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Why Nigeria’s Crypto-Friendly Company Flutterwave was Denied Tax Incentive



Image Credit: Kabiru Yusuf (Bitcoin and regulations)

On Flutterwave;

Flutterwave, a fin-tech company based in Lagos and San Francisco that provides payment infrastructure for global merchants and payment service providers across the continent, recently had its application for a Pioneer Status Incentive (PSI) denied by the Federal government. It is no news that Flutterwave has made its mark in the digital space as a fertile startup group that aids tons of dealers and foreign businesses in actualizing digital payments that transcend borders through a smooth mechanism. It is, therefore, no surprise that the company keeps growing in leaps and bounds. 

Earlier this year, it joined the league of top companies like Apple, Microsoft, Pfizer, Netflix, Facebook among others in TIME’s list of 100 most influential companies creating critical impacts across the globe. It has also partnered with Binance, a leading crypto-exchange platform to bridge the fiat-to-crypto currency gap. By this, Nigerians can purchase cryptocurrencies directly with the Naira. 

Why then is PSI important? 

The Pioneer Status Incentive (PSI) is a program set up by the Industrial Development (Income Tax Relief) Act, No. 22 of 1971 to promote increased investments in the economy. It is simply a form of tax holiday. And this incentive seeks to stimulate growth by granting an income tax exemption to qualified companies in key sectors of the economy. 

Furthermore, this exemption can either be a full or partial one and is made available for a period of (5) five years (an initial 3 years, renewable for another 2 years). The Pioneer Status Incentive is regulated by the Nigerian Investment Promotion Commission (NIPC) and its Exec. Secretary, Ms Yewande Sadiku in a statement remarked that the commission had entered into multiple partnerships with the private sector in a bid to harness potentials in the country. So why then was Flutterwave denied a chance at a Pioneer status certification? 

It was revealed that several reasons contributed to the rejection of a company’s application for PSI — ranging from having an ineligible business activity, submitting a request later than required et al. In the words of Emeka Offor, the director of strategic communication at NIPC; “The Industrial Development Act gives guidelines and one of the requirements is that an applicant for pioneer status or tax relief must make an application in the first year of production or service delivery, which most of them failed to do… In the case of Flutterwave, for instance, they applied within the third year of operations. Therefore, it is time-bound, according to the Industrial Development Act. Some other firms who had their applications for tax reliefs declined had a similar concern.” Hence, it was gathered that (3) three firms were approved in principle, while six were granted a full three-year certification. In this category, we have groups like Tiamin Rice Ltd, Medlog Logistics Ltd, African Foundries Ltd, Aarti Rolling Mills Ltd, Pan Africa Towers Ltd and Princess Medi-clinics Nig.

Some of the companies whose requests were also rejected included Flour mill of Nig., Benchmark Constructions Ltd, Envoy hotels, Al-hamsad Rice mills Ltd and a host of others. 

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Bitcoin in Africa

Crypto Regulation or CBDC? What Africa’s Biggest Crypto Hotspot Requires?



Crypto in Nigeria
Image Credit: Kabiru Yusuf

On February 5, 2021, the Central Bank of Nigeria rolled out an order urging financial institutions to close the accounts of persons or entities that transact in or operate a cryptocurrency exchange.  According to the apex bank, digital currencies generated by unregulated or unregistered firms raise legal concerns because they can be used to perpetrate illicit affairs; money laundering and terrorism. While this gives partial explanations to the clampdown on cryptocurrency in Nigeria, there were uproars from various quarters. Questions were raised on whether or not the ban of crypto was the way forward to the growing interest in digital currencies. The clamour for regulation of cryptocurrency was not only limited to the masses, it includes Senators, Honorable members of the House and the intervention of Vice President Yemi Osinbajo.

About 5 months after the supposed ban on crypto was made, CBN made another giant stride. At the Monetary Policy Committee Meeting (MPC) held on Tuesday, July 27, the CBN Governor, Godwin Emefiele, confirmed that a digital currency (CBDC) will be launched in October. What exactly is the CBN digital currency about? How does it affect Nigerians, especially crypto traders? Why does the CBN have to launch digital currency when regulations can be made for the existing cryptocurrency? These and other questions still linger in the minds of financial analysts and crypto enthusiasts.  Thus, the need for this article. 

What is CBDC?

The CBDC is an ‘e-Naira’ that is supported by law and can be used as legal tender. Due to this, it is usually considered as the central bank’s liability.   CBDCs are blockchain-based but centralized and supervised by bank regulators. This is the distinguishing factor between cryptocurrency and CBDC; while the former is highly decentralized, the latter is centralized and regulated by the central bank that created it. To achieve its centralization, every bank connected to the blockchain system can collate transaction data that can be aggregated and relayed to the CBN. Just like stable coins, the digital currencies will be pegged to the fiat Naira at 1:1.  The currency would most likely be issued to commercial banks which in turn be made available to customers. The CBN started research on CBDC in 2017 alongside 80% of other central banks. However, only the Bahamas, the Eastern Caribbean and China have implemented it in practice. The CBDC is set to be Africa’s first digital currency as it is closest to being pulled through. Other countries like South Africa, Ghana, Morocco and Kenya are working on introducing digital fiat currencies. 

How CBDC affects Nigerians: a Gift or a Curse? 

Any Nigerian operating a business will certainly be concerned about the effect of the CBDC on the financial market. For crypto enthusiasts, it is another form of witch-hunt put in place by the central bank to clamp down on cryptocurrency. Since digital currency is the future and cryptocurrency is “evil” as proposed by the apex bank, CBDC will enable faster transactions and promote the development of e-commerce. It will create innovative opportunities in the financial system as new business opportunities will arise from emerging business models, financial products and services. While there seem to be endless advantages of CBDC, its curses are no doubt evident in the ways it will be regulated. Transparency and centralization of the digital currency will enable the central bank to know who is holding what money at a particular point in time. With such regulation in place, the government can use CBDC to surveil the citizens, determine how much they earn, what they use the money for, where they save the money. Since it can be used to determine the amount a particular person earns, it allows the government to leverage tax on citizens. These are the ‘ill’ cryptocurrency permits, hence, its ban. 

Crypto Regulation or CBDC? 

 You may wonder why the central bank is interested in creating its digital currency when it could tap into the existing cryptocurrency. The reason behind this is not far-fetched. One of the important reasons for the ban on cryptocurrency was because it is highly decentralized. Not only because the government does not have control over it but because transactions are only known to the two parties involved without the parties knowing each other. This allows some users to carry out fraudulent activities; cybercrime and money laundering through cryptocurrency. A call for the regulation of cryptocurrency is quite impossible due to its decentralization, to solve the problem of anonymity, there is a need to launch a digital currency that can be monitored. To the Nigerian government, CBDC has the same function as cryptocurrency (except the issue of anonymity which is unimportant if one has nothing to hide). It is the government’s way of regulating crypto and embracing the opportunities the new system provides. 

In conclusion, while the CBDC may seem like a plot by the Nigerian government to further clamp down on cryptocurrency and to monitor the citizens, it is rather counter-productive to critique before it gets launched. For now, it is an idea that is yet to see the light of the day, the loopholes can only be confirmed after its launch in October.  

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Cryptocurrencies and the Problem of Regulation



Bitcoin protection
Image Credit: Kabiru Yusuf

There has been a gradual rise in the adoption of cryptocurrencies, and rightfully so. Cryptocurrencies have the potential to become huge disruptors to global financial systems in that they intend to perform the same functions as the traditional fiat currencies, but more efficiently. Cryptocurrencies are known to be digital assets, native primarily to a chosen network of interconnected devices. They can either be transacted basically as a utility (i.e native to a particular sector) or on a broader scale where they are bought and sold for a price determined by market conditions. They are traded on exchanges similar to the stock market, where investors buy and sell cryptocurrencies just like they would buy and sell shares on the stock exchange.

Cryptocurrency is extremely unpredictable and volatile, especially since it has no intrinsic value. This volatility is a main feature of cryptocurrencies, and the main reason the UK’s financial regulatory authority, the FCA, has described cryptocurrencies as high-risk, speculative investments that could potentially lead to a total loss in investment due to manipulations that can occur as a result of individual or institutional factors. Despite this, crypto has massive support from the financial industry. Institutional investors and companies like Tesla, and investment banks and financial services firms like JP Morgan, include Bitcoin in their portfolios.

Despite the growing popularity, there are few consumer protections and regulations for cryptocurrency, and in the wake of this many fraudulent activities are on the rise based on the supposed feature of anonymity that cryptocurrencies operate upon.

Legal Concerns Around Cryptocurrency Use

The U.S. Attorney General’s cyber-digital task force 2020 report identified three areas of concern with cryptocurrency use:

  • Direct use of cryptocurrency to commit crimes and finance terrorism
  • Using cryptocurrency to launder money and evade taxes
  • Cryptocurrency theft and investment fraud.

In general, a common legal concern about cryptocurrency is the level of anonymity  that cryptocurrency can offer. This creates a perfect environment for criminal activities. Cryptocurrency developers are now offering anonymity enhanced cryptocoins (AECs) like Monero, Zcash, and Dash, specifically to make tracking transactions more difficult.

With all of these in view, the regulations and policies around cryptocurrencies and their adoption in different countries of the world literally differ from each other. While a nation such as Nigeria would ban financial institutions from performing any form of transactions using crypto currencies, owing to the basic ideology that it fosters more harm than good in the nation, countries like the United States would adopt the use of cryptocurrency for the enhancement of financial transactions.

Comparative Summary of Regulations

One of the most common actions identified across the jurisdictions of different nations is government-issued notices about the pitfalls of investing in the cryptocurrency markets.  Such warnings, mostly issued by central banks, are largely designed to educate the citizenry about the difference between actual currencies, which are issued and guaranteed by the state, and cryptocurrencies which are not.  Most government warnings note the added risk resulting from the high volatility associated with cryptocurrencies and the fact that many of the organizations that facilitate such transactions are unregulated.  Most also note that citizens who invest in cryptocurrencies do so at their own personal risk and that no legal recourse is available to them in the event of loss.

Many of the warnings issued by various countries also note the opportunities that cryptocurrencies create for illegal activities, such as money laundering and terrorism.  Some of the countries surveyed go beyond simply warning the public and have expanded their laws on money laundering, counterterrorism, and organized crimes to include cryptocurrency markets, and require banks and other financial institutions that facilitate such markets to conduct all the due diligence requirements imposed under such laws.  For instance, Australia, Canada, and the Isle of Man recently enacted laws to bring cryptocurrency transactions and institutions that facilitate them under the ambit of money laundering and counter-terrorist financing laws.

Some jurisdictions have gone even further to impose restrictions on investments in cryptocurrencies, the extent of which varies from one jurisdiction to another.  Some (Algeria, Bolivia, Morocco, Vietnam) ban all activities involving cryptocurrencies.  Qatar and Bahrain have a slightly different approach in that they bar their citizens from engaging in any kind of activity involving cryptocurrencies locally, but allow citizens to do so outside their borders.  There are also countries that, while not banning their citizens from investing in cryptocurrencies, impose indirect restrictions by barring financial institutions within their borders from facilitating transactions involving cryptocurrencies (Bangladesh, Iran, Nigeria, China, and Colombia).

While Bitcoin and other cryptocurrencies have generated dizzying returns for investors, there are significant risks and regulatory issues to consider. There are very few consumer and investor protections that address cryptocurrency, and the exchanges that deal in it.


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Nigeria’s Fintech Regulatory Hurdles: SEC’s New Rule And CBN’s BVN Validation Suspension




On Thursday, 8th of April, 2021, the Securities and Exchange Commission (SEC) issued a warning to “unregistered” investment platforms, asking them to desist from offering Nigerians access to foreign securities. The Commission stated that only registered platforms can offer foreign securities to Nigerians. According to SEC’s published statement, “The Commission categorically states that by the provisions of Sections 67-70 of the Investments and Securities Act (ISA), 2007 and Rules 414 & 415 of the SEC Rules and Regulations, only foreign securities listed on any Exchange registered in Nigeria may be issued, sold or offered for sale or subscription to the Nigerian public.”

The regulatory battle between investment-tech platforms and the SEC has been ongoing for a while. In December 2020, the Commission issued a statement which stated that investment platform, Chaka, would be restricted from offering stocks to the Nigerian public. However, on March 26, 2021, Chaka announced that it had taken necessary steps to obtain a newly created license. An excerpt from the company’s announcement says:
“We are pleased to inform our stakeholders and the general public that Chaka has taken the necessary steps to register with the Securities & Exchange Commission of Nigeria (SEC) for a newly created license, as SEC continues to maintain its avowed intention to encourage innovation within the market space.” With the SEC’s recent statement on the “proliferation of unregistered online investment and trading platforms,” things are a bit blurry on the state of regulations for investment platforms like Chaka.

The existence of investment platforms like Chaka, Trove, and Bamboo, has caught the attention of many Nigerians who are excited about having access to a simple means of investing in foreign securities. This has provided a path to financial freedom for many Nigerians, as well as a means to hedge against the constant devaluation of the Naira.

The regulatory hurdle plaguing these investment platforms may, however, wipe away the benefits that the platforms offer to Nigerians, thereby, threatening the streams of income that some Nigerians generate from trading foreign securities through these platforms, as well as leveraging the platform’s services to hedge their wealth against the devaluation of the naira. This would also directly affect the core of the business model of these investment companies, thereby, threatening their survival.

At the moment, the Nigerian fintech space is facing multiple struggles with regulations. The issue between the SEC and investment-tech platforms is one out of many. Just this week, news broke that the CBN suspended the provision of BVN validation service to fintechs and non-bank financial institutions. According to an email sent by Paystack, CBN’s directive will affect every third-party partner. The email reads thus:
“We’ve recently been made aware of a regulatory directive from the primary custodian of Nigeria’s BVN service to all their partners to suspend the provision of the BVN validation service to their third-party partners. In light of this news, we’re hereby informing you that the BVN Resolve service will be temporarily unavailable starting at midnight, today, April 8.”

This directive may have significant negative effects on the operations of fintechs in the country because identity verification or Know Your Customer (KYC) is critical for any financial institution to engage in any business with a customer. The verification system of many fintech startups in Nigeria is centered around BVN. Thus, banning BVN validation for these startups may adversely affect their operations.

Building an alternative identity verification system that does not require BVN could be more expensive because identity verification alternatives like ID verification cost more, which could increase the running costs of fintechs in Nigeria or lead to an increase in the cost of accessing their services by users. However, cheaper available KYC alternatives could suffice for the verification of identity for many platforms.

It is presently unclear why CBN is issuing this directive or why the SEC has been coming for Chaka and other investment platforms. However, we do know that the fintech space has been apparently under intense heat from regulatory bodies in recent times.

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