Cryptocurrency in Nigeria: Legal Status and Regulations
Since Bitcoin’s (BTC) inception in 2009, the digital currency world has exploded. Governments globally are actively developing rules and guidelines to manage risks and support innovation in blockchain and digital assets. Nigeria, a country with a large, tech-forward youth population eager to use digital assets, is actively working on its cryptocurrency regulations.
This article explores the regulatory environment for digital assets and cryptocurrencies in Nigeria. First, we will examine the Nigerian crypto market to understand its potential and why regulations are needed.
The Rise of Cryptocurrency Adoption in Nigeria
Nigeria’s interest in cryptocurrencies was already growing, but it became very clear during the crypto market downturn of April 2022. A CoinGecko analysis of Google Trends data showed Nigeria to be among the nations most interested in cryptocurrencies. Examining search histories highlighted Nigeria’s strong interest in digital currencies, even during market dips.
Another study by Chainalysis ranked Nigeria among the top countries in the Global Crypto Adoption Index, particularly for peer-to-peer (P2P) trading. KuCoin and Paxful are key cryptocurrency exchanges in Nigeria for P2P activities.
This growth is driven by limited access to financial services, high inflation, the declining value of the Nigerian Naira, and a large youth demographic (53.7% of Nigerians are aged 15–65). These tech-savvy young Nigerians are looking for new work, investment, and financial independence opportunities. Blockchain and cryptocurrencies have created new paths to growth in Nigeria.
To address the increasing use of digital assets, Nigerian regulators released a set of rules in May 2022. This indicates the country is attempting to balance the risks and potential benefits of digital assets.
Related: IMF calls for tighter crypto regulation in Africa as the industry unfolds
The Legality of Cryptocurrency in Nigeria
The Central Bank of Nigeria (CBN) does not recognize cryptocurrencies as legal tender. In February 2021, the CBN prohibited Nigerian commercial banks from facilitating any cryptocurrency transactions. The CBN aimed to protect citizens from fraudulent crypto activities by ensuring the Nigerian financial system remained separate from cryptocurrency trading.
However, the CBN has also acknowledged the potential of cryptocurrencies to enhance financial inclusion and transparency in the future.
Despite the restrictions on banks, cryptocurrency use is not illegal in Nigeria. There are currently no specific laws criminalizing cryptocurrency use. Cryptocurrencies are actively traded on exchanges across the country, but they are kept separate from the banking sector.
This separation has led to the popularity of peer-to-peer (P2P) trading in Nigeria. P2P trading, where crypto is exchanged directly between individuals, is a common practice. Paxful, a P2P exchange, reported that Nigeria’s Bitcoin trading volume in the first half of 2022 exceeded $400 million, making Nigeria its largest market globally. Despite the CBN’s ban, Nigerians actively engage in P2P cryptocurrency transactions.
Numerous local Bitcoin communities and meetups exist where individuals learn about cryptocurrencies. It is crucial to understand the high risks involved before investing in cryptocurrencies.
Cryptocurrency Regulations in Nigeria
Following the CBN’s ban and increasing cryptocurrency use, the Securities and Exchange Commission (SEC) of Nigeria began developing cryptocurrency regulations. In May 2022, the SEC published a detailed 54-page document titled “New Rules on Issuance, Offering Platforms and Custody of Digital Assets” on its website.
This document provides a framework for cryptocurrency service providers in Nigeria and outlines guidelines for banks and financial institutions on interacting with digital assets.
The document clarifies the definition of digital assets in Nigeria and states that all digital asset token offerings, initial coin offerings (ICOs), and other blockchain-based offerings within Nigeria or involving Nigerian citizens will be regulated by the SEC.
Rules for Crypto Exchanges in Nigeria
Under the SEC’s new rules, all crypto exchanges operating in Nigeria must obtain a permit, granting the SEC access to their records. These “digital asset rules” define a Digital Asset Exchange (DAX) as an electronic platform facilitating the trading of virtual or digital assets.
A virtual or digital asset is defined as a digital representation of value used for transfer, trade, payment, or investment, which includes cryptocurrencies.
As per SEC regulations, DAXs must obtain a Virtual Asset Service Provider (VASP) license by meeting application, registration fee, and other requirements.
Crypto exchanges must also provide evidence of a minimum paid-up capital of 500 million nairas and a fidelity bond covering at least 25% of this amount.
Licensed DAXs must adhere to SEC regulations, maintain records, ensure personnel and resource availability, implement security measures and risk management protocols, and appoint a chief information security officer to mitigate cyber risks.
Cashing Out Crypto for Fiat in Nigeria
Due to the separation between the banking sector and cryptocurrencies following the CBN’s ban, converting cryptocurrencies to fiat currency is challenging. While businesses and individuals have begun using cryptocurrencies for payments, converting them to Naira can be difficult.
In 2022, the Breet App gained popularity in Nigeria and other African countries. It allows users to sell cryptocurrencies for Naira directly to their bank accounts but does not function as a crypto exchange for buying or trading.
The Breet App is an automated mobile app available on Google Play and the Apple Store, which facilitates the conversion of cryptocurrencies like Bitcoin (BTC), Ether (ETH), Dogecoin (DOGE), Litecoin (LTC), and stablecoins to Naira, enabling withdrawals to Nigerian bank accounts.
Users can also employ cryptocurrency brokers like BitPesa, offering brokerage services for selling cryptocurrencies and receiving payment in local currency. Furthermore, P2P marketplaces help connect sellers to individuals willing to exchange local currency for cryptocurrency.
Taxation of Crypto in Nigeria
The Central Bank of Nigeria issued a circular in February 2021, cautioning against dealing with cryptocurrencies, as they are not legal tender. As of now, there is no specific tax law addressing cryptocurrencies in Nigeria. However, the Federal Inland Revenue Service has indicated that cryptocurrency transactions are subject to capital gains tax.
The Nigerian government intends to tax cryptocurrencies and digital assets if the proposed Finance Bill is approved. This bill will cover capital gains from digital assets and extend taxation to digital lotteries and gaming businesses involving digital assets. This proposed bill seeks to align cryptocurrency and digital asset taxation with international norms, promoting cross-border growth and regulation for Nigerian citizens and institutions.
The Future of Cryptocurrency in Nigeria
While Nigeria demonstrates significant grassroots adoption of P2P crypto markets and widespread social acceptance of cryptocurrencies, it lags in areas such as crypto on-off ramps, crypto retail trading, decentralized finance (DeFi), and institutional adoption of cryptocurrency and blockchain technologies.
Key trends to watch that will shape the future of cryptocurrency in Nigeria include:
Cryptocurrency as a Payment Method
Cryptocurrency will be explored not just for retail transactions, but also as a primary method for cross-border payments and faster remittances. Given the slow and challenging existing fiat remittance processes and high crypto acceptance, many online marketplaces and corporations will likely accept cryptocurrencies as payment.
Cryptocurrency as an Investment Tool
Amid rising inflation and a weakening Naira, Nigerians are increasingly viewing cryptocurrencies as a store of value and a means to protect their investments. The ongoing depreciation of the Naira has eroded confidence, leading many Nigerians to seek investments in Bitcoin and other cryptocurrencies.
With established regulatory bodies and the proposed Finance Bill, these investments will gain legitimacy, bolstering confidence in cryptocurrency as a valid method for payment, trade, and investment among average Nigerian citizens.
Author: Shailey Singh