Nigeria’s Crypto Thaw: Not What It Seems

As a researcher, I’m observing that Nigeria (a nation of approximately 233 million people) is drafting a cryptocurrency tax proposal. This move suggests a potential endorsement of its usage, but it’s crucial to remember that tax policy can also be used strategically, as demonstrated by India, to potentially curb crypto activities

In simpler terms, the Securities and Exchange Commission of the country has issued its first licenses to crypto exchanges Busha and Quidax, marking a significant step forward in the digital assets sector. Furthermore, it welcomed five crypto asset startups – Trovotech, Wrapped CBDC, HXAfrica, Dream City Capital, and Blockvault Custodian – into a pre-registration system aimed at exploring potential business models for digital assets before fully registering them

In this piece, we’re delving into insights from Noelle Acheson, a seasoned professional who previously led research at CoinDesk and Genesis Trading, and hosted the CoinDesk Markets Daily podcast. The content is drawn from her “Crypto Is Macro Now” newsletter, where she explores the interwoven aspects of the evolving crypto and macroeconomic terrains. Please note that these views are solely hers, and should not be construed as investment advice

This represents a significant shift for a government that appeared firm in its efforts to curtail cryptocurrency enthusiasm. Previously in 2021, it prohibited commercial banks from dealing with crypto businesses. However, despite financial institutions still being barred from trading or holding cryptos themselves, the ban was lifted last December and preliminary licensing requirements were set up

No real change

Since then, the industry has faced numerous challenges rather than enjoying smooth operations. For instance, access to Nigerian exchanges was said to have been restricted temporarily for some, and two Binance executives who visited Nigeria to address tax authority issues were detained in February. One managed to escape, but Tigran Gambaryan – an American citizen – remains imprisoned in Nigeria, accused of money laundering and currency speculation (the charge of tax fraud has been withdrawn)

In April, four major financial technology (fintech) companies in Nigeria were prevented from accepting new customers due to their association with cryptocurrency traders, and approximately 1,100 bank accounts related to these traders were frozen. Shortly afterwards, the National Security Adviser of Nigeria labeled cryptocurrency trading as a matter of national security concern. As reported by officials, the volatile crypto market is considered the primary culprit behind Nigeria’s financial troubles, rather than high inflation rates, budget mismanagement, and societal unrest

The “tough” approach appears to be becoming more lenient lately. In May, the agency brought on board Emomotimi Agama, who openly expresses enthusiasm for cryptocurrency and financial technology, as their new Director General

It appears efforts are being made to stimulate growth within the cryptocurrency sector, simultaneously advocating for regulations. What’s driving this shift in stance?

Economics at work

Let’s start with the optimistic scenarios:

It’s possible that the authorities are now acknowledging the widespread public approval for cryptocurrencies. As per crypto forensics firm Chainalysis, Nigeria ranked second globally in terms of adoption in 2023 (India being first). This could be due to the fact that easing some crypto regulations might help divert some of the rage from last month’s widespread protests. These protests, tagged #EndBadGovernance, were ignited by a skyrocketing cost of living with inflation nearing 35%, resulting in over 20 fatalities and more than 1,000 arrests (some facing potential capital punishment)

A possible reason for the government’s change could be the opportunity for investment. Nigeria urgently requires investors to regain confidence in its markets. The issue of capital outflow is a significant worry for a nation that has seen a depreciation of more than 45% against the US dollar this year, which is officially recognized

In this situation, an increase in capital investment or accumulation would certainly be beneficial. Nigeria represents about 60% of the total cryptocurrency trading volume across Africa, making it a significant market. The vastness of this potential market could entice investors not only for the assets themselves but also for businesses creating associated services

As a researcher, I’ve been pondering over the potential impact of Nigeria’s progressive regulatory approach towards cryptocurrencies. It seems that by setting an example, we could inspire the creation of more robust market infrastructures within our region. This is because other jurisdictions might choose to emulate our regulatory framework. Just recently, the central bank of Ghana unveiled proposed licensing guidelines for crypto exchanges, which suggests a similar trend may be emerging there as well

The real incentive

A plausible reason instead could be the desire for increased dominance in cryptocurrency trading and investments. It’s been reported that one cause for the arrest of Binance executives was their unwillingness to disclose client information. It seems reasonable to infer that newly licensed platforms will likely be more compliant with state regulations

In May, it was proposed by Nigeria’s SEC that peer-to-peer crypto trading would be banned. Although I haven’t read the exact details, it appears that these rules could impose strict penalties on those who ignore them. Keep in mind, earlier this year, over 200 foreign exchange agents (including numerous street vendors) were detained by authorities for “manipulating the market.”

It’s also important to point out that both licenses were issued through the SEC’s “Fast-Track Regulatory Review Program,” a system that permits initial operations with intensive oversight from the regulatory body, and the potential for termination at any moment. At this time, none of these companies have achieved full registration status

Furthermore, it’s been reported that banks have been hesitant to work with the limited number of cryptocurrency businesses that have been authorized, largely because they lack faith in the government’s endorsement

So far, this isn’t looking like full support.

As a crypto investor in Africa, I’ve come to understand that the regulation of cryptocurrencies here is unavoidable. Governments across the continent are realizing that trying to halt crypto activities is a losing battle. Interestingly, Nigeria has emerged as the world’s second most active “crypto” economy, according to Chainalysis global adoption rankings, despite initially banning crypto firms from accessing fiat

It’s clear that stricter regulations often lead to more oversight, but it’s yet unknown how much importance Nigerians will place on this new system, considering their general mistrust towards their central bank and law enforcement agencies

Businesses and organizations are now able to engage in cryptocurrency trading or investment, however, this involvement may lead to being monitored more closely due to being included on certain lists. Moreover, the level of access they have can be altered at any time

If large businesses and financial institutions are hesitant about the regulatory change, it’s reasonable for individual traders and savers to feel the same way. They might even consider the peer-to-peer market, although it’s currently illegal, as a risk worth taking

In hopes that other regions follow suit, it’s crucial to remember that merely discussing regulations isn’t sufficient, particularly when trust in institutions – a vital factor for the industries being regulated – is lacking

Please be aware that the opinions stated within this article belong solely to the author and may not align with those held by CoinDesk, Inc., its proprietors, or associated entities