Nigeria’s crypto regulation: Between enforcement and clarity, By Olaoluwa Samuel-Biyi

If Nigeria is to align its crypto regulations with global standards and achieve the continental leadership it aspires to under the Tinubu administration, regulatory and enforcement agencies must collaborate more effectively. The SEC has developed the leadership and expertise to oversee the crypto space, and its guidelines should form the backbone of regulatory enforcement. Disjointed or poorly executed enforcement could stifle the progress made…

The Federal Government of Nigeria has recently taken legal action against a group of crypto traders for engaging in unlicensed trading operations. This move, though unsurprising given the government’s historically tense relationship with cryptocurrencies, raises critical questions about the coherence of regulatory efforts. The link between USDT, a popular stablecoin, and the formal exchange rate between the US dollar and the naira has long been a subject of contention, driving much of the government’s caution.

The merit of these concerns cannot be dismissed, but there is a consensus among stakeholders that the government’s past approach to cryptocurrency enforcement has been ineffective. A regulatory framework that clearly defines the interaction between regulators and the industry was sorely needed. There were high hopes that the new administration would usher in a more pragmatic approach, and the Central Bank of Nigeria (CBN) under Olayemi Cardoso took a promising first step. In December 2023, the CBN issued guidelines recognising virtual asset service providers (VASPs) as financial institutions under the Money Laundering (Prevention and Prohibition) Act 2022 and acknowledged the SEC’s authority to regulate them.

This shift allowed banks and financial institutions to engage with VASPs, provided the latter complied with SEC licensing requirements. This development was seen as a breath of fresh air, marking a significant step forward in the country’s crypto regulation journey. Under Dr Emomotimi Agama’s leadership, the SEC moved to provisionally license two local VASPs, signaling progress toward formalising the crypto landscape.

Despite all of the positive movements above, there are still some fundamental errors that expose a lack of robust understanding of the asset class, or a lack of coherence in or cooperation between regulatory and enforcement authorities on the subject. In the recent lawsuit by the Economic and Financial Crimes Commission (EFCC) filed against some traders of USDT, the charge sheet had the language below:

“That you, …  and …, between January 2021 and December 2021, in Abuja, within the jurisdiction of this Honourable Court, carried on the specialized business of another financial institution without a valid license, and thereby committed an offense contrary to Section 57(1) and (2) of the Banks and Other Financial Institutions Act, 2020, and punishable under Section 57(5) of the same Act. That you… not being an authorized dealer in the Nigeria Autonomous Foreign Exchange Market, negotiated United States Dollar Tether (USDT) against Naira with the public, and thereby committed an offense contrary to and punishable under Section 29(1)(c) of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act.”

While USDT is pegged to the US dollar and is designed to mirror its value, it is fundamentally different from the USD. USDT is a digital token issued by the Tether Foundation and backed by a reserve of USD-denominated assets, including US treasuries, corporate bonds, precious metals and even other cryptocurrencies. However, the stability of USDT is based entirely on trust in the Tether Foundation’s ability to maintain this reserve.

Following the implementation of a formal licensing process by the SEC, it is expected that the authorities will begin to take enforcement actions against unlicensed venues. Enforcement is equally as important as regulations, as it is what attributes power and effect to it. However, the technicalities of such enforcement procedures, if not executed thoughtfully, could recreate an environment of confusion and informality – the same environment that formal regulations were intended to eliminate.

These above charges raise two key issues.

1. Timing of Alleged Offence and Lack of Clarity

The alleged offence occurred between January and December 2021, before the formal recognition of VASPs as financial institutions. At that time, crypto assets were not regulated under the Banks and Other Financial Institutions Act (BOFIA) 2020, and there was no legal framework mandating licenses for crypto transactions. Section 57 of the Act cited specified a list of specialised entities to perform non-bank financial services, like bureau de change operators and IMTOs, but does not explicitly include or define VASPs.

2. Misconstruing Crypto as Foreign Exchange

The second charge in the lawsuit brings to light a significant issue: it conflates USDT, a stablecoin, with the US nollar itself. The charge implies that trading USDT for Naira is equivalent to conducting foreign exchange transactions. This interpretation is problematic and could have far-reaching consequences, if not addressed properly.

While USDT is pegged to the US dollar and is designed to mirror its value, it is fundamentally different from the USD. USDT is a digital token issued by the Tether Foundation and backed by a reserve of USD-denominated assets, including US treasuries, corporate bonds, precious metals and even other cryptocurrencies. However, the stability of USDT is based entirely on trust in the Tether Foundation’s ability to maintain this reserve. The token itself is not legal tender, and its value fluctuates based on market confidence in Tether’s reserves or broader market dynamics. Stablecoins are essentially bearer instruments representing a claim on an equivalent amount of assets. USDT holders trust that they can redeem one USDT for one USD, but this depends on the solvency and operational transparency of Tether. By equating USDT with the USD, Nigerian regulators would be blurring the lines between digital assets and fiat currencies, which have very different regulatory and economic implications.

This misclassification could inadvertently give legitimacy to the idea that stablecoins like USDT are part of Nigeria’s formal foreign exchange market. While USDT’s price is designed to track the USD, it is not subject to the same legal and monetary controls that apply to the dollar or other foreign currencies under Nigerian law. Allowing this precedent to stand could open the door for future legal ambiguities regarding the status of other stablecoins or even other cryptocurrencies.

It is crucial that we get this right — not only to protect Nigeria’s financial system from potential risks like financial fraud, money laundering, capital flight, and tax evasion, but also to foster innovation and position the country as a leader in the global digital economy evidenced by a whole-of-government approach to digital asset regulation and enforcement.

While USDT might have attributes of the dollar in terms of its mirror pricing (and the “USD” in its name), the extent to which it is foreign exchange as defined by the Foreign Exchange Act ends there. Moreover, other stablecoins, such as DAI and FRAX, are not backed by USD reserves at all. DAI, for instance, is collateralised by other cryptocurrencies, making it far more volatile and susceptible to de-pegging during market downturns. FRAX, meanwhile, uses a partially algorithmic mechanism to maintain its peg, introducing further complexity. These examples show that stablecoins or crypto in general are not homogenous and cannot be treated as equivalent to fiat currencies like the USD, regardless of their use-cases. If the charge above will not be as effective if the term “USDT” is substituted with “DAI” or “FRAX”, it should likewise not be effective for USDT or USDC, regardless of the spirit of the transaction.

Indeed, the Foreign Exchange Act referenced in the charge defines foreign currency as any non-naira currency that is or has been legal tender outside Nigeria. Rather than treating USDT as a foreign currency, it would be more appropriate for the authorities to recognise stablecoins as digital securities or financial instruments, subject to regulation under the Securities Act. The SEC has already made progress in this direction by issuing guidelines for the regulation of VASPs, which include provisions for stablecoins. Moving forward, enforcement actions should align with these guidelines, rather than relying on auxiliary laws like the Foreign Exchange Act or the BOFIA Act.

If Nigeria is to align its crypto regulations with global standards and achieve the continental leadership it aspires to under the Tinubu administration, regulatory and enforcement agencies must collaborate more effectively. The SEC has developed the leadership and expertise to oversee the crypto space, and its guidelines should form the backbone of regulatory enforcement. Disjointed or poorly executed enforcement could stifle the progress made, driving the industry back into the informal space that regulations were meant to bring out of the shadows.

It is crucial that we get this right — not only to protect Nigeria’s financial system from potential risks like financial fraud, money laundering, capital flight, and tax evasion, but also to foster innovation and position the country as a leader in the global digital economy evidenced by a whole-of-government approach to digital asset regulation and enforcement.

Olaoluwa Samuel-Biyi is a Partner at Hacked Ventures, Venture Partner at Greenhouse Capital and Doctoral Candidate in Cryptoeconomics at IE Business School, Madrid.