government is by issuing very strong notices about the pitfalls of investing in the crypto-currency markets. Such warnings were issued by the Central Bank (CBN) and the Securities and Exchange Commission (SEC). The warnings are largely designed to educate the citizenry about the difference between actual currencies; which are issued and guaranteed by the state, and crypto-currencies; which are not. The government also added the risk resulting from the high volatility associated with crypto-currencies and the fact that many of the organizations that facilitate such transactions are unregulated. It was also emphasised that citizens who invest in crypto-currencies do so at their own peril and personal risk and that no legal recourse is available to them in the event of loss.
The various warnings issued also projects the opportunities that crypto-currencies create for illegal activities, such as money laundering and terrorism, illegal drug trafficking, human trafficking, and support for radical movements. In January 2017, the CBN issued a statement banning any transactions in Bitcoins, this was carried out by the banks’ regulator circulating a statement to all banks in the country warning them against facilitating the trading of Bitcoins in the country. The CBN stated that traders risked losing all their money when they trade in a currency that is not regulated. This risk is largely associated to the volatile nature of crypto-currencies. However, a lot did not heed to this warning as most crypto-currency exchanges continued to operate as usual.
The Nigeria’s SEC also made a statement in 2017 warning Bitcoin traders to exercise extreme caution. Again in March, 2018, the CBN reiterated its stance on crypto-currencies warning traders that digital assets are a mere gamble.
The trade in crypto-currency is not extinguished despite the series of warnings, the CBN however took decisive steps by having an organized committee to review and articulate a road map for blockchain and crypto-currency regulation as well as the possible safety when used as an asset of value and in line with global practices.
Like most African countries, the legislation regulating crypto-currency in Nigeria is below par and inadequate to cater to the needs of the crytpo-currency world.
Existing laws relating to Crypto-currency in Nigeria
It is clear that there is a great gap between the regulatory framework regulating the use and trade of crypto-currency in Nigeria. It is however, imperative to analyze the laws in Nigeria that have provisions which would apply to crypto-currency as a currency in Nigeria.
- The Cyber-crime Act
The Cyber-crime Act is an act which came into existence to check the rising use of the internet for illegal purposes. It seeks to identify and punish crimes committed with computers and the internet and reduce the level of fraud perpetuated with the use of the internet.
The Cyber-crime Act prohibits Computer related forgery, computer related fraud and identity theft and impersonation. The Act provides a punishment of not less than three years imprisonment and/or N7,000,000 fine.
These provisions relate to the use of crypto-currency in the sense that where in the process of any crypto-currency based transactions, a person contravenes any of these provisions, the person shall be guilty of an offence under the Cyber-crime Act.
- The EFCC Act
The EFCC Act is the legislation that regulates the activities of the Economic and Financial Crimes Commission which is a commission created to investigate and prosecute economic and financial crimes in Nigeria. The EFCC Act prohibits the acquisition and use of illegally obtained products and funds. It also prohibits the control and possession of illegally obtained funds. The punishments specified under the Act range from fines to imprisonment for life.
Despite these provisions, there is a great gap in the legal framework relating to crypto-currency. The crypto-currency world is a new innovation and as such, requires specific regulations that cater to the special nature of it. It is very important for a legislation that takes in the uniqueness of crypto-currency to be created. These provisions do the bare minimum and leave a lot of gaps to be exploited.
Certain regulatory challenges pertaining to crypto-currency confront regulators. One is the definition/categorization challenge which arises because crypto-currencies combine properties of currencies, commodities, capital assets, security, and payments systems and their classification as one or the other will often have or attract varying legal implications and tax treatment. As stated earlier, the problem of classification as either commodity or currency deters its easy regulation. Another challenge is the global reach of crypto-currencies arising from their decentralized and digital nature. Other challenges include difficulty in monitoring and strong connection with crimes like money laundering and terrorist financing. These regulatory issues have tampered with the establishment of crypto-currency as legal tender in many jurisdictions. This, in turn, has affected their growth and dampened public perception on the currency which is critical for the growth of the crypto-currency system.
There are legal issues associated with almost every financial activity in the world and crypto currency is not an exception. The peculiarity of the currency no doubt has contributed to the difficulties associated with its regulation globally. Every new technology is pre-destined to suffer legal setbacks, from mainstream acceptance to misuse and abuse. In 2018 alone, it was reported that £4 billion was laundered via crypto-currencies in Europe. An increase in this special brand of money laundering and other cybercrimes has a negative impact on the crypto-market, as investors lose confidence to invest their money into the market.
A call for governmental introduction of a distinctive anti-money laundering regulations and data recoverability regulations is therefore eminent, considering the technological advancement in the use of crypto-currencies. The ability to uncloak masked transactions in the crypto-world is vital to reducing the associated legal risks, ensuring accountability and eliminating frauds. As earlier observed, some countries have taken notable steps in expanding their laws on money laundering, counter-terrorism, and organized crime to include crypto-currency markets, thereby requiring banks and other financial institutions to conduct all necessary due diligence requirements imposed under such laws.
With these evolving global trends in the financial sector, Nigeria’s financial regulatory institutions have taken the initiative of developing a robust financial system and regulation that will accommodate the current tech. This paper concludes that in spite of the imminent abuse associated with trading in crypto-currency, it should not be condemned in its totality; rather stringent national and global regulations should be put in place in curbing its misuse.