Introduction
In recent years, the rise of digital assets has revolutionized the global financial landscape, and Nigeria is no exception. As one of Africa’s largest economy and most populous nation, Nigeria has seen a surge in the adoption of cryptocurrencies, non-fungible tokens (NFTs), and other digital assets. However, Nigeria lacks a clear and comprehensive legal framework for regulating these digital assets, creating significant legal uncertainties and risks for investors, businesses, and regulators.
Defining Digital Assets
Digital assets exist in digital form and are traded or transferred electronically. These include:
- Cryptocurrencies such as Bitcoin and Ethereum.
- Tokenized assets representing ownership of real-world commodities.
- Non-fungible tokens (NFTs), which represent unique digital items.
- Virtual currencies used in online games or platforms.
While digital assets offer new opportunities for trade and investment, their intangible nature presents regulatory challenges, as they do not align neatly with Nigeria’s existing legal frameworks.
The Current Legal Landscape
- Central Bank of Nigeria (CBN): In 2021, the Central Bank of Nigeria (CBN) issued a directive prohibiting all regulated financial institutions from engaging in cryptocurrency transactions and facilitating payments for cryptocurrency exchanges[1]. This measure was implemented to safeguard the Naira and uphold financial stability.
- Securities and Exchange Commission (SEC) Rules: The SEC has introduced rules for the offering and custody of digital assets. These rules apply to all issuers seeking to raise capital through digital asset offerings, including Initial Coin Offerings (ICOs) and digital tokens. The SEC’s framework requires issuers to submit an assessment form and a white paper detailing the technology behind the project[2].
- Accelerated Regulatory Incubation Program (ARIP): Launched in June 2024, the Accelerated Regulatory Incubation Program (ARIP) aims to streamline the onboarding of Virtual Assets Service Providers (VASPs) and Digital Investment Service Providers (DISPs). It allows these entities to obtain “Approval-in-Principle” while working towards full compliance with the SEC’s Digital Asset Rules. ARIP facilitates innovation by providing a controlled environment for these providers to operate and test their business models, addressing market integrity and investor protection issues in the process[3].
Key Legal Grey Areas
- Ownership and Transfer of Digital Assets: The ownership and transfer of digital assets pose significant challenges, particularly in the context of blockchain technology’s decentralized nature. Unlike traditional physical or financial assets, which are easily defined and enforced in legal terms, digital assets lack central oversight. This raises complexities in legally transferring ownership, as exemplified by the absence of a central authority to oversee cryptocurrency transactions.
- Taxation of Digital Assets: The taxation of digital assets remains a grey area in Nigeria. The 2022 Finance Act designated digital assets as subject to capital gains tax, with rates set at 10% for individuals and 20% for companies. The 2023 Finance Act further clarified this framework, reaffirming the 10% capital gains tax on profits derived from digital assets. However, there are still no specific guidelines on how to assess and report cryptocurrency transactions, leaving both individuals and businesses uncertain about compliance.
- Regulatory Inconsistencies: Regulatory inconsistencies between the CBN and SEC complicate the effective implementation of laws on digital Assets[4]. One the One hand, while the SEC seems to validate the operation of Digital Assets in Nigeria Subject to certain approvals, the CBN’s policy has been such to suggest that transactions or the operation of Digital Assts in Nigeria is illegal. Infact, there are instances where Bank Accounts engaged in Digital Assets transactions were being frozen on the directives of the CBN.
- Digital Assets in Estate Planning: One critical grey area is how digital assets are treated in estate planning. In Nigeria, the transfer of assets is primarily regulated by the Wills Act of 1852 and the Administration of Estate Law. However, these traditional statutes do not specifically address the management or transfer of digital assets. However, individuals have the freedom to express their wishes regarding the administration of their digital assets in their wills. In the absence of a will, the Administration of Estates Law and the Civil Procedure Rules of the respective States in Nigeria govern the management of the deceased’s assets. Unfortunately, digital assets are often inadequately considered or managed under the administration of the estate, thus rendering the transfer process more complex[5].
- Consumer Protection: Nigeria lacks specific consumer protection laws for digital assets, making it difficult to protect users against theft or fraud. The Federal Competition and Consumer Protection Commission (FCCPC) has issued guidelines for digital lending but these do not cover digital assets like cryptocurrencies. The Limited Interim Regulatory/Registration Framework for Digital Lending aims to regulate digital money lenders but falls short in broader digital asset protection[6]. Although the SEC’s Regulatory Incubator Program supports fintech innovation, it does not fully address consumer protection for digital assets, highlighting a significant regulatory gap[7].
- Anti-Money Laundering (AML) and Compliance: Digital assets, due to their anonymous and decentralized nature, present unique challenges for AML enforcement. While Nigeria’s Money Laundering (Prevention and Prohibition) Act 2022 mandates compliance by Virtual Asset Service Providers (VASPs) and extends AML oversight to virtual assets, the framework struggles to address the complexities of digital currencies[8]. The Special Control Unit Against Money Laundering (SCUML) supervises adherence by Designated Non-Financial Institutions (DNFIs), but gaps remain. Despite the SEC’s Regulatory Incubator Program, comprehensive AML regulations for digital assets are still lacking[9].
Addressing the Legal Uncertainty
To overcome these legal grey areas, Nigeria needs to create a cohesive regulatory framework that addresses the complexities of digital assets. Some proposed solutions include:
- Establish a unified regulatory approach: Nigeria needs to establish a unified regulatory framework that addresses the unique aspects of digital assets, including ownership, transfer, taxation, and consumer protection. This involves coordinated efforts between the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC), and other relevant agencies to develop clear and cohesive guidelines for digital asset transactions. By harmonizing regulatory approaches, Nigeria can effectively manage the complexities of digital assets and ensure a secure and transparent market[10].
- Clarify Taxation Rules for Digital Assets: To eliminate ambiguity and ensure compliance, it is essential to define specific taxation guidelines for digital assets, particularly concerning the taxation of transactions and capital gains derived from these assets.
- Improve AML Compliance: Enhance anti-money laundering (AML) regulations to include digital assets, ensuring that Virtual Asset Service Providers (VASPs) comply with stringent AML requirements.
- Integrating digital assets into estate law: Updating probate and inheritance laws to recognize digital assets is crucial for ensuring they can be effectively managed and transferred to beneficiaries.
Conclusion
While digital assets present enormous opportunities for economic growth and innovation in Nigeria, the legal framework to regulate them remains underdeveloped. Addressing these grey areas will require proactive efforts from lawmakers, regulators, and industry stakeholders to create a safe and transparent environment for digital asset ownership, transfer, and investment. Without clear legal guidelines, the risks and uncertainties surrounding digital assets may outweigh their potential benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[1] HARLEM SOLICITORS 7TH September, 2022) “The Legal Framework for the Operation of Digital Assets Offering Platforms in Nigeria” The Legal Framework for the Operation of Digital Assets Offering Platforms in Nigeria – HARLEM SOLICITORS Accessed 19/09/2024
[2] Ibid.
[3] ARIP FRAMEWORK (June 2024)
[4] Swen Keller “Cryptocurrency Taxation in Nigeria: Everything you need to know “ (Cryptocurrency Taxation in Nigeria: Everything you need to know – Skrumble Accessed 19/09/2024
[5] Funmilola Mesaiyete, Oluwaseyi Adebayo & Sharon Omoregie- SIMONSCOOPER PARTNERS (18th March, 2024) “From Bytes To Heirs: Digital Estate Planning In Wealth Management” From Bytes To Heirs: Digital Estate Planning In Wealth Management – Wealth & Asset Management – Wealth Management – Nigeria (mondaq.com) Accessed 19/09/2024
[6] DENTONS ACAS_LAW (25TH November, 2022) “Compliance with the FCCPC’s Regulatory Framework for the Digital Lending Space in Nigeria: Digital Lenders in Nigeria may be Racing Against Time” Dentons ACAS-Law – Compliance with the FCCPC Regulatory Framework for the Digital Lending Space in Nigeria (dentonsacaslaw.com) Accessed 19/09/2024
[7] Joseph Arop (4th January, 2024) “The Regulation of Digital Assets in Nigeria” The Regulation of Digital Assets in Nigeria by Joseph Arop:: SSRN Accessed 19/09/2024
[8] PWC (July, 2022) “An overview of the Key Provisions of the Money Laundering (Prevention and Prohibition) Act 2022” regulatory-alert-an-overview-of-the-money-laundering-act-2022.pdf (pwc.com) Accessed 19/09/2024
[9] Ibid.
[10] Heritage Falodun (17th September, 2024) “Regulating Bitcoin And Crypto In Nigeria: Crossroads Between Capital Control And Financial Freedom” REGULATING BITCOIN AND CRYPTO IN NIGERIA: CROSSROADS BETWEEN CAPITAL CONTROL AND FINANCIAL FREEDOM – Bitcoin Magazine – Bitcoin News, Articles and Expert Insights Accessed 19/09/2024