Nigeria is currently grappling with ideas of how to regulate the crypto market but it can borrow some healthy ideas from its closest competitor on the African continent, South Africa.
The rainbow nation was in the news this week following a position paper on crypto assets in South Africa published by the Intergovernmental Fintech Working Group (IFWG). The paper essentially lays out plans to regulate crypto assets in the country.
The paper is the first clear indication of the plans of the South African government since rumours began swirling that it plans to put restrictions on the market. Local exchanges also said they were expecting more regulatory statements from the government in 2021. In May, the South African Reserve Bank (SARS) started conduction a tax risk assessment exercise in respect of South African residents engaged in the mining, speculation, and or investment in crypto assets.
South Africa’s position on the crypto market has been remarkably the opposite of that of Nigeria, where the financial regulator has placed a ban on financial service operators from providing any form of support to crypto businesses. In fact, it ordered the closure of all crypto-related bank accounts, effectively putting an end to bitcoin transactions through banks.
However, the Central Bank of Nigeria appears to be coming back to the idea of regulation in the light of deepening economic woes and increased growth of institutional and national investors in the cryptocurrency market. But the apex bank has a different priority for regulating the market. The regulator is looking at getting into the race for a Central Bank Digital Currency (CBDC) and has given an end-of-the-year deadline for a draft release of the national digital coin. While that is some encouraging news for some crypto operators, they worry the bank is not engaging the players in the industry neither are other public sector stakeholders being carried along which could put local buy-in in doubt.
In contrast, the position paper from IFWG originated from a robust engagement of different stakeholders in the public sector including the Competition Commission, the Financial Intelligence Centre, the Financial Sector Conduct Authority, the National Credit Regulator, National Treasury, the South African Revenue Service, and the South African Reserve Bank.
Interestingly, the IFWG was constituted in 2017 the same year the Central Bank of Nigeria claimed it has put together a committee of experts to understudy the crypto market and come up with a position paper that will aid the direction of the Nigerian financial regulator. Almost 4 years after, the CBN committee has yet to produce the result of its findings. Since that period the CBN has found itself at odds with other government agencies like the Securities and Exchange Commission, a department it controls, and the National Information Technology and Development Agency (NITDA) which has expressed intentions to work with operators in the market. According to many insider sources, the letter that announced the prohibition on financial institutions was without recourse to other public service stakeholders.
“The 25 recommendations contained in this document will never be able to do justice to the countless hours IFWG members spent debating each of the five identified crypto-asset use cases and their various nuances. While the publication of this document was always seen as the end goal (with appreciation that it will remain a living document), the greatest insight the IFWG as a collective gained from the exercise is what the process of true collaborative policymaking contains in practice,” Olaotse Matshane, IFWG Chairperson said.
The IFWG also said the general position on crypto-assets is neither explicitly ‘hostile’ nor explicitly ‘friendly’, with the regulators aiming to remain neutral with the objective of enabling responsible innovation in the crypto-asset ecosystem while ensuring a level playing field between both incumbent and new role players.
A neutral perspective as an approach offers flexibility to the regulators in South Africa to consider all parameters, including how it impacts the economy of the country and the safety of people’s investments.
The country owns a significant share of blockchain infrastructure deployment in Africa, according to a report by Luno, one of the largest crypto exchanges on the continent. For context, South Africa is arguably the only country in Africa where some form of Bitcoin mining is happening, which is a credit to the high power generation capacity of the country and the neutral position of the authorities to companies deploying blockchain infrastructure.
Of the 10,267 Bitcoin nodes in the world, Africa accounts for only 20 (0.2%). The number is even smaller at 12 nodes for Ethereum, but the percentage is about the same with Bitcoin at 0.2 percent. South Africa is responsible for the vast majority of the existing nodes on the continent.
Bitcoin’s Lightning Network on the continent is similarly immature, the report says as Africa accounts for just 0.24 percent of BTC Lightning nodes, contributing just 0.07 percent of total network capacity, yet again with almost all contributions coming from South Africa.
Nigeria only dominates the continent in terms of peer-to-peer transactions in Bitcoin, going by records from Paxful and Localbitcoin, and yet prefers a hard stance.
“Nigeria does not need to ask for permission from any other nation nor acquire a license nor secure a trade agreement from any corporation to reshape its economy with Bitcoin. All that is required is a vision for a new future and an allocation of its own national resources to pursue a Bitcoin standard,” Russell Okung, an National Football League (NFL) player wrote in an open letter to the Nigerian government recently. Okung famously asked his employers, Carolina Panthers to pay him his salary in bitcoin, the first NFL player to do so in the world.
The IFWG position paper has no intention of regulating the actual crypto assets and associated products, but rather the entities that provide services in relation to such products.
The IFWG plan includes identifying a list of services that can considered crypto assets service providers (CASPs) and then bring them under the ambit of the Financial Intelligence Centre (FIC) Act so that they are considered ‘accountable institutions’. The position paper prefers to regulate the CASPs, an approach should the CBN ever decides to properly regulate the market in Nigeria.