by Gabriel Eze, Associate

Photo by André François McKenzie on Unsplash

Legal compliance is key to building and sustaining a reputable brand

Understanding the legal terrain where a business is or will be located and complying with its legal requirements are important factors in building a reputable brand. Clients love and trust businesses with transparent processes and potential investors don’t take legal compliance lightly. Laws and regulations define relationships between a business and those who interact with it. They protect the interests of businesses, their clients, investors, and employees within an organization. But their applications differ for each jurisdiction. Failure to adhere to them may attract sanctions; punishment in form of fines or even imprisonment which  may result in reputational damage. Currently, there is no specific legislation on cryptocurrencies in Nigeria. But depending on the sector or industry a business plays in, certain laws, regulations, and guides may apply as well as other considerations that may be brought to fore. 

Regulatory Landscape in Nigeria

As in a number of countries, the regulatory weather in Nigeria’s emerging cryptocurrency market remains foggy. On 5 February 2021, the Central Bank of Nigeria (CBN) directed banks and other financial institutions to stop facilitating payments for cryptocurrency transactions in Nigeria. In the circular, the CBN required regulated financial institutions to identify persons and/or entities transacting in cryptocurrency or operating cryptocurrency exchanges within their systems and close such accounts immediately. The circular effectively extends and expands the CBN’s previous directive of January 2017 and February 2018 respectively where the CBN similarly cautioned Deposit Money Banks (DMBs), Non Bank Financial Institutions (NBFIs), Other Financial Institutions (OFIs), and members of the public on the risks associated with cryptocurrencies transactions. 

While the CBN views cryptocurrencies as a danger to the financial system due to the susceptibility of cryptocurrencies to fraud and criminality, the SEC recently considered cryptocurrencies such as bitcoin for example as digital assets, specifically commodities or securities. In its statement released 14 September 2020, the Securities and Exchange Commission (SEC) defined crypto assets “as digital representation of value that can be digitally traded and functions as: (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value — but does not have legal tender status in any jurisdiction.“ The SEC also stated its intention to regulate “any person, (individual or corporate) whose activities involve any aspect of Blockchain-related and virtual digital asset services”. According to the SEC statement, such persons would be mandated to be “registered by the Commission and as such, will be subject to the regulatory guidelines.” Unfortunately, this commendable initiative by the SEC has been suspended following the CBN directive of February 2021.

Legal Compliance & Business  Considerations – Insider’s perspective 

Through our Blockchain & Virtual Assets Practice, we continue to work with  both local and international brands in providing legal guidance that enables them to navigate the business and legal risks that may be associated with  their cryptocurrency and blockchain-powered projects. As a member of the firm’s Blockchain & Virtual Assets Practice group, I have worked with my partners and colleagues on matters involving both centralized and decentralized digital asset exchanges,  crypto wallet services, and other virtual assets service providers (VASPs) and FinTech startups with interest in the Nigerian market. Based on our experience and expertise in this area, shared below are six major considerations to note in or before starting a business in Nigeria’s emerging blockchain & cryptocurrency market:

1. Business Formation & Structure: To operate successfully in the blockchain & crypto space, you need to consider the structure of your business. Particularly in a space where regulation is uncertain, you want to be sure that you have not only registered your company with the appropriate memorandum and articles of association but also put effective internal controls in place. Your corporate health is crucial. Something as simple as a one-click Articles of Association for instance may hurt your business interest. A not well-thought out Memorandum of Association may also hurt badly. Get help early, even before the word “GO”!
2. Contract Drafting and Review: Apart from business formation and structure,  contracts drafting, review, and advisory are critical to the success of any business. In the blockchain & cryptocurrency space, safety is often compromised for speed. From acquisitions to joint ventures, partnerships and a suite of other mix, contracts make or mar businesses. In my work with the Blockchain & Virtual Assets Practice group, one of the values we bring to clients is having our eyes on detail while not losing grip of the big picture.
3. Data protection & privacy: Crypto and blockchain-powered or blockchain-based businesses are 100% data-driven. This is why having a healthy data protection & privacy policy and culture is vital. With our expertise in data protection & privacy, compliance with applicable laws and regulations is one of the areas we can help with.
4. Know your customer (KYC), anti-money laundering (AML), and combating financing of terrorism (CFT) compliance: Recently, my team and I worked with one of the biggest cryptocurrency exchanges in the world to improve their KYC, AML, and CFT policy and compliance. This aspect is critical to security and safety, especially to the financial system. Therefore, blockchain & crypto startups—irrespective of size—must ensure that they do not only have the right policies in place, but also have the administrative mechanism and technological infrastructure to ensure implementation.
5. Intellectual Property: Whether your blockchain & crypto startup is a centralized or decentralized exchange, a crypto wallet or crypto education platform, a crypto media agency or a crypto investment management firm etc., your intangible assets may just be your most valuable assets. So be sure to secure your copyrights, trademarks, patents, and even trade secrets. Working with a law firm that is well known for its specialization in intellectual property and information technology in the knowledge economy and digital age, you will of course be in great company.
6. Policy & Regulatory Advocacy: In my work in the Blockchain & Virtual Assets Practice so far, I have come to appreciate more the place of policy and regulatory advocacy in the business of blockchain & crypto startups. Particularly in a space where regulation is uncertain and potentially disruptive, you want to be sure that as a Stakeholder your voice can be heard. We are always happy to help boost our clients’ contributions to policy and regulations. This is because we are highly active in this space. You can leverage our policy and regulatory advocacy in the Nigerian blockchain & cryptocurrency space to facilitate key engagements with relevant policy makers and regulators that may benefit the client’s business interest. (Our Lead Partner Senator Ihenyen who heads the Blockchain & Virtual Assets Practice is currently the President of the Stakeholders in Blockchain Technology Association of Nigeria {SiBAN} and the General Secretary of the Blockchain Industry Coordinating Committee of Nigeria (BICCoN). I am an active member of the Policy & Regulations Committee at SiBAN as well.

Conclusion

Although cryptocurrencies remain largely unregulated in Nigeria presently, the rights and liabilities that exist between contracting parties remain—whether off-chain or on-chain. It is imperative that crypto founders, entrepreneurs, and business persons get it right by the laws where applicable and also take advantage of the knowledge and in-depth understanding of legal experts in the field.