Choosing the Innovative Approach to Regulation: What the CBN Could Have Done with Cryptocurrency

It is not new to see the clash between the business person pursuing profitability and the regulator entrusted with ensuring that profit is not made at the expense of the greater good of society. In fact, the primary purpose of corporate law is to prevent corporations from being used as instruments of fraud. In some jurisdictions this conflict manifests as the free market vs increased regulation debate but here in Nigeria I believe it has shown up as the innovation vs. protection debate.

With a predominantly young population, the technology space in Nigeria is growing by the second. If you took a census of technology companies 10 years ago and compared that with the number today you would definitely find a wide positive variance. The desire of entrepreneurs in the Nigerian technology space is to keep innovating and advancing; developing unique solutions to people’s needs and closing up gaps in the market.

Recognising this desire, what role should the regulator play? It is the job of the regulator to take cues from the commercial environment and develop laws and policies that would serve as a guide to protect the wider society from those who would pursue their personal interest at the expense of others. However, the regulator’s role is not only to safeguard individuals and society from maltreatment but also to ensure that there is responsible innovation. For without innovation, new businesses will not be formed and this will slow down economic growth.

However, the regulator’s role is not only to safeguard individuals and society from maltreatment but also to ensure that there is responsible innovation. For without innovation, new businesses will not be formed and this will slow down economic growth.

To ensure that regulation is effective, Dudley and Brito state the following steps should be followed:

·        Identify a significant market failure or systemic problem;

·        Identify alternative approaches;

·        Choose the regulatory action that maximizes net benefits;

·        Base the proposal on strong scientific or technical grounds;

·        Understand the effects of the regulation on different populations; and

·        Respect individual choice and property rights.

These steps should have been followed before the Central Bank of Nigeria (CBN) reiterated its position on cryptocurrency last Friday, 5th February, 2021. Instead from the contents of the circular and the later press release, the CBN appears to merely have adopted the prohibition/protection approach. The CBN appeared to be saying cryptocurrency is new, it is dangerous and so we will ban it. When we compare the CBN’s approach and the Securities and Exchange Commission (SEC)’s approach to dealing with the innovation of crowdfunding, we certainly see a marked difference. SEC adopted a pro innovation/ growth approach recognizing that the idea of crowdfunding is here to stay and as such it is better to provide for risk management mechanisms to safeguard the interests of the society as opposed to outrightly banning its use. The CBN on the other hand, by its circular appears to have thrown the baby out with the bath water.

Cryptocurrency may be a volatile asset but its adoption like all other digital forms of carrying out transactions is growing daily. In fact, certain governments have issued government backed cryptocurrencies. If this evidence was not convincing enough, it would also have been useful to calculate the revenue being generated by these cryptocurrency platforms and balancing this benefit against the potential risks of money laundering and terrorist financing. Other areas the CBN should consider include:

1.      Tax

Over the past 5-10 years, the government has embarked on a strategy to bring Nigerian businesses into the tax net. The current regulation will only move cryptocurrency trade back to unconventional groups and will lead to a loss of the revenue the government could have benefitted from the organisations that had formalised trade in the asset. This does not even take into consideration the jobs that will be lost as an aftermath of compliance with the circular issued by the CBN.

2.      Foreign Direct Investment

Another factor the CBN should have considered is the impact on foreign direct investment. In a country that desires to attract foreign direct investment, an uncertain regulatory environment is definitely not beneficial. In a webinar last year organized by the Nigerian Stock Exchange to discuss policy issues around investment in Nigeria, one foreign investor remarked that his company had directed him early in 2020 to liquidate all investments in Nigeria because of the uncertainty of the market. He also said that there would be no new investments in Nigeria without a change in the stance of the government on regulation .

It would have been foolhardy in the early 2000s when we moved from mainframe to personal computers, to introduce a legislation to ban the sales of laptops because there were new risks that could emerge that did not exist in the era of mainframe computers. Commerce had already moved and therefore the regulator had no choice than to take steps forward as well. The CBN has moved with innovation before in the days of the introduction of electronic commerce and online payments; developing the required principles to safeguard the interests of society. I do not think the approach to cryptocurrency should be different. It would be great for the CBN to take steps to better understand the space and provide for risk management structures that banks can adopt. We should not take a step backwards this time. 

REFERENCES

[1]The Right Way to Regulate the Tech Industry, Lisa Quest and Anthony Charrie,https://sloanreview.mit.edu/article/the-right-way-to-regulate-the-tech-industry/

[1]https://www.ced.org/reports/regulation-and-the-economy

[1]Modernizing Government Regulation: The Need for Action, Committee for Economic Development, 1998, p. vii (https://www.ced.org/reports/single/modernizing-government-regulation-the-need-for-action).

[1]Susan E. Dudley and Jerry Brito, opening paragraphs of chapter 1, “What is Regulation?” in Regulation: A Primer (second edition), Fairfax, VA: Mercatus Center At George Mason University, August 14, 2012 (https://mercatus.org/publication/regulation-primer)