On 22 December 2023, the Central Bank of Nigeria (“CBN”) issued the Guidelines on the Operation of Bank Accounts for Virtual Assets Service Providers (the “Guidelines”). In issuing the Guidelines, the CBN has lifted its restrictions on banks and other financial institutions from operating accounts for cryptocurrency transactions.
Before the issuance of the Guidelines, Virtual Assets Service Providers (“VASPs“) were legally recognised in Nigeria. The Securities and Exchange Commission (“SEC“) issued the New Rules on Issuance, Offering, and Custody of Digital Assets in 2022 to regulate digital and virtual assets, including cryptocurrencies. Additionally, the Money Laundering (Prevention and Prohibition) Act 2022, in its definition of “financial institutions,” recognises VASPs.
Guidelines on the Operations of Bank Accounts for Virtual Assets Service Providers
The issuance of the Guidelines by the CBN is in alignment with global trends, fostering a more robust framework for the regulation of virtual and digital assets and the relationship between VASPs and financial institutions in Nigeria, among other things. This move also aligns with the Financial Action Task Force’s Recommendation which emphasises the need to regulate VASPs to prevent the misuse of virtual assets for money laundering etc.
According to the Guidelines, banks and other financial institutions (together, “FIs”) are now permitted to engage in the following activities:
- facilitate the opening and operation of designated accounts for eligible stakeholders to carry out virtual asset transactions (in accordance with the Guidelines);
- facilitate the opening and operation of designated settlement accounts for VASPs; and
- act as channels for FX flows and trade.
Designated accounts may only be opened with the approval of senior management of an FI. An application to open such an account must be supported by, among other things, evidence of a valid licence issued by the SEC for the entity to carry on business as a VASP, Digital Assets Exchange (DAX) or Digital Assets Offering Platform (DAOP). Notably, these designated accounts can only be utilised for transactions involving virtual/digital assets and not for any other purposes. In addition, they cannot be used for cash withdrawal, nor can a third-party cheque be cleared from a designated account.
FIs must obtain authorisation from the CBN for opening and operating Designated Settlement Accounts (“DSAs”) for SEC-licensed VASPs and Digital Asset (“DA”) entities. The DSAs are designed to house all Naira positions of individuals associated with VASPs/DA entities. Other features of DSAs include restrictions on facilitating FX positions of individuals on the VASP/DA platform, prohibitions on collateral usage for credit, limitations on transfers to foreign accounts and a provision stipulating that transfers from the Naira position of individuals on the VASP platform to their bank accounts shall not exceed twice, in a quarter.
The Guidelines also underscores the importance of Know-Your-Customer (KYC) processes, restricts the usage/creation of Nigerian Uniform Bank Account Numbers (NUBAN) accounts by VASPs, and mandates transactions on the VASP/DA platform to be conducted solely in Naira.
- FIs are required to monitor activities in designated accounts continuously. Monthly reports to the CBN are to include information on the number of designated accounts, transaction value, details of counterparties, incidents of fraud or theft, and customer complaints.
- FIs must not enter into any concession agreement/arrangement with a designated account holder, and such designated account must be subject to maximum transaction charges as provided for under the Guide to Charges by Banks and Other Financial and Non-Bank Financial Institutions 2020 (“BOFIA“) issued by the CBN.
- FIs must establish transaction limits based on risk assessment criteria, considering the volume of cash moved by the account holder and associated risks.
- Designated accounts inactive for three consecutive months are to be declared dormant, and subsequently closed, with their balances treated in accordance with the provisions of the BOFIA.
- FIs must establish risk management systems to identify the potential use of designated accounts for money laundering, terrorism financing, and counter-proliferation financing.
- Customer due diligence should be conducted during onboarding, significant transactions, substantial customer information changes, material changes in account operation, or insufficient information awareness.
- FIs must independently validate address and documentation requirements. Incorrect or invalid records shall trigger a Post-No-Debit status on the account and an update of its records, provided that Suspicious Transaction Reports (STR) must be rendered to the Nigerian Financial Intelligence Unit (NFIU) in that regard.
- The Guidelines maintains the prohibition on FIs from holding, trading or transacting in virtual currencies for themselves.
The CBN may impose the following sanctions against FIs, their boards of directors, officers, or staff for non-compliance with the Guidelines:
- prohibition from opening further designated accounts;
- monetary penalties not below ₦2,000,000 (Two Million Naira) against the FIs, their board members, senior management, and any staff; and
- the suspension of operating licenses.
The Guidelines indicates the CBN’s adoption of a clearer regulatory regime for banking transactions involving digital/virtual assets and the activities of VASPs. The emphasis on the need for VASPs to obtain an operating license from the SEC reflects a complementary approach by both the CBN and the SEC in regulating transactions relating to virtual/digital assets in Nigeria.