Blockchain & Cryptocurrency in Nigeria: Regulation & Tax issues

This article formed the basis of our presentation at SEC Nigeria “Fintech Talk”, an in-house event organized at their headquarters, and also the one presented at the University of Abuja, Tax Symposium organized in honor of Chief (Sir) Oseni Elamah, Executive Secretary, Joint Tax Board. The event agenda was Cryptocurrency Tax: An unchartered territory, and treacherous waters, September 12, 2018. Some of the issues raised here will form part of the discussions that will dominate the upcoming Abuja Blockchain & AI Round-Table Conference 2018.

If you have not registered, please learn about the event and register here: https://blockchainsummit.ng

https://slides.com/chuta/cryptotax

The first cut…

Like the popular saying goes, “The first cut is usually the deepest”.

Whenever or wherever in Nigeria the word Crypto or Bitcoin is mentioned, most people relate to it as “scam”. The tendency to automatically link it to their previous experiences in MMM get-rich-quick-schemes is usually exponential. As a result, primary efforts by different blockchain & crypto groups and communities across Nigeria has been towards education and re-orientation. Most people’s mindset was twisted from that heinous encounter.

However, the landscape has evolved, and gradually positive results are coming in.

Despite the repeated warnings by the CBN, NDIC, and SEC, Nigerians have in defiance; clung to this nascent technology with investments running into billions of naira

Cryptocurrency is a disruptive technology, and it will thrive with or without government authorization. Currently, it is booming even without any form of policy statement from the government or any of her agencies.

Now, there are a variety of economic fundamentals driving the demand for cryptocurrencies in Nigeria. For most, it’s the prospect of wealth creation. For others, it’s the prospect of solving the long-standing in-bound and outbound remittances problem in Africa. For another sub-set, it’s the prospect of using blockchain technology to leapfrog the solution to some of the continent’s infrastructure and social innovation gaps.

A Booming Crypto Space

From cryptocurrency exchange services to cold storage, hobby mining, lending, funds transfer, e-commerce, captive adoptions, museums and ATMs, the Nigerian cryptocurrency ecosystem has become vibrant with “Crypto-preneurs” and serious investors are beginning to take strategic positions ahead of the imminent crypto-revolution and possible official “definition of cryptocurrency” from relevant regulatory authorities.

Several Exchanges operating in Nigeria, have a combined transaction trade volume exceeding N4 Billion naira weekly! E.g. Localbitcoins.com, Paxful.com, Luno.com, Remitano.com, quidax.com, belfrics.com etc.

Common cryptocurrency transactions engaged by Nigerians include;

· OTC (over-the-counter) Cryptocurrencies pairs Trading

· Exchange of one token for another — for example, using Ethereum in exchange for Litecoin

· Receiving crypto payments in exchange for products, goods and services or as salary

· Air drops

· Peer 2 Peer Transaction

· Mining/ minting coins

· Initial Coin Offerings (ICO)

· Lending services, etc.

Regulatory Uncertainties

It is obvious that cryptocurrencies & blockchain technologies bear a peculiar significance for Africa and Nigeria in particular, therefore creates considerable opportunities for both local and foreign investors. Accordingly, the Government has to find a way to intelligently legalize and regulate crypto-businesses so that the industry can thrive.

Although the Central Bank of Nigeria has issued a “warning” that relates to cryptocurrencies, they have not prohibited the operation of crypto-businesses in Nigeria. The Securities and Exchange Commission (SEC) also issued a public notice warning the public to exercise caution with regards to making investments in cryptocurrencies.

But there is no definitive regulation from the SEC, or CBN on investment in crypto-businesses or on Initial Coin Offerings (ICOs).

Before any further development can come into the industry, there is a need to determine whether cryptocurrencies should be classified as a currency or as a commodity, or whatever.

Different countries view Cryptocurrency in different ways. In some countries, it is viewed as Property, Asset, Security, Commodity, Foreign currency or Barter Items. How they are viewed determine how they can be regulated or taxed.

How does Nigeria government view/ classify Cryptocurrency?

??

No one knows.

But we need to know. It’s important we know. That knowing is why we are looking at the agencies, the policy-makers and government arms that are concerned, so we can get their definition of “cryptocurrency”.

What is Nigeria’s governments’ definition of “Cryptocurrency”?

This absolutely important.

Assuming cryptocurrencies be classified as currency by the Nigeria government, for instance, then CBN can rightly exercise regulatory control.

There are also tax considerations that arise from a classification, either way. For instance, if cryptocurrencies are considered as a commodity, this classification may trigger sales-tax obligations.

Also, a classification as a commodity will take cryptocurrencies out of the Exclusive Legislative List in the Nigerian constitution — not being legal tender- and provide state governments with the legislative competence to regulate cryptocurrencies.

However, this is in contrast to the associated blockchain technology, which stands for a decentralized, unregulated and free society that does not fall under the thumb of a central power apparatus. Blockchain is the technology that powers cryptocurrencies like Bitcoin, Ethereum etc. It is revolutionary and disruptive in its DNA.

The Blockchain Revolutionary Impact

Today, Blockchain technology is helping to improve Nigeria’s funding ecosystem for small businesses, where the traditional banking system seems to have failed woefully.

For instance, whilst recovering from a recession, in January this year, SureRemit’ a Nigerian non-cash remittance start-up raised $7 million through blockchain through Initial Coin Offering (ICO) from a global community, with help from South Korea’s largest cryptocurrency fund ‘Hashed’. SureRemit based in Lagos, Nigeria, leverages on the merchant network of SureGifts and her global partners, to enable immigrants to send e-vouchers that can be used to purchase goods and services at several quality merchants and pay bills globally.

Regulatory Uncertainties.

Regulatory uncertainties have brought in a lot of negative permutations for startups wanting to dive into this ecosystem. It has become common to see Nigerian Startups shifting to offshore locations perceived as favorable to the industry, to register and outboard their businesses. The result is capital flight and brain drain!

Since current CBN pronouncements, prohibit Banks and Financial Institutions (BFIs) from investing in cryptocurrencies or having any kind of business relationship with companies associated with cryptocurrencies and from carrying on business as a virtual currency exchange, the industry is approaching near comatose. But there are mild, and intelligent approaches to dealing with the Blockchain/ Cryptocurrency technologies beyond protective and coercive policy instruments such as stiff regulations and taxation.

The government must seek out those avenues as quickly as possible.

There is an urgent need for CBN, SEC, NDIC, and other concerned agencies to issue regulatory guidelines and clear policy statements on the operation of blockchain/ cryptocurrency in the country.

Japan’s Finance Minister Taro Aso was quoted as saying at the G20 Finance Ministers’ meeting held in 2017 “I told my G20 counterparts that no country would benefit from [strict] inward-looking policies based on protectionism”.

In view of the aforementioned, the Blockchain and Cryptocurrency communities across Nigeria shall be expecting the relevant agencies to make pronouncements regarding: Security standards, customer service standards, risk management standards, standards for deployment of cryptocurrencies, industry-specific AML/CFT/ KYC, privacy issues, inward and outward remittances, exchange rate regulation, a clear and UNAMBIGUOUS definition of ‘cryptocurrency’, a clear delimitation of crypto-activities that are subject to regulation, Decentralized and centralized repositories.

Summary

Although there is no provision in the existing laws that prohibit a Nigerian company from launching a private coin offering (ICO), SEC should make this clear enough even though private companies are by law outside the regulatory purview of the SEC. However, we expect that the SEC will take proactive steps to issue ICO-specific regulations.

A possible legal basis for this line of action will be that Cryptocurrency-denominated investments be classified as securities because they form a unit of investment in a corporation. To that extent, and because the offering is public, the SEC should have original regulatory oversight.

Thank you!

Chuta Chimezie

Coordinator, Blockchain Nigeria User Group