Nigeria’s Securities and Exchange Commission is considering tighter controls to combat illegal trading in digital assets, including cryptocurrencies. The Conversation Africa asked Iwa Salami, a researcher in regulatory frameworks for crypto-assets, to explain how best Nigeria can manage cryptocurrency.
What is cryptocurrency and how does it work?
Cryptocurrency is a digital representation of a value or of a right. It can be transferred and stored electronically using distributed ledger technology. This is technology that allows multiple parties to share and update a common ledger (record) without relying on a central authority. Records of transactions are called blocks and they make up a blockchain.
The origin of cryptocurrency can be traced to 1989 when DigiCash, a company in the Netherlands, launched a digital currency called “eCash”. Although eCash didn’t survive, it influenced blockchain developments. The first and the best known cryptocurrency, Bitcoin, was launched in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto. Another is Ether, used on the Ethereum network. All other cryptocurrencies aside from Bitcoin are called Altcoins and each has unique features.
Cryptocurrencies exist outside the control of governments and central authorities. In theory, they are immune to government interference or manipulation. Cryptography ensures secure online payments without intermediaries. Although intangible, cryptocurrencies hold value based on market demand and adoption.
The rise of cryptocurrencies can be attributed to:
ease of access (compared with cash, foreign currency and traditional financial services through a bank)
weak currencies (owing to economic stagnation, debt and political instability)
easy and quick mechanisms to transfer funds
privacy in transactions.
Is Nigeria managing cryptocurrency operations well?
Nigeria’s approach to regulating crypto-asset transactions has been unclear and inconsistent. In February 2021 the Central Bank barred financial institutions from these transactions. But in May 2022, the Nigerian Securities and Exchange Commission – the capital markets regulator – published a framework for their regulation. This was a sign that it approved of cryptocurrency trading. Then it backtracked in November 2022. In May 2024, the Central Bank banned person-to-person cryptocurrency trading in the naira.
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How best can Nigeria manage cryptocurrency?
Nigeria needs a balanced approach to regulation if the industry is to thrive without harming financial and monetary stability. A stable financial system is capable of allocating resources efficiently and managing financial risks. The approach must protect consumers and investors.
If Nigerians were prevented from trading the naira on cryptocurrency exchanges, they might turn to other assets denominated in US dollars. That would be worse for the naira.
Cryptocurrencies have had a long history of being used in illegal activities like money laundering and the drug trade. But they have not been linked with the devaluation of national currencies, as the Nigerian government has alleged.
The first step would be to register whoever is dealing in digital instruments.
One of the key concerns raised by Nigerian authorities can be dealt with by tracking the identities and activities of users of crypto-exchanges. The regulatory framework passed by the Securities and Exchange Commission in May 2022 provides for this. It requires all regulated exchanges to comply with Know-Your-Customer requirements. Regulators can ask exchanges to disclose the identities of cryptocurrency account (wallet) holders linked with suspicious activities. Blockchain analytics firms like Chainalysis and Elliptic work closely with exchanges and can uncover sinister transactions.
International standards also enable regulators to get information from foreign exchanges providing wallets to their citizens. So, in an ideal world, if regulators adopt international standards for crypto-asset activities these concerns should be addressed. For example, the Financial Stability Board has recommended that regulatory authorities share information on suspicious transactions on foreign cryptocurrency exchanges. If all regulators worldwide adopt international regulation, the outcomes would be consistent. This would address some of the key concerns raised by Nigerian regulators.
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