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On December 22, 2023, the Central Bank of Nigeria (CBN) as part of its regulatory mandate took a significant step in regulating the emerging sector of Virtual Asset Service Providers (VASPs) by introducing Guidelines that specifically address the operation of bank accounts for entities involved in virtual assets. This came at a time when the regulators including the CBN, Securities and Exchange Commission (SEC), etc have always chided away from exerting regulatory control over digital assets especially cryptocurrencies.
The CBN Guidelines on the Operation of Bank Accounts for Virtual Asset Service Providers reflect the growing importance of the digital asset landscape and the need for a structured regulatory framework to ensure the stability, security, and integrity of financial transactions involving virtual assets. It is against this background that this piece aims to give an overview of the Guidelines viz-a-viz its salient provisions.
WHO IS A VIRTUAL ASSET SERVICE PROVIDER (VASP)
By the provisions of paragraph 4.0 of the CBN Guidelines on the Operations of Bank Accounts for Virtual Asset Service Providers, 2023, a Virtual Asset Service Provider (VASP) is an entity that conducts one or more of the following operations on behalf of another person:
Any organization that carries out any or all of the above-highlighted services for and on behalf of another is a VASP.
THE REGULATOR’S POSITION OVER THE YEARS
Over the years, the CBN has always been meticulous in its stand on cryptocurrencies. This has seen it issue circulars warning banks and other financial institutions to be wary of dealings in cryptocurrencies due to the money laundering and terrorism financing risks associated with its use.[ii]
For instance, on January 12, 2017, the CBN issued a circular[iii] stating that digital currencies such as bitcoin, Litecoin, and others are used in terrorism financing, and money laundering given the anonymity of virtual transactions thereby urging banks and other financial institutions to be wary of the risks associated with its use and to desist from transacting in cryptocurrencies pending substantive regulation or decision by the CBN.
Similarly, on February 5, 2021, the CBN directed all Deposit Money Banks (DMBs), Non-Bank Financial institutions (NBFIs), and Other Financial Institutions (OFIs) to identify persons or entities transacting in or operating cryptocurrency exchanges within their systems and ensure that such accounts are closed immediately while reiterating that cryptocurrency use or facilitation as a means of exchange is highly prohibited.[iv]
The SEC on the other hand released the SEC Rules on Issuance, Offering Platforms and Custody of Digital Assets, 2022 offering succour to the often-unregulated terrain of digital assets. It is therefore a commendable move that the CBN vide its circular dated December 22, 2023[v] issued the Guidelines to financial institutions under its regulatory purview towards regulating their banking relationship with VASPs in Nigeria.
A REVIEW OF THE CBN GUIDELINES
SCOPE OF OPERATIONS
The Guidelines shall apply to banks and other financial institutions under the purview of the CBN including:
OBJECTIVES
The Guidelines aim among other things to:
a)provide minimum standards and requirements for banking business relationships and account opening for Virtual Assets Service Providers in Nigeria; b) provide for effective monitoring of the activities of Banks and Other Financial Institutions in providing service for SEC licensed VASPs/Digital Assets (DA) entities in Nigeria; c) Provide guidance on the relationship and operations of accounts for licensed VASPs/DA entities; and d) Ensure effective risk management in the banking industry with regards to the operations of licensed VASPS.
OPERATION OF ACCOUNTS FOR VASPS
Financial institutions are by the Guidelines not allowed to open or operate accounts for any individual or entity except it is designated to conduct the business of virtual or digital assets. Such designated accounts must equally be opened only with the approval of senior management of the financial institution following an application containing the following documents:
a. evidence of a valid license issued by the SEC for the entity to engage in the business of VASP/DAXIDAOP
b. certified true copy of the memorandum and article of association
c. certified true copy of Form CAC 2— Statement of share capital and return of allotment of shares.
d. certified true copy of Form CAC 2.1 particulars of secretary.
e. certified true copy of Form CAC 3—notice of registered address.
f. certified true copy Form CAC 7— Particulars of Directors.
g. verifiable registered address of the company.
h. copy of the Certificate of Capital Importation (CCI) (where applicable)
i. valid means of identification of all the directors, principal officers, and beneficial owners of the company.
j. BVN of all the directors, principal officers, and beneficial owners of the company.
k. Home address of all the directors, principal officers, and beneficial owners of the company. I. AML, CFT, and CPF Policy of the entity.
m. All other requirements of a corporate account in line with the CBN ODD Regulations
n. Any other requirement that the CBN may impose from time to time.
RESTRICTION ON THE USE OF DESIGNATED ACCOUNT
A designated account opened under this Guideline shall be used solely for transactions relating to virtual/digital assets only. Additionally, cash withdrawal and third-party cheque clearance are equally prohibited on such accounts.
Except for settlement of a virtual/digital assets transaction which shall be done through a transfer to another designated account, withdrawal shall be only through a Managers’ Cheque or transfer to an account.
CUSTOMER DUE DILIGENCE
Financial institutions are mandated to conduct customer due diligence for VASPs when:
RECORDS MAINTAINANCE
Financial institutions shall maintain records of a designated account’s transactions for 5 (five) years or such other period as may be stated by CBN. The records to be maintained include records of customers and beneficial owners obtained through ODD measures including copies of records of official identification documents like passports, identity cards, driver’s licenses or allied documents, and beneficiary’s names, addresses or other identifying information normally recorded by the intermediary; b. nature and date of the transaction; c. type and amount involved; d. type and identifying number of any account involved in the transaction; and e. results of any analysis including inquiries to establish the background and purpose of complex unusual large transactions
Additionally, financial institutions are mandated to make customer transaction information available to the CBN within 24 hours of request for such information.
Records of the supporting evidence and methods used to verify identity shall equally be retained for a minimum period of five years after the account is closed or the business relationship has ended.
CONSUMER PROTECTION MEASURES
Financial institutions shall by this Guideline ensure that appropriate consumer protection systems are in place to protect consumers against risks of fraud while also providing a channel for communication of customer complaints against designated account holders.
The financial institutions must also establish a complaints redress mechanism while ensuring proper communication is made to the public.
SANCTIONS
The CBN may impose any or all of the under-listed sanctions against a financial institution, its board of directors, officers, or staff for failure to adhere to the Guideline: a. Prohibition from opening any further designated account; b. Monetary penalty not below the sum of 2,000,000.00 against the FIs, members of its board, senior management, and any staff, for any infraction. C. Suspension of the operating license.
CONCLUSION
The CBN Guidelines for the Operation of Bank Accounts for VASPs represent a significant step in the regulatory landscape of the country’s digital financial ecosystem. It is believed that proper implementation and enforcement tend to reshape Nigeria’s digital financial ecosystem positively.
[i] This definition aligns with the definition of VASPs under Part D, Rule 3.0 of the SEC Rules on Issuance, Offering Platforms and Custody of Digital Assets, 2022
[ii] For instance, on February 27, 2018, the CBN warned against investing in cryptocurrencies and posited that dealing in it or facilitating payment through it is prohibited.
[iii] See CBN Circular: FPR/DIR/GEN/CIR/06/010 dated January 12, 2017
[iv] See CBN Circular: BSD/DIR/PUB/LAB/014/001 dated February 5, 2021
[v] See CBN Circular: FPRIDIRIPUBICIRIOO2IOO3 dated December 22, 2023
Written by Muhiz Adisa for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com