Introduction

On the 22nd of December 2023, the Central Bank of Nigeria (“CBN”) released the Guidelines on Operations of Bank Accounts for Virtual Assets Service Providers (the “Guidelines”) to govern the CBN’s relationship with Virtual Assets Service Providers (VASPs) in Nigeria. In 2021, the CBN had released a circular dated 5th of February 2021 restricting all deposit money banks, non-bank financial institutions and other financial institutions from dealing in or facilitating payments for cryptocurrency exchanges and also directing them to close accounts of persons transacting in or operating cryptocurrency exchanges. The CBN’s previous position has been the source of much controversy especially as Nigeria’s cryptocurrency usage remains one of the highest in the world. Despite the surrounding controversies, the CBN remained steadfast in its stance on cryptocurrency, with the apex bank issuing penalties of up to N1.3 billion against banks that failed to comply with the regulation on cryptocurrency accounts.

The CBN’s recent shift in position comes as a welcome development given the uncertainties that have characterized Nigeria’s regulation on cryptocurrency and virtual assets. The Securities and Exchange Commission (“SEC”) in 2022 released its rules on Issuance, Offering and Custody of Digital Assets and Virtual Asset Service Providers (VASPs) to provide a framework for the operations of Virtual Asset Service Providers in Nigeria. The Finance Act of 2023 further amended the Capital Gains Tax Act to classify digital assets, including cryptocurrency, as chargeable assets for the purpose of capital gains tax. There has been much speculation as to how these changes brought on by the SEC’s rules and the Finance Act were to be implemented, and it seems the CBN has laid these uncertainties to rest through the issuance of the Guidelines. Although cryptocurrency was not previously illegal in Nigeria, the CBN’s directives to deposit money banks and financial institutions to desist from engaging with crypto service providers adversely impacted the operations of virtual assets service providers.

The recently released Guidelines supersede the CBN’s circular of 5th of February 2021 and effectively activates the SEC’s Regulatory Framework on Virtual Assets, allowing banks and financial institutions the liberty to engage with virtual asset providers. The Guidelines provide the minimum standards and requirements for account opening, effective monitoring of the activities of banks and financial institutions, and risk management of the operations of VASPs in Nigeria. In this newsletter, we address the scope and objectives of the Guidelines and the definition of key concepts used therein. We also shine the spotlight on the activities which stakeholders are permitted to engage in, the requirements for setting up an account (including the setting up of settlement accounts), risk management as well as the sanctions regime under the Guidelines.

Scope and Objectives

The provisions of the Guidelines apply to all banks and financial institutions under the regulatory purview of the CBN. Eligible stakeholders under the Guidelines are: commercial and merchant banks, payment services providers (involved in settlement for third parties) and all entities registered by the SEC and licensed as digital/virtual assets service providers, including VASPs, Digital Asset Custodians, Digital Asset Offering Platforms and Digital Asset Exchanges. It should be noted that the CBN does not intend to regulate the activities of peer-to-peer transactions of virtual assets, rather the CBN’s Guidelines regulate the activities of financial institutions under its regulatory purview in their dealings with entities operating as VASPs.

The objectives of the Guidelines are thus to: provide minimum standards and requirements for banking business relationships and account opening for Virtual Assets Service Providers in Nigeria; provide for effective monitoring of the activities of Banks and Other Financial Institutions in providing service for Securities and Exchange Commission (SEC) licensed VASPs/DigitaI Assets (DA) entities in Nigeria; provide guidance on the relationship and operations of accounts for licensed VASPs/DA entities; and ensure effective risk management in the banking industry with regards to the operations of licenced VASPS. The Guidelines complement the relevant provisions in the Money Laundering (Prevention and Prohibition) Act, the Central Bank of Nigeria (Anti-Money Laundering, Combating the Financing of Terrorism and Countering Proliferation Financing of Weapons of Mass Destruction in Financial Institutions) Regulations, the Customer Due Diligence (CDD) Regulations and other relevant AML/CFT/CPF laws and regulations issued by competent authorities. Another important point to note is that banks and financial institutions are still prohibited from holding, trading and/or transacting in virtual currencies on their own account.

Definitions and Concepts

Quite similar to the recommendations of the Financial Action Task Force (FATF), the Guidelines distinguish between digital assets and virtual assets. Digital Assets are defined as a digital token that represents assets such as a debt or equity claim on the issuer while Virtual Assets means a digital representation of value that can be transferred, digitally traded and can be used for payment or investment purposes. Under the Guidelines, virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered in the FATF recommendations. The Guidelines also define virtual asset service providers (VASPs) to mean any entity who conducts the following activities or operations for or on behalf of another person:

(a) exchange between virtual assets and fiat currencies;

(b) exchange between one or more forms of virtual assets;

(c) transfer of virtual assets;

(d) safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and

(e) participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

The Guidelines define Digital Asset Custodian to mean a person who provides the services of safekeeping, storing, holding or maintaining custody of virtual assets/digital tokens for the account of another person. A Digital Asset Exchange (DA) means an electronic platform which facilitates the trading of a virtual asset or digital asset. The Guidelines also define Digital Asset Offering to include Initial Coin Offerings (ICOs) and other Distributed Ledger Technology (DLT) offers of digital assets, while Digital Asset Offering Platform means an electronic platform operated by a DAOP operator for offering digital assets. It must be mentioned that these definitions are largely in line with the position under the SEC rules on Issuance, Offering and Custody of Digital Assets and VASPs.

Permissible Activities

The Guidelines define the permissible activities that eligible stakeholders may undertake in their operation of accounts for VASPs to include:

(a) opening of designated accounts;

(b) provision of designated settlement accounts and settlement services;

(c) acting as channels for FX flows and trade; and

(d) any other activity that may be permitted by the CBN from time to time.

Account Opening Requirements

Paragraph 7.1 of the Guidelines provides that Financial Institutions (FIs) shall not open or permit the operation of any account by any person or entity to conduct the business of virtual/digital assets unless that account is designated for that purpose and opened in line with the requirements of the Guidelines. Additionally, such accounts can only be opened with the approval of senior management (officers from the rank of Assistant General Manager and above) of the financial institution. Applications for account opening by any company providing virtual/digital asset services shall be supported by the following documents:

(a) evidence of a valid license issued by the Securities and Exchange Commission (SEC) for the entity to engage in the business of VASP/DAX/DAOP;

(b) certified true copy of the memorandum and article of association;

(c) certified true copy Form CAC 2 (Statement of share capital and return of allotment of shares);

(d) certified true copy Form CAC 2.1 (Appointment/change of company secretary);

(e) certified true copy Form CAC 3 (Notice of situation/change of registered address);

(f) certified true copy Form CAC 7 (Particulars of directors);

(g) verifiable registered address of the company;

(h) copy of Certificate of Capital Importation (CCI) (where applicable);

(i) valid means of identification of all the directors, principal officers and beneficial owners of the company;

(j) BVN of all the directors, principal officers and beneficial owners of the company;

(k) home address of all the directors, principal officers and beneficial owners of the company;

(l) AML, CFT and CPF Policy of the entity;

(m) All other requirements of a corporate account in line with the CBN’s CDD Regulations;

(n) any other requirement that the CBN may impose from time to time.

Additionally, the Guidelines restrict the use of such bank accounts to transactions on virtual/digital assets only. Cash withdrawals are also not allowed, and no third-party cheques are permitted to be cleared from the account. Settlement of transactions shall only be done through a transfer to another designated account and withdrawals from the account may be done only through a manager’s cheque or transfer to an account. This is presumably to establish traceability of the transactions and possibly reduce anonymity and the potential for the use of cryptocurrency accounts to perpetrate fraud.

Financial institutions are also required to closely monitor all activities conducted in the designated accounts. FIs shall submit monthly returns to the CBN containing: the number of designated accounts opened within the reporting period, the value and volume of transactions conducted in each account within the reporting period, the details of the counter party(ies) to the transactions, incidents of fraud or theft, the number of customer complaints and remedial measures taken; and other such information as may be required.

Settlement Account

Under the Guidelines, FIs must obtain authorization from the CBN for the opening and operation of designated settlement accounts of the SEC’s VASPs/DA entities. All VASPs are required to settle their transactions into the designated settlement accounts opened with their respective banks. Such settlement accounts are not interest bearing and the details of the transactions on the VASP platform leading to settlement on the designated settlement account must be accessible online, on real-time basis to the FIs at all times. All credits into the settlement accounts shall be used to fund the Naira position of persons on the VASP platform and FIs are not allowed to facilitate transfer and settlement from FX positions of persons on the VASP/DA platform to any foreign account. The FI must also ensure that all SEC licenced VASP/DA entities maintain a minimum collateral equal to 150% highest net debt position into the designated settlement account.

Risk Management

The Guidelines set out risk management measures that must be put in place by Financial Institutions in dealing with designated accounts opened in accordance with the Guidelines. FIs are required to establish transaction limits for each account in line with its risk assessment criteria, bearing in mind the volume of cash moved by the account holder and the risks associated with the business of the account holder. FIs are also required to take all reasonable measures to establish beneficial ownership, source of wealth and source of funds of the designated account. Customer due diligence must also be conducted during the onboarding of VASPs, when significant transactions take place, or where there is a change in customer information/documentation or the way the account is being operated. Additionally, Fis shall independently verify customer documentation and information, provide Suspicious Transactions Reports (STR) to the Nigerian Financial Intelligent Unit (NFIU), and maintain all necessary records of transactions for a period of at least five years after completion of such transaction.

FIs are also not permitted to enter into any concession agreements with the account holder and are prohibited from trading or holding virtual assets in their proprietary account.

Sanctions

In addition to its sanctioning powers under the Banks and Other Financial Institutions Act 2020 and the remedial measures in the Guidelines, the CBN may impose the following sanctions on Financial Institutions that contravene the provisions of the Guidelines:

(a) prohibition from opening any further designated account;

(b) imposition of a monetary penalty not below the sum of 2,000,000.00 against the FIs, members of its board, senior management, and any staff, for any infraction; and

(c) suspension of the operating licence of a Fl.

Conclusion

The Guidelines usher in a new era for transactions relating to digital and virtual assets in Nigeria. The previous restrictions requiring banks to close accounts dealing in cryptocurrencies have been lifted and it is expected that the Guidelines will contribute to the development of the virtual asset ecosystem in Nigeria. We can also expect the SEC to commence licencing of entities as required by the Guidelines and in accordance with the already existing Rules on Issuance and Offering of Digital Assets. In addition, corporate entities which could previously not operate in the Nigerian market can be expected to incorporate entities, apply to the SEC for the relevant licence and set up bank accounts for the provision of digital/virtual assets services. In all, the Guidelines are a timely step in further advancing the adoption and usage of virtual and digital assets in Nigeria.