Overview of Virtual Assets Service Providers (VASPs)

CONTRIBUTED BY E. O. OKOSUN ESQ

Introduction

The swift expansion and widespread acceptance of digital assets, especially cryptocurrencies, have garnered international scrutiny regarding their regulation and economic impact. As Nigeria’s digital asset sector undergoes ongoing development, the imperative for comprehensive regulation and precise definition becomes increasingly apparent. This is essential to effectively navigate the dynamic characteristics of the sector and establish a robust regulatory framework.^[1]

In defining a digital asset, it can be seen as a digital token that represents assets such as a debt or equity claim on the issuer. On the other hand, a Virtual Asset is a digital representation of value that can be transferred, digitally traded, and used for payment or investment purposes. Virtual Asset Service Providers (VASPs) are entities that perform various activities on behalf of another person, including the exchange of virtual assets, transfer of virtual assets, safekeeping and administration of virtual assets, and facilitation of control instruments. They may also provide financial services related to the issuer’s offer and/or sale of a virtual asset.^[2]

This article explores the regulatory framework, operations, compliance, and legal landscape of virtual asset providers, providing valuable insights into their operations and compliance, inclusive of economic implications.

Regulatory Framework for VASPs in Nigeria

The emergence of digital assets, including cryptocurrencies and virtual currencies, has presented significant challenges and opportunities for regulatory authorities worldwide.^[3] In Nigeria, the Central Bank of Nigeria (CBN) has consistently emphasized that virtual currencies are unlicensed, unregulated, and lack legal tender status in the country. The Central Bank’s firm stance on cryptocurrencies explicitly prohibited banks and financial institutions from trading or investing in cryptocurrency.

The situation became inherently conflicting given the pre-existing stance of the Central Bank of Nigeria (CBN) against digital currency. This conflict intensified with the issuance of CBN Letter BSD/DIR/PUB/LAB/014/001 on 5^th February 2021, instructing deposit money banks, non-bank financial institutions, and other financial entities to refrain from engaging in or facilitating cryptocurrency exchange within their systems. The directive mandated the immediate closure of crypto-related accounts. Consequently, the Securities and Exchange Commission’s (SEC) Regulatory Framework faced impediments in its implementation, as financial institutions promptly ceased interactions with cryptocurrency service providers.

However, a significant shift occurred on December 22, 2023, when the Central Bank of Nigeria (“CBN”) issued Guidelines FPR/DIR/PUB/CIR/002/003 regarding the operations of bank accounts for Virtual Assets Service Providers (“VASPs”) (the “Guidelines”). This regulatory development marked a departure from the previous prohibition, as the Guidelines lifted the ban that had been in place on banks and other financial institutions, allowing them to operate accounts for virtual/digital service providers.^[4]

Moreover, the Securities and Exchange Commission (“SEC”) has undertaken efforts to regulate virtual/digital assets in Nigeria. On September 14, 2020, the SEC issued a “Statement on Digital Assets and their Classification and Treatment” (“the Statement”). In this declaration, the SEC recognized cryptocurrency and other virtual crypto assets as securities, thereby subjecting them to regulatory oversight under section 13 of the Investment and Securities Act, 2007. Additionally, in 2022, the SEC introduced regulations governing the Issuance, Offering, and Custody of Digital Assets and Virtual Asset Service Providers (“SEC Regulatory Framework”). Consequently, a directive was issued mandating all digital asset providers to undergo registration under this framework ^[5]

Recent developments, particularly the issuance of new guidelines, suggest a shift in the CBN’s perspective. It appears that the CBN acknowledges the permanence of digital assets in the financial landscape and recognizes the necessity of regulation to prevent missing out on the potential benefits and risks associated with these assets

The Current Regulatory Framework for virtual assets include:

1. The Central Bank of Nigeria Act, 2007 (CBN Act)

The Central Bank of Nigeria (CBN) assumes a pivotal role within the Nigerian financial system, as delineated by several sections of the CBN Act. This legislative framework empowers the central bank to exercise the authority to issue legal tender currency in Nigeria and oversee the maintenance of the nation’s external reserve.^[6] The Central Bank of Nigeria (CBN) possesses the legal mandate to regulate and oversee the activities of banks and other financial institutions that operate within the territory of Nigeria. ^[7] The Central Bank of Nigeria (CBN) is entrusted with multifaceted responsibilities encompassing currency issuance, government banking, financial supervision, and the formulation and implementation of monetary policy. These functions are inherently geared towards sustaining stability and nurturing the advancement of the Nigerian financial system. This imperative role becomes particularly salient considering that virtual assets fall within the purview of these responsibilities.^[8]

1. Central Bank of Nigeria (CBN) Regulations

The Guidelines issued by the Central Bank of Nigeria (CBN), known as FPR/DIR/PUB/CIR/002/003, outline the regulations for bank accounts held by Virtual Assets Service Providers (VASPs). These Guidelines have several key objectives:

1. To establish minimum standards and requirements for banking business relationships and account opening procedures for VASPs operating in Nigeria.
2. To enable effective monitoring of the activities carried out by Banks and Other Financial Institutions that provide services to Securities and Exchange Commission (SEC) licensed VASPs and Digital Assets (DA) entities in Nigeria.
3. To guide the relationship and operations of accounts held by licensed VASPs and DA entities.
4. To ensure the implementation of robust risk management practices within the banking industry with regard to the operations of licensed VASPs^[9].

It also provided for the scope of the guidelines which included:

Commercial and merchant banks, Payment service providers (restricted to those that are involved in settlement for third parties), All entities registered by the SEC to conduct the business of digital/virtual assets services and any other entity that may be categorized by the CBN from time to time.

It is of utmost importance to highlight that these guidelines are designed to activate the existing SEC regulations, enabling them to carry out their mandates with greater efficiency. Moreover, these guidelines impose restrictions on cash withdrawals and the clearance of third-party checks. Precisely, they state that withdrawals should only be conducted via a Manager’s Cheque or a transfer to an account unless the transaction is related to the settlement of a virtual/digital assets transaction. In such instances, the withdrawal must be made through a transfer to another Designated Account and financial institutions are obligated to regularly report to the Central Bank of Nigeria (CBN).

3. Securities and Exchange Commission (SEC) Guidelines

The Investment and Securities Act (ISA) establishes a comprehensive framework for the registration and regulatory oversight of diverse entities and activities associated with securities and investments within the jurisdiction.^[10], the ISA establishes the SEC. as the primary regulatory body responsible for the supervision and development of the Nigerian capital market.^[11]

The Securities and Exchange Commission (SEC) unveiled the “New Rules on Issuance, Offering Platforms, and Custody of Digital Assets” (hereinafter referred to as the “Rules”), officially published on May 21, 2022. These regulatory measures are designed to oversee advancements in the digital asset sector, ensuring that activities involving the exchange and safekeeping of digital assets adhere to legal standards. The Rules comprehensively address the following key areas:

Top of Form

1. Issuance of Digital Assets as Securities

2. Registration Requirements for Digital Assets Offering Platforms (DAOPs)

3. Registration Requirements for Digital Asset Custodians (DACs)

4. Virtual Assets Service Providers (VASPs)

5. Digital Assets Exchange (DAX)

4. The Federal Competition and Consumer Protection Act, 2018 (FCCP Act)

The Federal Competition and Consumer Protection Commission (FCCPC) in Nigeria plays a crucial role in promoting fair competition^[12]. protecting consumers’ rights, and ensuring economic efficiency^[13]. Section 3 of the FCCP Act establishes the FCCPC as the primary regulatory body responsible for enforcing competition and consumer protection laws in Nigeria^[14].

A consumer is an individual who acquires or expresses an intent to acquire goods, excluding those with resale intentions. This classification does not include those obtaining goods for the specific purpose of incorporating them into the production or manufacturing of other items for sale. It also includes users engaged in digital assets.^[15]

The FCCP aims to prevent anti-competitive practices, protect customers’ access to digital asset services, and promote competitive pricing, innovation, and quality services. It also conducts consumer education campaigns to educate customers on optimal practices, risks, and security measures, empowering them to make informed decisions and protect against scams or fraudulent activities.^[16]

Other regulatory laws include:

The Capital Gains Tax Act (CGTA), The Value Added Tax Act (VAT ACT), The Companies Income Tax Act (CITA), The Personal Income Tax Act (PITA), The Copyright Act, The Trade Marks Act, The Patent and Design Act (PDA).

Implications for the Nigerian Economy

The emergence of cryptocurrencies and other virtual currencies, including virtual service providers, has sparked reactions in the global economy, particularly in countries like Nigeria. The Nigerian economy has been the subject of ongoing discussions, focusing on the pros and cons of virtual currencies. However, the Nigerian government has previously made efforts to prohibit virtual assets through regulatory bodies like the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC), leading to a combination of mixed and mostly unfavourable responses.^[17]

The initial ban on digital assets was imposed due to concerns about their instability, posing risks for fraudulent activities and money laundering. However, the Central Bank of Nigeria (CBN) has recently removed these restrictions and implemented improved guidelines to ensure effective control of digital assets. This new approach places a significant burden on financial institutions to actively monitor providers and transactions involving digital assets and requires them to report any suspicious activities to the central bank. Given this, what are the potential economic significances for the Nigerian economy, some of these include:

The regulation of Virtual Asset Service Providers (VASPs) presents significant challenges, which could create a loophole for individuals and corporate entities to engage in tax evasion. This could result in reduced government revenue compared to the thriving activities in the market, thereby affecting the government’s budget plans. On the other hand, proponents argue that effective regulation could attract investors and multinational corporations to enter the Nigerian market. This would provide them with the opportunity to trade in virtual and digital assets, which are considered more stable and easily accessible. In an economy with a well-developed financial market, proficient management of VASPs has the potential to increase revenue through taxation, thus strengthening the government’s budgetary objectives.^[18]

Virtual assets, including blockchain technology and others, possess the capability to tackle significant hurdles in the field of agriculture. Nevertheless, the primary hindrance for blockchain lies in establishing connections between the technology and sustainable business models, while also identifying compelling use cases. By leveraging blockchains, access to finance in the agricultural sector can be significantly improved, effectively addressing concerns like food scarcity and bolstering food security.^[19]

Conclusion

The digital assets industry in Nigeria is constantly evolving, with regulatory changes and emerging frameworks by the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) recognizing its presence in the financial sector. Despite challenges in achieving seamless regulation, the potential economic impacts are significant. Effective regulation can combat illicit activities and create a favourable investment environment. Striking a balance between regulatory oversight and innovation is crucial for maximizing the positive effects on the Nigerian economy. Stakeholders, including regulatory bodies, financial institutions, and digital asset service providers, must collaborate to refine and implement comprehensive regulatory frameworks.

SNIPPET:

Virtual Assets Service Providers (VASPs) are entities that perform various activities on behalf of another person, including the exchange of virtual assets, transfer of virtual assets, safekeeping and administration of virtual assets, and facilitation of control instruments.

1. Arop, Joseph, The Regulation of Digital Assets in Nigeria (July 17, 2023). Available at SSRN: https://ssrn.com/abstract=4655847 or http://dx.doi.org/10.2139/ssrn.4655847 Accessed 21 January 2024. ↑
2. Central Bank of Nigeria, CIRCULAR TO ALL BANKS AND OTHER FINANCIAL INSTITUTIONS GUIDELINES ON OPERATIONS OF BANK ACCOUNTS FOR VIRTUAL ASSETS SERVICE PROVIDERS (VASPs) Available at https://www.cbn.gov.ng/Out/2024/FPRD/GUIDELINES%20ON%20OPERATIONS%20OF%20BANK%20ACCOUNTS%20FOR%20VIRTUAL%20Asset%20Providers.pdf Accessed 21 January 2024. ↑
3. Ibid. ↑
4. Adeleke Alex-Adedipe , Viyon Ojo and Samuel Ngwu, Understanding The Central Bank Of Nigeria Guidelines On The Operation Of Bank Accounts For Virtual Assets Service Providers In Nigeria. Available at https://www.mondaq.com/nigeria/fin-tech/1407908/understanding-the-central-bank-of-nigeria-guidelines-on-the-operation-of-bank-accounts-for-virtual-assets-service-providers-in-nigeria Accessed 21 January 2024. ↑
5. Ibid. ↑
6. Section 2(b) Central Bank of Nigeria Act. ↑
7. Banks and Other Financial Institutions Act (BOFIA), ss 61 and 62. ↑
8. Section 31 Central Bank of Nigeria Act. ↑
9. Ibid. ↑
10. ISB 2021, s 1. ↑
11. ISB 2021, s 3(1). ↑
12. FCCPA, ss 17 (a), (b), and (g); FCCPA, s 1(a). ↑
13. FCCPA, s 17(i), and FCPPA, s 1(b ↑
14. Ibid. ↑
15. FCCPA S 167. ↑
16. Ibid. ↑
17. Ahannaya, Chinedu & Gandolph, & Daisi, Adewale & Sanni, Adeyemi & Sheriff, & Arogundade, Jamiu & Adewale, & Olatunde, Ogunwole & Joshua, Olatunde. (2021). THE EFFECT OF CRYPTOCURRENCIES ON NIGERIA ECONOMY. Available at https://www.researchgate.net/publication/350887754_THE_EFFECT_OF _CRYPTOCURRENCIES_ON_NIGERIA_ECONOMY/citation/download accessed January 2024. Accessed on 21 January 2024 ↑
18. Ibid. ↑
19. Ibid. ↑