Introduction
The Central Bank of Nigeria released new Guidelines on December 22nd, 2023 (FPR/DlR/PUB/ClR/002/003) reviewing its initial restrictions on the facilitation of cryptocurrency transactions by financial institutions in Nigeria. The guideline tagged “GUIDELINES ON OPERATIONS OF BANK ACCOUNTS FOR VIRTUAL ASSETS SERVICE PROVIDERS (VASPs)” supersedes the CBN Circular the CBN's circulars of January 12, 2017 (FPR/DlR/GEN/ClR/06/010) and of February 5, 2021 (BSD/DlR/PUB/LAB/014/001). The initial circular restricted banks and other financial institutions from operating accounts for cryptocurrency service providers.
Here are key highlights of the provisions in the Guidelines that are beneficial for the attention of our clientele and stakeholders in the blockchain industry.
Scope of the Guidelines
The Guidelines apply to banks and other financial institutions under the regulatory purview of the CBN and eligible stakeholders such as:
Commercial and Merchant banks
Payment Service Providers (third-party settlement providers)
All entities registered by the Securities and Exchange Commission (SEC) to conduct the business of digital/virtual assets services under the categories of:
Virtual Assets Service Providers.
Digital Asset Custodian.
Digital Asset Offering Platform.
Digital Asset Exchange.
DAX Operator.
Any other entity that may be categorized by the CBN from time to time.
Application to the SEC Regulation on Digital Assets
VASPs are regarded as providers of services relating to virtual asset exchange, transfer, custody, and issuance of virtual assets by the SEC regulatory framework on virtual assets. The SEC rules on issuance, offering Platforms, and Custody of Digital Assets released in May 2022 were yet to be effective due to the prior restrictions by the CBN. The SEC regulation provides licensing categories and requirements for VASPs in Nigeria and the CBN Guidelines (Paragraph 7.3) require evidence of a valid license issued by the SEC as a requirement for bank account opening. Consequently, with these Guidelines, the SEC regulatory framework becomes effective and compliance by stakeholders is expected.
Operation of Bank Accounts by VASPS
Bank accounts operated by VASPS (“Designated Accounts”) are permitted to be used solely for transacting the business of digital/virtual assets. The opening of the designated account must be subject to the approval of a senior management staff of the financial institution.
Permitted Activities for Financial Institutions
Financial institutions are permitted to undertake the following activities in their operations of accounts for VASPs:
i. Opening of bank accounts
ii. Provide designated settlement accounts and settlement services.
iii. Act as channels for FX flows and trade
iv. Any other activity that may be permitted by the CBN from time to time.
Restricted Activities/bank account uses
Designated accounts must be used for transacting digital/virtual assets only and transactions must be conducted in Naira. Withdrawals shall be done through transfers to other accounts or through a Manager’s Cheque, except in instances of a digital/virtual asset transaction settlement, which shall be through a transfer to another designated account.
Designated accounts are restricted for the following additional purposes:
Account opening/documentation requirement
Any application for opening a designated account by a company providing virtual/digital asset services under these Guidelines shall be supported by the following documents:
evidence of a valid license issued by the Securities and Exchange Commission (SEC) for the entity to engage in the business of VASP/DAX/DAOP/DAC
certified true copy of the memorandum and article of association.
certified true copy Form CAC 2 — Statement of share capital and return of allotment of shares.
certified true copy Form CAC 2.1 particulars of secretary.
certified true copy Form CAC 3 - notice of registered address.
certified true copy Form CAC 7- Particulars of Directors.
verifiable registered address of the company.
copy of Certificate of Capital Importation (CCI) (where applicable)
valid means of identification of all the directors, principal officers, and beneficial owners of the company.
BVN of all the directors, principal officers, and beneficial owners of the company.
Home address of all the directors, principal officers, and beneficial owners of the company.
AML, CFT, and CPF policy of the entity.
All other requirements of a corporate account in line with the CBN CDD Regulations
Any other requirement that the CBN may impose from time to time.
Rules Governing Designated Settlement Account
Designated settlement accounts of VASPs are subject to various obligations and restrictions that include the following:
The designated settlement accounts shall warehouse all Naira positions of the VASP's customers.
Financial institutions shall obtain authorisation from the CBN for the opening and operation of designated settlement accounts of SEC-licensed VASPs.
Credit to the designated settlement account shall be for the funding of Naira positions of a VASP’s customer and Debit from the designated settlement account shall only be in favour of the specific account that was used to fund the Naira position on the VASP platform.
Transactions on the VASP’s platform shall only be in Naira and the details of the transactions on the VASP platform leading to settlement on the designated settlement account shall be accessible online, on a real-time basis to the Financial Institution at all times.
The settlement cycle for transactions of VASPs/DAs shall be T+3.
Financial Institutions shall not facilitate transfer and settlement from the FX positions of persons on the VASP/DAs platform to any foreign account.
Transfers from the Naira position of Customers on the VASP platform into their bank account shall not be more than twice in a quarter.
Financial Institutions shall ensure that SEC-licensed VASPs always maintain a minimum collateral equal to 150% highest net debit position into the designated settlement account (over the past 10 days).
Customer Due Diligence (CDD)
Financial institutions are required to conduct due diligence on VASPs and their customers, with a duty to independently validate information and documentation provided in fulfilling requirements. They are responsible for instituting appropriate Know Your Customer (KYC) procedures to reasonably/promptly identify all individuals/entities offering services under this regulation.
Financial institutions shall conduct CDD in circumstances such as:
Onboarding VASPs
Transactions of significant value
Substantial change in customer information or documentation
There is a material change in the way that the account is being operated
Upon becoming aware of insufficient information collected about an existing customer
Enhanced Due Diligence
Enhanced due diligence is to be applied by financial institutions to all designated accounts upon risk assessments and on a need basis, from time to time. They can investigate suspicious transactions and report the findings to the NFIU.
Reporting Requirements and Suspicious Transaction Reporting
Financial institutions must submit monthly reports to the CBN with data and other information on designated accounts. The report is to detail within the reporting period:
Designated accounts opened
Value and volume of transactions conducted in each account
Details of the counterparty(ies) to the transactions
Incidents of fraud or theft; and
Number of customer complaints and remedial measures taken
Suspicious transaction reports regarding investigated transactions and findings are to be rendered to the NFIU by Financial institutions. Also, when a transacting account is discovered to have incorrect or invalid information.
Consumer Protection Obligations
ensure that appropriate consumer protecüon systems against risks of fraud are established.
provide a channel for communication of customer complaints against designated account holders.
establish complaints redress mechanism and ensure proper communication of this mechanism to the general public.
ensure strict adherence to the provision of the Circular issued by the CBN (Referenced CPD/DIR/GENICIR/OIIOOI) on the Deployment of the Consumer Complaints Management system (CCMS).
Sanctions
Financial institutions can sanction non-compliant VASPs that fall within the following categories:
Designated accounts without customer transactions for three (3) consecutive months will be declared dormant and closed
Accounts with incorrect or invalid information/documentation may be placed on Post No-Debit, subject to review when the customer updates the required information.
In the exercise of its disciplinary powers against a financial institution and its officers, the CBN may apply any or all of the following sanctions for failure to comply with any of the requirements of these Guidelines:
Prohibition from opening any further designated account;
Monetary penalty not below the sum of N2,000,000 against the Financial institution, members of its board, senior management, and any staff, for any infraction.
Suspension of the operating license of a Financial institution.
Conclusion
Overall, the CBN has unraveled the Guidelines to set a standard for the operation of bank accounts by VASPs with responsibilities on all stakeholders. The Guidelines have given effect to the SEC rules on Digital Assets released in 2022, pending implementation due to the disconnect in licensing requirements. The release of the Guidelines also green-lights the investment readiness of the booming blockchain market in Nigeria for local and foreign Investors.
