Nigeria—a country with one of the world’s most passionate love affairs with cryptocurrency—is at a strange crossroads. Just weeks after hinting at a more progressive position, the administration issued approvals-in-principle to two digital asset exchanges—Busha and Quidax. Now, it seems that the federal government has hit the brakes on all new licensing. This sudden stop has left the Nigerian crypto market hanging in the balance. More people than ever are asking what’s driving it, and what could be in store if it continues. Our featured article goes long on the challenge, using New Jersey as a case study. From analyzing the cause of the delay, to dissecting its effects on the industry and offering a glimpse into what lies ahead for crypto regulation in Nigeria.

Nigeria's Postponement of Crypto Licenses

The initial enthusiasm generated by the approvals-in-principle granted to Busha and Quidax has been tempered by the subsequent silence from regulatory bodies. At the time, the Nigerian Securities and Exchange Commission (SEC) seemed open to accepting legitimate crypto operations. Their lack of action has many on edge. This delay is particularly glaring considering Nigeria is one of Africa’s biggest crypto markets. A significant part of its economy has a population that participates in digital asset trading/investment.

The regulatory landscape in Nigeria has changed quickly and dramatically. Since late 2020, Nigeria’s Central Bank had instituted a policy of punitive measures against banks that did business with crypto companies. Lately, we’re seeing a policy reversal where the CBN is introducing more definitive compliance guidelines, indicating a softer stance. Simultaneously, the SEC has been tasked with licensing Virtual Asset Service Providers (VASPs), aiming to bring the burgeoning crypto sector under a formal regulatory framework. The intention was to spur more innovation. We put a strong emphasis on protecting investors and complying with anti-money laundering (AML) and counter-terrorism financing (CTF) policies. For many of these grantees, the current licensing freeze upends these plans and clouds the future with uncertainty. Besides that, it further undermines the government’s claim to wish to create a thriving crypto ecosystem.

Crypto exchanges looking to acquire a VASP license have an enormous hurdle to climb. They have to overcome a significant upfront capital barrier of 500 million Naira, about $362,500 as of 2/2024 exchange rates. This key requirement protects taxpayers and consumers by making sure only committed and well-capitalized companies are allowed to participate in the market. It risks building an impenetrable barrier against smaller, more innovative upstarts looking to enter. The licensing backlog has created a challenging environment for businesses already operating in the crypto space. The capital requirements are keeping budding entrepreneurs from breaking into the Nigerian market.

Reasons for the Delay

There are a few interconnected reasons for the Nigerian government’s hesitance to issue any additional crypto licenses. One likely explanation is the SEC’s dedication to the due diligence process. Licensing VASPs means very close scrutiny of their operational structures, security measures, AML/CTF compliance and overall financial health. The SEC needs to ensure that these entities meet the required standards to protect investors and maintain the integrity of the financial system. This can be a lengthy process, made even more complicated by the fast-paced innovation within the crypto industry and the ongoing development of the regulatory landscape.

Another might be the requirement that they work across agencies. Cryptocurrency is currently regulated by at least five different government entities. This should include the SEC, the CBN and potentially other agencies with a law enforcement and/or financial intelligence mandate. To safely regulate emerging technologies, there must be seamless coordination and information sharing among these agencies to quickly identify and mitigate potential risks and ensure industry compliance. Any lagging communication or contrary directions between these agencies might delay the action of acquiring a license.

Additionally, the Nigerian government is likely adopting a wait-and-see strategy given the nascent sector’s risks involved with cryptocurrency. These risks range from price volatility, market manipulation, and fraud to potential use of crypto for illicit activities. It is imperative that the federal government take these risks seriously and put in place strong, commonsense regulatory safeguards to address them. Sometimes you need to talk to foreign regulatory agencies. Second, look to the lessons of other countries that have adopted crypto regulations already.

Finally, political and economic factors might be at work, too. Returning to Nigeria, the Nigerian government is faced with competing priorities and limited resources. These challenges are preventing it from prioritizing the regulation of crypto. Beyond this, lobbying from legacy fiat institutions or other major players might be exposing the government to crypto’s more dangerous elements. Without an understanding of these underlying factors, it’s impossible to get a complete picture of the licensing delay.

Impact on the Crypto Industry in Nigeria

The government’s foot-dragging on the issuance of these licenses presents several notable implications for Nigeria’s fledgling crypto industry. Firstly, it creates uncertainty and discourages investment. This would make potential investors reluctant to put their money into the Nigerian crypto market. Their lack of clarity around future regulations is preventing them from deploying capital. This ultimately hampers innovation and impedes growth in the emerging industry.

Secondly, this delay causes the unregulated and often fraudulent crypto platforms to flourish. Regulatory clarity without specificity on the regulatory side, bad faith actors will be free to take advantage of a fledgling market. They are able to more easily fleece unsuspecting investors. This harms the integrity of the entire crypto ecosystem and undermines public confidence.

Finally, the uncertainty can threaten Nigeria’s potential to bring in foreign investment. This further places the nation behind its Western African competitors who are furthering the acceleration of crypto adoption. In fact, many African countries such as South Africa and Kenya have moved ahead with proactive, positive regulatory regimes toward cryptocurrency. As a consequence, they are drawing massive amounts of investment. Without a clear, positive regulatory environment for crypto businesses to thrive, Nigeria risks letting the opportunity pass. Just last month, this same Senate Committee on Capital Markets sent a powerful message to the administration. They argued that the country’s ambiguous position on cryptocurrency was damaging and called for definitive regulations.

Lastly, the postponement stands to further damage the perception of Nigeria’s crypto future. The international crypto community may view Nigeria as an unfriendly or uncertain jurisdiction, which can discourage foreign companies from establishing operations in the country. This limitation undermines some of the intended benefits of crypto for Nigeria’s economy. On the other hand, it would greatly suppress job creation, financial inclusion, and technological innovation. The government must respond to these concerns and prove that it’s serious about building a successful and properly-regulated crypto industry.

Global Banks Entering the US Crypto Market

Nigeria faces worsening approval backlogs for crypto registration. At the same time, significant developments are underway on American shores, which have the potential to significantly shape the direction of the global crypto sea turtle. Heavy hitters of traditional finance are lobbying for a foot in the crypto door. This operational shift illustrates the increasing acceptance and integration of digital assets into our mainstream financial system. This trend has the potential to radically transform the crypto industry. Even more importantly, it has the potential to open up new markets for both institutional and retail investors.

First, the current conditions are ripe for global banks to enter into the US crypto market. First and foremost, FIs are facing increasing client demand for crypto services. Many bank customers are already investing in crypto through other platforms, and they are eager to access these services through their trusted banking providers. In fact, banks are already meeting this demand, creating new custody, trading, and investment products involving crypto assets.

The second reason that banks are interested in crypto is that it represents a new avenue for revenue growth. Crypto-related services create new opportunities for fees and commissions, further enriching banks’ bottom line. Further, banks can employ crypto to distinguish themselves and win new clients, thus increasing their market share.

Third, banks themselves are starting to see opportunity with blockchain — the underlying technology behind cryptocurrency. Blockchain increases the speed and efficiency of a variety of financial processes including payments and settlements. It provides an additional layer of security in record-keeping. As seen with the infamous Silk Road, banks are pouring investment into blockchain technology to streamline their operations and help create attractive new products and services.

Trends and Developments

Here are a few key trends and developments that are creating an inviting climate for global banks to enter the US crypto market. One overarching trend we’ve seen is the growing attention to crypto custody services. The bank is offering custodial storage for digital assets. Such stay-at-home alternatives are vital for institutional investors needing to match regulatory challenges like those faced by pension funds.

After FTX, another trend is the rise of crypto trading exchanges. Banks are launching their own platforms or partnering with existing crypto exchanges to offer their customers access to digital asset trading. These platforms offer a safe, accessible, and relatively regulated means to purchase and trade crypto assets for investors.

In fact, banks are quite literally jumping into the stablecoin deep end. Specifically, these cryptocurrencies are pegged in value to traditional currencies like the US dollar. Finally, stablecoins offer a more efficient way to process cross-border payments, reducing time and cost. They have provided a trusty store of value in unpredictable markets. Some of these banks are already eyeing their own stablecoins.

These developments signal a growing acceptance of crypto by the traditional financial industry and a recognition of its potential to transform the financial system.

  • JPMorgan Chase: JPMorgan Chase has launched its own crypto unit and is offering crypto custody and trading services to its institutional clients.
  • Goldman Sachs: Goldman Sachs has also launched a crypto trading desk and is offering crypto derivatives to its clients.
  • BNY Mellon: BNY Mellon, one of the world's largest custodian banks, is offering crypto custody services to its institutional clients.
  • State Street: State Street, another major custodian bank, is also offering crypto custody services and is exploring the use of blockchain technology for its operations.

These developments of global banks entering the US crypto market have important implications for the future of cryptocurrency. There are two main benefits to advancing one of these bills. Longtime financial institutions have an important responsibility in shifting the public perception of crypto. Their participation further serves to undermine the perception of it as the niche or speculative asset class.

Implications for the Future of Cryptocurrency

Second, it helps facilitate wider adoption of crypto assets by institutional investors and retail investors. Banks can sell crypto directly to investors and offer a more regulated, convenient outlet for buying, selling, and storing crypto. This helps create a smoother adoption process across the crypto market and higher liquidity.

Third, it can help promote positive innovation within the crypto space. Banks can bring their expertise in financial technology and regulatory compliance to the crypto space, which can help to develop new and innovative products and services.

On the one hand, the entry of global banks into the crypto market offers many exciting opportunities. One significant challenge is the lack of clear and consistent regulatory frameworks. Investors and banks alike require that banks operate under a clear regulatory framework in which they will be held accountable and protect any bank investor.

A second more serious concern is the possibility of conflicts of interest. These dynamics frequently place banks at cross-ends with their interests in the crypto-market. Crucially, they do so while they promote their own proprietary crypto products and custody other crypto assets. Regulators must act to close these obvious conflicts and avoid real or perceived competition that harms investors.

Despite these challenges, the entry of global banks into the US crypto market is a positive development for the crypto industry. This further heralds a fundamental acceptance of digital assets across the traditional financial industry. In summary, look forward to more adoption, more innovation and ultimately more growth. There are important lessons the Nigerian government must learn from these developments. Instead, it should pave the way for a regulatory environment that advances innovation, protects all investors, and promotes the growth of a decentralized, global crypto ecosystem.

To sum up, Nigeria’s crypto license freeze has created a very strange situation. Multiple factors play into this, including motivations for due diligence, inter-agency coordination, risk aversion, and possible political pressures. This ongoing delay has disastrous effects on the Nigerian crypto ecosystem. It would kill innovation, drive investment onto unregulated platforms, and damage Nigeria’s ability to compete in the international market for the crypto economy. Simultaneously, the entry of global banks into the US crypto market signifies a growing acceptance of digital assets within the traditional financial system, bringing legitimacy, improved access, and innovation to the crypto space. What’s happening around the world provides valuable lessons for Nigeria. By implementing a regulatory framework that promotes innovation while still ensuring proper protections for investors, the U.S. can cultivate a robust and sustainable crypto market.

In conclusion, Nigeria's crypto license freeze presents a complex situation with various contributing factors, including due diligence, inter-agency coordination, risk mitigation, and potential political influences. This delay has significant repercussions for the Nigerian crypto industry, potentially hindering investment, fostering unregulated platforms, and impacting Nigeria's competitiveness in the global crypto landscape. Simultaneously, the entry of global banks into the US crypto market signifies a growing acceptance of digital assets within the traditional financial system, bringing legitimacy, improved access, and innovation to the crypto space. Nigeria can learn from these global trends and strive to create a regulatory environment that balances innovation with investor protection, ultimately fostering a thriving and sustainable crypto ecosystem.