NFIU, SEC draft separate regulatory proposals for Nigeria’s crypto market

New rules for the virtual assets service providers (VASPs) are being put together separately by the Nigerian Financial Intelligence Unit (NFIU) and the Securities and Exchange Commission (SEC).

According to sources who spoke to BusinessDay, In February 2022, stakeholders in Nigeria’s blockchain and crypto industry were invited by an NFIU-led Virtual Assets Workstream over a National Assessment Risk (NRA). The NFIU, an autonomous unit domiciled within the Central Bank of Nigeria (CBN), is the central national agency responsible for the receipt of disclosures from reporting organisations, the analysis of these disclosures and the production of intelligence for dissemination to competent authorities.

The draft proposals follow threat of sanction by the Financial Action Task Force (FATF) if Nigeria fails to improve its anti-money laundering and combating the financing of terrorism (AML-CFT) regulations before October 2022.

The FATF defines a “virtual asset service provider” or VASP as: Any natural or legal person that conducts one or more of the following activities or operations for or on behalf of another natural or legal person: Exchange between virtual assets and fiat currencies; exchange between one or more forms of virtual assets; transfer1 of virtual assets; safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

Nigeria does not currently have an AML-CFT policy it implements for VASPs, a situation that portends money laundering and terrorism financing risks for the country. According to one of the sources who attended the meeting with the NFIU, the Virtual Assets Workstream needed VASPs to share transaction data in order to conduct the NRA.

“But due to the distrust and lack of confidence that had permeated the relationship between the VASPs sector and regulators, particularly the CBN due to the central bank’s anti-crypto stance in the country, most VASPs didn’t eventually share data,” the source said.

The CBN had in February 2021 restated that banks and other financial institutions were banned from conducting transacting any form of business with crypto-related entities and individuals. It however stated preference for Central Bank Digital Currencies (CBDCs).

“The use of cryptocurrencies in Nigeria are a direct contravention of existing law,” the apex bank had noted in a statement signed by Osita Nwansobi, Acting Director, Corporate Communications. “It is also important to highlight that there is a critical difference between a Central Bank issued Digital Currency and cryptocurrencies, as the names imply, while Central Banks can issue Digital Currencies, cryptocurrencies are issued by unknown and unregulated entities.”

The CBN position not only affected the operations of all the cryptocurrency businesses in the country with some even relocating their headquarters from Nigeria, regulatory agencies such as the SEC also withdrew from a budding relationship it was already building with the market operators.

The engagement between the SEC and the cryptocurrency market began in 2020 and was intended to lead to a regulatory document that will guide the activities of cryptocurrency exchanges across the country. The SEC went as far as releasing a draft document that categorised cryptocurrencies as securities which gave the exchange commission the authority to regulate the market.

Although the CBN has not lifted the ban, the SEC appears to be returning to the discussion with stakeholders in the market. People familiar with the matter said the commission may also be acting on the threat from FATF and started putting proposed rules together recently.

Read also: We did not  request bank details of federal lawmakers, judges – NFIU

The rules include the SEC Capital Market Operators and Virtual Asset Service Providers Anti-Money Laundering and Combating the Financing of Terrorism) Regulations 2022; proposed Rules for Regulation of Virtual Asset Service Providers (VASPs); and Rules on Issuance, Offering Platform and Custody of Digital Assets.

The proposed rules were circulated among some players in the financial industry in March 2022. Some stakeholders say they haven’t had the opportunity to comprehensively study the drafts and respond accordingly.

Some stakeholders say it is possible for SEC to have its own AML-CFT regulation for VASPs after working in collaboration with NFIU.

SEC’s regulation will mainly focus on crypto or digital assets as investments and securities under the Investments and Securities Act (ISA), while NFIU is expected to focus on AML-CFT compliance for VASPs.

Senator Ihenyen, President of Stakeholders in Blockchain Technology Association of Nigeria (SiBAN), says there is currently no formal discussion between the group and SEC. The group had in the past had discussions and collaboration with the commission through the auspices of Blockchain Industry Coordinating Committee of Nigeria (BICCoN).

“I continue to maintain that prohibiting crypto in Nigeria’s banking and financial system has never been the answer. The answer is adopting a risk-based regulation that ensures that while we are minimizing risks, we are also maximizing opportunities for the Nigerian people and the Nigerian government. At SiBAN, we remain pro-innovation and pro-regulation,” Ihenyen said.

In March, Ihenyen said he participated as a representative of SiBAN in a fintech industry review meeting organized by the Fintech Association of Nigeria (FintechNGR) where the proposed rules by SEC were reviewed by stakeholders present.

“There, stakeholders identified the provisions that SEC needs to review or reconsider in order to ensure that the proposed regulations do not stifle innovation. We also concluded that it is vital that the SEC accommodates local innovators in the VASPs sector as much as it can as we considered some of the licensing fees prohibitive and discouraging,” he said.