Technology has in no little way affected the activities of man in modern times. In its pervasive nature, it has cut across all aspects of human life, even altering well known means, by introducing new means to assuage the rigours of our daily transactions.
One of the major breakthroughs of technological advancement is its impact in the evolution of the form of money. Money being one of man’s most remarkable creation has had technology influence its development hugely. Now other than the regular physical form of money, it can now be in non physical form. Asides physical currency, digital currency is now a recognised medium of exchange. With the introduction of digital currency, such as Bitcoins, Litecoin, Onecoin, Itunes gift card, Amazon gift cards etc,as a means of exchange in financial transactions, the world is beginning to tilt towards the use of these non-physical forms of money in daily commercial dealings. Even Nigeria has not been an exception in this regard. However, it has had its challenges, especially the debate about its legality, acceptability and even more. This piece attempts to discuss the attendant issues of using digital currency in financial transactions in Nigeria.
The first part outlines the historical background to digital currency; the general concept of digital currency is examined in the second part; the third part examines the legality of using and dealing in digital currency in Nigeria; the fourth part sheds light on some concerns associated with trading in digital currency; and the last part proffers some recommendations.
- Historical Background of Digital Currency
The history of digital currency dates back to the 1983 research paper of American Computer scientist, David Chaum: “Blind Signatures for Untraceable Payment”. This paper proposed the idea of digital currency.
In 1990, David Chuam founded Digicash, an electronic cash company in Amsterdam to commercialize the ideas canvassed in his research paper.
In 1996, E-gold was introduced in the USA, and was widely used as internet money for peer to peer payments in various instruments. It was however, shut down in 2008.
Also in the 1990s, was also the Dot-com Bubble, which served as a form of digital currency.
In 1997, the Coca-Cola Company offered mobile payments in buying from vending machines. In 1998, PayPal launched its USSD denominated service.
In 2005, in China, QQ coins, were used as a type of commodity-based digital currency on Tencent QQ’s messaging platform. QQ coins were so effective in China that they were said to have had a destabilizing effect on the Chinese Yuan.
In 2006, was also the Liberty Reserve. This digital currency service allowed users to convert Dollars or Euros to Liberty Reserve Dollars or Euros, and exchange them freely with one another at a 1% fee. Albeit, some digital currency operations were reputed to be used for ponzi schemes and money laundering, and were prosecuted by the U.S. government for operating without Money Services Business(MSB) licenses. In 2009, bitcoin was launched, which was the start of decentralized block chain-based digital currencies with no central server, and no tangible assets held in reserve. This simply means, attempt by government to regulate them proved abortive, as there was no central organization or body to turn them off.
Bitcoin has become the most widely used and accepted form of digital currency.
- What Does Digital Currency Mean?
Money basically is an accepted means of exchange, and measure of value. The world is used to the use of banknotes and minted coins in daily commercial transactions.
Flowing from the above, digital currency is an emerging means of exchange. But it is in digital format,unlike the regular bank notes and minted coins.
Digital currency is the generic term for money that exists in the digital space (non physical form). It is also called digital money, electronic money, electronic currency, or cyber cash.
3.1. Addressing the Different Types of Digital Currencies.
Consequent to a careful consideration of what digital currency is, it is absolutely necessary to consider the different ways digital currency may manifest. They are as follows:
3.1.1. Electronic Money:
This simply refers to money that exists in banking computer systems, that may be used to facilitate electronic commercial transactions.
The value of this type of digital currency is backed by fiat currency(Fiat currency is a legal tender whose value is backed by the government that issued it. So the Nigerian Naira is fiat money, just like Pounds, Euro, Dollars etc, that are currencies of countries in the world). This is what distinguishes it from virtual and crypto currency basically.
They are originally physical cash, but stored in electronic systems of banks to be used via digital means in commercial transactions.Companies such as Paystack, Netteller,QuickTeller,Square, Skrill PayPal and Mastercard allow for the use of electronic money to ensure seamless financial and commercial transactions.
So buying groceries in the supermarket, or the ordering items from online stores with the use of one’s ATM card, only evinces the use of electronic money as a means of exchange.
The use of electronic money in day to day financial transactions has helped to reduce the use and reliance on bank notes or physical currencies generally.
3.1.2. Virtual Currency:
Just like electronic money identified above, virtual money represent a form of money albeit not in physical form, but facilitates payment of goods and services.The term came into existence in 2012. The European Central Bank defines it as:
“digital money in an unregulated environment, issued and controlled by its developers and used as a payment method among members of a specific virtual community,”
In 2014, the European Banking Authority defined, virtual currency as :
“a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically.Unlike electronic money, virtual currency is not backed by fiat currency. It is not like electronic money that is stored in the electronic system of banks. Virtual currency unlike electronic money relies on a system of trust and may not be issued by the Central Bank or any other banking regulatory authority. They are mined by developers via electronic means, yet possess monetary value.
Virtual currency has a limited usage. It is used used by members of a specific online community or group of users on a given platform.
Virtual currency can be centralized or decentralized.Ripple(XRP) for instance is decentralized.
In its restrictive nature, virtual currencies are used mostly for peer to peer payments eg for home-sharing file-sharing, ride-sharing, online markets, even for lending money(Kiakia in Nigeria, provides a good example of a peer to peer lending platform).
Technically, gift cards such as ITunes gift card, Netflix gift card, Amazon gift cards, Chase, Walmart gift cards etc. function as virtual currency, as they are recognized means of exchange among online members of their different online platforms
This is also a form of virtual currency. They are mainly in form of token or coins. The term “crypto-currency” derives from encryption techniques which are used to secure the network.
It is “crypto” because of the encryption and cryptographic techniques(process of hiding information basically) that help safeguard them generally.
This simply means they are files created by electronic means by developers, having monetary value, although using cryptographical methods to secure the integrity of the currency and network basically.
Crypto-currencies generally, are decentralized networks based on block chain technology; they function using block chain technology.
Block chain also known as Distributed Ledger Technology(DLT), simply means a distributed ledger that stores the source of a digital asset, which is enforced by a disparate network of computers.
Essentially, it makes the history of any digital asset unalterable or traceable.
International Business Machine Corporations(IBM) is the world’s largest block chain technology company.
Examples of crypto-currencies include: Bitcoin, Bitcoin Cash, Altcoins, Bitcoin Satoshi Vision(BSV) Etherum, Ripple(XRP), Tether, Litecoin, Libra, Binance Coin, Onecoin, Peercoin, Namecoin, EOS, Dash, Monero, Zcash etc
The good thing about crypto-currencies is that, owing to their decentralized and cryptographic nature, they are insulated against any form of attack from government interference, control or manipulations. And they are almost impossible to trace, hack or counterfeit.
- 2. Advantages of Using Digital Currency.
Certain advantages have been identified from the use of digital currency. Some of these advantages are outlined as follows:
i) There is no problem associated with the incidence of inflation, which is common with physical cash;
ii)It allows for the ease of trading with international customers;
iii)There is a much faster receipt of funds;iv) For virtual and crypto currencies, there is lower transaction fees and elimination of extortionate bank charges upon each transaction;
v)There is easier access to money via smart phones and computers, unlike the long queues in banks for physical cash;
vii)For virtual and crypto currencies basically, there is user autonomy. The user can control how his money is spent without any intermediary such as banks or government; and
viii)They are very secured, unlike physical cash that can even be catered away with by armed robbers.
- Legality of Using and Dealing in Digital Currency in Nigeria.
This head will discuss legality as it affects mainly virtual and crypto currencies in Nigeria, as there is already well known established legal framework for electronic money in Nigeria.
To say that virtual and crypto currencies are illegal in Nigeria is very untrue, albeit, Nigeria like many African countries is yet to come up with a legislation or legal framework to regulate the activities of the users and traders of virtual and crypto currencies.
However, in a circular issued by the Central Bank of Nigeria(CBN) on the 12th of January, 2017,with reference no: FPR/DIR/GEN/CIR/06/010, warning of the risk of dealing in virtual and crypto currencies, because the currency is largely unregulated and untraceable, which can make it susceptible to abuse by cyber criminals.
In 2017 also, the Securities and Exchange Commission(SEC) through a circular warned virtual and crypto currency traders to tread with extreme caution, as persons, companies or entities promoting them are yet to be recognized or authorized by them or any other regulatory body in Nigeria. This to stave off fraud and financial loss.
Sequel to the circular issued by the CBN in 2017, in 2018, it reteirate its stance through a press release that, crypto-currencies are not licensed or regulated by the it. And dealers and investors in any kind of cryptocurrency in Nigeria were not protected by law, thus may be unable to seek legal redress in event of failure of the exchangers or collapse of the business.
In 2018, the Nigerian Senate launched the Committee on Banking and other Financial Institutions, to investigate the viability of cryptocurrency as a form of investment, and also how it can be regulated.
In 2019, The Nigeria Deposit Insurance Corporation (NDIC) also issued a press release, advising Nigerians to exercise caution in the trade of virtual and crypto currencies in financial transactions.
In 2019 also, the Speaker of the House of Assembly, Femi Gbajabiamila, on his visit to the NDIC, called for a substantive legal framework for regulation of crypto-currencies in Nigeria, and added that the House was ready to develop a legal framework to this end, and also, seek the expansion of the statutory functions of NDIC, in order to ensure that its roles do not overlap with that of CBN.
Fintech Roadmap Committee of the Nigerian Capital Market, in its report to SEC, at the 2nd Capital Market Committee Meeting of the year, which took place on Thursday, August 22, 2019, stated that SEC needs to decide on the classification of crypto-currencies either as mere commodities or securities however, not as currency. And that SEC should be responsible for the regulation of virtual financial assets exchanges and develop a legal framework to regulate it. This is however, yet to be implemented by SEC.
It can be gleaned from the foregoing that:
i) virtual and crypto currencies are not illegal in Nigeria;
ii) they are yet to licensed or regulated by CBN and SEC; and
iii) They are not yet recognized as legal tender in Nigeria by CBN.
4.1. Can one Register a Business Name or Company to Deal in Digital Currency?
For electronic money, the answer is a straightforward YES, as the business is licensed by CBN. We have platforms like PAGA, OPAY etc involved in the sending and receiving money via digital means. Even persons in shops and kiosks engaging in same. This is also inclusive of banks.
However, for virtual and crypto currencies like gift cards, bitcoins, etherum etc, there is no law prohibiting dealing in them yet, what we have best had are just statements advising extreme caution in the dealings by users, and traders by regulatory bodies. Also, that they are not yet recognized legal tenders in Nigeria. But since they can be deemed as properties capable of being owned, they can be sold and bought, until a law is enacted to prohibit this. So, YES.
Furthermore, dealing in these currencies, and involving in criminal transactions especially financial crimes, comes criminal liability.
- Concerns Associated with the Use and Dealing in Digital Currency in Nigeria.
It is safe to say digital currency especially virtual and crypto currency has met a rocky ground to thrive on in Nigeria. Whilst electronic money has gained widespread acceptance, trading in virtual and crypto currencies is contrastingly clutching at the straws.
Below are a number of challenges associated with dealing in virtual and crypto currencies in Nigeria:
- The absence of a legal framework for it yet in Nigeria remains a heavy clog in its wheel of progression;
- It is not a legal tender yet in Nigeria, hence, a major worry for potential investors;
- The several statements of regulatory bodies expressing the need for caution in dealing in these currencies, and the directive banning banks from dealing in cryptocurrencies has eroded public confidence in them;
- There is the ingrained fraud factor in trading in these currencies. In Nigeria, these currencies are are sold and bought by largely active or repented cyber fraudsters. In fact, persons who were not prior involved in crooked online businesses are still subject of harassment by policemen, anti graft bodies because there is a widely believed notion, that persons involved in the trade of these digital currencies, are largely cyber fraudsters. Last year, there was a petition received by the EFCC that Estonian firm, Paxful Inc defrauded a slew of Nigerian investors of crypto-currencies worth millions of Dollars via arbitrary account closures. This is enough to scare any potential investor;
- It can help to facilitate commission of crimes and raises cyber security issues: Jesse. D.Bray, in his paper: “Anonymity, Cybercrime and the Connection to Cryptocurrency” noted that the anonymity involved in usage of crypto-currency can allow for commission of cyber crimes such as, crypto-jacking, intial coin offering fraud, money laundering, drug dealing, tax evasion, terrorism, ransom ware attacks, Ponzi schemes and illegal trades. United States President, Donald Trump, in 2019, even tweeted his disapproval of crypto-currrency, as a tool facilitating the commission of crimes, saying:“I am not a fan of Bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity”;
- Still on the fraud factor: It is noteworthy, that from the outset, it was stated that virtual currencies rely on a system of trust. This has over time in Nigeria been abused, as some dealers obtain these items from unsuspecting foreigners, who are the victims of their fraudulent activities, and not from direct legal sources. Also associated is there is the problem of fraudulent vendors commonly known as, “rippers” who sell either used cards or buy but end up not paying for these items;
- It is a risky venture: Flowing from the 2017 CBN Circular, in the event of financial loss from failure of exchangers or collapse of business, dealers and investors are not protected by law and cannot seek redress in court;
- It requires a level of technical know-how to use and deal in. One must be tech-savvy to trade in all forms of digital currency, especially virtual and crypto-currency;
- It has limited and restrictive usage and acceptability: One of the characteristics is its universal acceptability. Unlike physical cash, digital currency is not acceptable for every commercial transaction. Its usage is limited to an exclusive online community or people with the technical moxie to trade with them. For instance, it may be difficult to use digital currency to buy items from the woman selling food condiments in a public market, hence, evincing the restrictive usage and acceptability of digital currency, as opposed to the general acceptability of physical cash; and
- There is also the poor internet challenge. Even for those using electronic money, there are times that poor internet botches up commercial transactions, which can be frustrating for contracting parties. From transfer errors on point of sale(POS) terminals to general poor network service of the banks to release money when requested by customers via digital means.
- WAY FORWARD
On a conclusive note, it is no gainsaying that as the world advances, we must move with it. The world is going digital, and even its financial systems. To be ready for a well laid out digital future, concrete steps must be take to manage, control and regulate it. The coming of digital currency has come to do a lot of benefit to our monetary system. Admittedly,especially for virtual and crypto currency, their stark peculiarities have not made regulating it a cakewalk, but some countries are already walking the walk.It is noteworthy that, countries such as Venezuela, Antigua and Barbuda, Dominica Grenada, St Lucia, St Vincent and the Grenadines, St Kitts and Nevis, Montserrat, and Lithuania have gone ahead to develop their own crypto-currrencies, in a bid to ease engaging in commercial transactions.
So in lieu of the hue and cry about the challenges and fears surrounding its operation, it is high time, our financial regulatory bodies came up with an all encompassing legal framework that will accommodate these mediums of exchange and rein in on the misuse.
The Nigerian regulatory bodies can cogitate upon the provisions of the Commonwealth Regulatory Guidance on Virtual Currencies published in 2019, to protect persons, groups and entities interested in the use, trading and exchange of virtual and crypto currencies from threats of cyber attacks and likely risk of fraud that may occasion financial loss.The laws against financial crimes, terrorism and every other type of organized crime must be amended to cover for digital currency transactions. The Nigerian regulatory bodies can also take a cue from countries like Germany, South Korea, India(The Supreme Court of India, in fact recently ruled against the decision of the Reserve Bank of India (RBI) in April 2018, banning domestic financial institutions from providing banking services to crypto exchanges.), Canada Japan, Mexico, Malaysia, Singapore and Isles of Man that have come up with regulations on cryptocurrency, in a bid to ease and safeguard commercial transactions, especially with the use of these digital currencies.
The absence of international financial regulators with respect to transnational or cross-border digital currency exchange must also be aptly outlined and thoroughly reviwed .
Israel writes from Lagos. He can be reached at: Olawunmiisrael10@gmail.com