Understanding the Licensing and Regulatory Framework for Payment Systems and Cryptocurrency in Nigeria

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By Babatunde Oyewole

INTRODUCTION

In recent times, financial technology (also known as FINTECH) companies have gained prominence and acceptability within the Nigerian financial/banking environment. This is largely ascribed to the ever-dynamic and numerous innovative approaches being adopted in relation to payment services in Nigeria. In the same vein, there has been an awakened consciousness and preference as to the accumulation and transaction of digital assets in form of cryptocurrencies amongst Nigerians. This is quite evident in the fact that Nigerians are currently the highest users of cryptocurrency per capita basis.[1] Hence, attracting foreign investors in Nigerian Fintech Companies. The potentials of the industry to the Nigerian economy are extensive and sizeable thus, birthing the need for a more regulatory clarity.

Saddled with the responsibility of issuing regulations in the banking/financial sector(s) are primarily, the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC). Therefore, this research work analyses the existing licensing and regulatory framework for payment systems and cryptocurrency in Nigeria.

THE LICENSING AND REGULATORY FRAMEWORK FOR PAYMENT SYSTEMS IN NIGERIA

The primary laws regulating payments in Nigeria are the Central Bank of Nigeria (Establishment) Act, 2007 (CBN Act)[2], and the Banks and Other Financial Institutions (BOFIA) Act, 2020. These laws empower the Central Bank of Nigeria (CBN) to exercise oversight functions in the payment sector. Sections 33 and 57 of the BOFIA (as amended) and Section 51 of the CBN Act,[3] sanctions the CBN to make rules, regulations and guidelines with respect to monetary policies and control of the banking/financial industry.

Overtime, the CBN has undertaken various measures aimed at improving enabling frameworks for the development of the payment services, electronic and mobile banking architecture; aimed at facilitating the attainment of the bankers’ bank’s financial inclusion goals.[4] On 9th December, 2020, the CBN released the New License Categorizations for the Nigerian Payment Systems, via a circular, which mapped out payment system operations into four categories, to wit;

  1. Payment Solution Services (PSS)
  2. Mobile Money Operators (MMO)
  3. Switching and Processing
  4. Regulatory Sandbox
  • However, on 24th May 2021, the CBN issued a Circular on New License Requirements for the Payments System (hereinafter called “the Circular”) in Nigeria. The Circular spells out the requirements for persons who intend to be licensed by the CBN as a payment service provider in Nigeria. On the flip side, the Central Bank of Nigeria remarked that the country’s payments system attracted about $500m worth of investments in firms run by Nigerian founders, between 2015 and 2020 alone[5].  Moving on, the approved new license categorization requirements focuses on the following;[6]
  1. Switching and Processing license
  2. Mobile Money Operator (MMO) license
  3. Payment Solution Services (PPS) license
  4. Payment Terminal Service Provider (PTSP) license
  5. Payment Solution Service Provider (PSSP) and
  6. Super-agent license

Switching and Processing License:

A Switching Company is a payment/transaction operator that links transaction data to financial institutions or hosts for processing and approving electronic transactions at the very instance of receiving transaction requests from more than one interface like the POS, ATM etc. they are primarily involved in switching, card processing, transaction clearing and settlement agents’ services. Also, Switching and Processing companies can now carry out non-bank acquiring services as well as Super-Agent, PSSP and PTSP permissible activities.

An applicant for switching and processing license must:

a) be a company registered with the Corporate Affairs Commission (“CAC”). The object of the Memorandum and Articles of Association should be restricted to sanctioned activities of a switching and processing company;

b) have N2 billions of shareholders’ funds unimpaired by losses;

c) deposit in its own name, a refundable lump sum of N2 billion into the CBN’s Payment Service Providers (PSP) Share Capital Deposit[7] Account No. 1000014009.

NOTE: A non-refundable fee of One hundred thousand Naira (N100,000) is to be paid to the CBN as application fee. If the application is successful, another 1 million Naira (N1, 000,000) is to be paid before the issuance of a final license. The validity of the license is determined by the CBN upon satisfactory performance of operations of the licensee.

Mobile Money Operator (MMO) License:

This license is a requisite for companies who offer payment services through mobile phones and mobile telephone networks (e.g Banks, financial institutions, FinTechs e.t.c). Due to easy accessibility and an extensive customer-base, most providers of financial services now offer mobile money payments system which includes activities such as cash- in cash- out services, agent recruitment and management, wallet creation and management, opening of wallet accounts, pool account management, international remittance with TED approval, bill Payments, salary payments, airtime top-up e.t.c. In addition, MMOs can now carry out Super-Agent activities.

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An applicant for an MMO license must:

a) be a company incorporated with the CAC. The memorandum of association should be restricted to the sanctioned activities for MMOs. A holder of the MMO license can engage in wallet creation, e-money issuing and management, pool account management, as well as activities permitted for super-agent.

b)Possess N2 billion of shareholders’ funds unimpaired by losses;

c) It must deposit, in its own name, a refundable sum of N2 billion into the CBN’s PSP Share Capital Deposit Account No. 1000014009. These escrowed funds are invested in treasury bills.

NOTE: An application fee of One hundred thousand Naira (N100, 000) is also to be paid to CBN, as well as One million Naira (N1,000,000) to be paid as licensing fee before the license is issued if the application is successful. The validity of this license is also determined by the CBN subject to satisfactory performance of operations.

Payment Solution Services (PSS) License:

Payment solution services provide bridging infrastructure, end-to-end electronic payment solutions, systems and services to stakeholders within the financial services ecosystem. Primarily, they operate payment gateways and portals, payment solution/application development for the purpose of enabling e-collections and disbursements; and merchant service aggregation and collections. The Payment Solution Services are comprised of Payment Solutions Service Provider license, Payment Terminal Service Provider License and the Super-Agent License. An applicant can take up any or all of the three licenses at once.

An applicant for a PSS license must:

a) be a company incorporated with the CAC. The memorandum of association should be restricted to the permissible activities for PSS providers. A holder of the PSS license can combine the sanctioned activities of super-agent, payment terminal service provider, and payment solutions service provider.

b) Possess N250m of shareholders’ funds unimpaired by losses;

c) Deposit, in its own name, a refundable lump sum of N250 million into the CBN’s PSP Share Capital Deposit Account No. 1000014009.

NOTE: The escrow of Two Hundred and Fifty million is to be paid if the applicant is applying for all the three licenses that embody the Payment Solutions Services License.

Payment Terminal Service Provider (PTSP) License:

A PTSP is a company licensed to maintain, deploy, and ensure the effectiveness of Point of Sale (POS) operations, payments terminal application development, merchant/agent training and support; and value-added services. The holders of these license provide POS machines to interact with cards and make payments and funds transfers.

An applicant for a PTSP license must:

a) be a company incorporated with the CAC. The memorandum of association should be restricted to the permissible activities for PTSPs including POS terminal deployment and services, POS terminal ownership, Payment Terminal Application Developer (PTAD), merchant/agent training, and support;

b) Possess N100 million of shareholders’ funds unimpaired by losses;

c) Deposit, in its own name, a refundable lump sum of N100 million into the CBN’s PSP Share Capital Deposit Account No. 1000014009

NOTE: A non-refundable application fee of One Hundred Thousand Naira (N100, 000) is to be paid to the CBN.  If the application is successful, the sum of One Million Naira is to be paid as licensing fee before the license is issued. The validity of this license is determined by the Central Bank of Nigeria renewable upon satisfactory performance of operations.

Payment Solution Service Provider:

These entities constitute the primary e-payment infrastructures in Nigeria. A holder of a PSS license is permitted to carry on the allowable activities of PSSPs, PTSPs and Super-Agent.

An applicant for a PSSP license must:

a) be a company incorporated with the CAC with memorandum and articles of association. The memorandum of association should be restricted to the permissible activities for PSSPs such as payment processing gateway and portals, development of payment solution/application, and merchant service aggregation and collections;

b) Possess N100m of shareholders’ funds unimpaired by losses;

c) Deposit, in its own name, a refundable lump sum of N100 million into the CBN’s PSP Share Capital Deposit Account No. 1000014009

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Super Agents:

A Super-Agent is an entity, licensed by the CBN and contracted by a financial service provider, that is empowered to conduct certain financial activities within a local community. They engage in activities such as bills payment (utilities, taxes, tenement rates, subscription e.t.c), payment of salaries, funds transfer services (local money value transfer), balance enquiry, generation and issuance of mini statement, collection and submission of account opening and other related documentation, agent mobile payments/banking services, cash disbursement, cash repayment of loans and cash payment of retirement benefits, cheque book request and collection; and collection of bank mail/correspondence for customers.

An applicant must be:

a) a company incorporated with the CAC. The permissible activities that should be specified in its memorandum of association for super-agents are agent recruitment, management, and other activities set out in the Regulatory Framework for Licensing Super Agents in Nigeria;

b) possess N50 million of shareholders’ funds unimpaired by losses;

c) deposit, in its own name, a refundable lump sum of N50 million into the CBN’s PSP Share Capital Deposit Account No. 1000014009

Going forward, it must be noted that under the revised framework, applicants will be required to present their preceding three-years audited financial statements of the company (if applicable). Progressively, all new requests for licensing are to comply with these requirements[8], and all existing licensed companies were required to comply with these requirements before 30th of June, 2021.[9]

THE REGULATORY REGIME FOR CRYPTOCURRENCIES IN NIGERIA

Undoubtedly, financial transactions anywhere in world tag along with them their own legal aftereffects and cryptocurrency is of no exemption. The distinctiveness of the currency has undeniably contributed to the problems connected with its global regulation. On the 14th of September, 2020, the Securities and Exchange Commission (SEC) released a statement on Digital Assets and their classification, as well as treatment.[1] The statement entirely bothered on cryptocurrency regulations in Nigeria. According to the Commission, it will be taking a threefold approach to regulate innovation in the cryptocurrency sector; these include safety, market deepening, and providing solutions to problems that will guide its regulations, strategy, and its interaction with innovators seeking legitimacy and relevance in this emerging and overwhelming industry.[2]

Consequently, SEC issued regulatory guidelines for digital currencies and crypto-based companies or startups stating that they will regulate crypto-token or crypto-coin investments when the character of the investments qualifies as securities transactions.[3] Accordingly, the statement issued by the Commission hints that the objective of the regulation is not to hinder technology or stifle innovation but to create standards that encourage ethical practices in the Nigerian financial sector. In an earlier statement, SEC warned stakeholders and the investing public against dealing with fraudulent, unregistered investment schemes and capital market operators, especially those with bogus investment and unjustifiable return claims, and advised the public to tread carefully to avoid being swindled.[4]

Crypto Asset is neither issued nor guaranteed by any jurisdiction,[5] and fulfills the above functions only by agreement within the community of users of the Crypto Asset and was distinguished from Fiat Currency and E-money. The SEC went further to categorizes the following virtual assets[6] as follows:

  1. Crypto Asset – They will be treated as commodities if traded on a Recognized Investment Exchange and are issued as an investment, and is subject to Part E of SEC Rules & Regulations, and any other relevant sections and subsequent Rules that will be enacted in future.[7]
  1. Utility Tokens or “Non-Security Tokens” – These tokens provide users with a product and service e.g., virtual tokens, they are treated as commodities but will only fall under the purview of the commission if conducted on a Recognized Investment Exchange.[8] 
  1. Security Tokens – These are token with features and characteristics of securities such as shares and represent assets such as companies, or earnings streams, or an entitlement to dividends or interest payments, they have economic functions similar to equities and bonds, using security tokens means investors can expect that their ownership stake is preserved on the blockchain ledger. They are deemed Securities pursuant to PART XVIII (315) of Investment and Securities Act.[9] 
  1. Derivatives and Collective Investment Funds of Crypto Assets, Security Tokens, and Utility Tokens – A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset while Collective Investment Funds also known as Collective Investment. They will be regulated as specified investments under the Investment and Securities Act 2007& SEC Rules and Regulations while market intermediaries and operators dealing in such derivatives and collective investment funds will need to be registered and approved by the Commission.
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The commission went further to announce that it will regulate all Digital Assets Token Offerings (DATO), Initial Coin Offerings (ICO), Security Token ICOs, and other Blockchain-based offers within Nigeria by Nigerian issuers or by foreign issuers targeting Nigerian investors.[10] The imminent regulation of the Crypto Assets Market is something that must be done by SEC as the primary regulator for securities and investments in Nigeria as market regulation that ensure market integrity and the protection of the real investing public.

On the other hand, the CBN in a circular issued to banks and other financial institutions on January, 2017 about cryptocurrencies or virtual currency operations in Nigeria, noted that cryptocurrencies are largely untraceable and anonymous,[11] and they are vulnerable to abuse by criminals, particularly in money laundering and terrorism financing. More recently, the Central Bank of Nigeria (CBN) sent a letter to banks and other financial institutions in February 2021,[12] stating that trading in cryptocurrencies and enabling payment for cryptocurrency exchanges are hereby prohibited. The CBN also directed all banks and other financial institutions to find out and restrict the accounts of individuals or businesses that deal in cryptocurrencies or operate cryptocurrency exchanges.[13]It also opined that cryptocurrencies are created by unregulated and unregistered companies, and hence usage in Nigeria violated existing laws since they are not legal tenders. Cryptocurrency anonymity was noted to be a major problem by the CBN. It also observed that the anonymity and absence of KYC[14] rendered cryptocurrency vulnerable to illicit usage, such as money laundering and terrorism funding. On the other hand, there was the pronouncement that the volatility of cryptocurrencies could eventually jeopardized the stability of a countries’ financial systems[15]. In response to the CBN’s directives, banks have begun to identify and deactivate the accounts of persons engaging in cryptocurrency exchange. However, it is still unclear if affected customers will be able to re-activate accounts with their banks in the nearest future.

Having initially announced its intention to regulate digital assets, the SEC has turned around to state that it would work jointly with the CBN to better examine and unravel the recognized risks of cryptocurrency,[16]with the sole of putting in place appropriate regulations in the future. Unfortunately, cryptocurrencies are built on the idea of decentralization,[17] which means that they are purposely designed in a way that prevents them from being governed by a central authority in the same way that traditional/fiat currencies. Hence, is no standard worldwide framework to regulate virtual currencies, as its regulation is largely determined by the efforts of individual countries.[18]

CONCLUSION

The application of technology to the banking/financial sector has brought about a financial revolution globally. The wide and immediate embrace of this revolution is clear indication that the world is open and ready to something new. Overtime, fintech (cryptocurrency inclusive) has proven to be an innovation that can neither be repressed nor brought to heel. In light of this, countries have begun to issue regulations fostering acceptability of digital assets[19] and engendering innovations in the fintech ecosystem. Therefore, it is highly recommended that the Nigerian government should undertake productive steps at boosting and encouraging transaction and ownership of digital assets in Nigeria, as an alternative to delaying the inevitable.

Babatunde is a Law Graduate of  Ekiti State University, Ekiti State, Nigeria. He can be reached on Oyewole.s.babatunde@gmail.com

Footnotes

[1]https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/

[2] Ibid.

[3]https://www.lexology.com/library/detail.aspx?g=99b25076-ece8-47a3-868f-57d9ce5f25f7

[4] Ibid.

[5]However, as of June 2021, El Salvador is the only country that recognizes bitcoin as a legal tender.

[6]https://www.lawallianz.com/articles/framework-for-the-regulation-of-the-nigerian-crypto-assets-market/

[7]https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/

[8] ibid.

[9] ibid.

[10] Ibid.

[11]https://www.cbn.gov.ng/out/2017/fprd/aml%20january%202017%20circular%20to%20fis%20on%20virtual%20currency.pdf

[12]https://www.cbn.gov.ng/out/2021/ccd/cbn%20press%20release%20crypto%2007022021.pdf

[13] Ibid.

[14]Know Your Customer (KYC) standards are designed to protect financial institutions against fraud corruption, money laundering and terrorist financing.

[15] Ibid.

[16]https://www.premiumtimesng.com/business/business-news/455542-sec-working-with-cbn-on-crypto-trading-regulation-says-dg.html#:~:text=Nigeria’s%20Securities%20and%20Exchange%20Commission,of%20cryptocurrencies%20in%20the%20country.&text=He%20said%20the%20commission%20suspended,access%20to%20Nigerian%20bank%20accounts.

[17]https://www.investopedia.com/terms/c/cryptocurrency.asp

[18]https://www.mondaq.com/nigeria/fin-tech/1105924/is-cryptocurrency-legal-in-nigeria-actions-towards-the-regulations-of-cryptocurrency-in-nigeria#:~:text=No%20specific%20regulation%20in%20Nigeria,in%20place%20for%20cryptocurrency%20operators

[19]https://www.thomsonreuters.com/en-us/posts/wp-content/uploads/sites/20/2021/06/Compendium_Cryptocurrency-Regs_FINAL.pdf

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