Blockchain, which is mostly associated with cryptocurrencies and the like, had remained largely unregulated in Nigeria until September 2020, when the Securities and Exchange Commission (“SEC”) issued a statement on digital assets, to the effect that crypto-offerings and other forms of blockchain-based offers in Nigeria or targeted at Nigerian investors would be regulated by the SEC1.
Following this statement, the Central Bank of Nigeria (“CBN”) in February 2021, issued a circular, prohibiting banks from dealing in cryptocurrencies or enabling payments for cryptocurrency exchanges. There is no denying the tension and the negative impact this development had in the innovation and technology space.
With the continuous increase in decentralized finance (“DeFi”) and the obvious importance and significance of blockchain in driving economic growth, the government of the Federal Republic of Nigeria (“FRN”), through the National Information Technology Development Agency (“NITDA”) acknowledged the need to develop the Draft National Blockchain Adoption Strategy (the “Strategy”) in 2020. The aim of the Strategy is to drive the adoption of blockchain technology in government in a way that supports efficiency, transparency, and productivity. Having recognized the potential of blockchain technology to create new transaction channels for the development of the digital economy, and the need for the government and regulators to embrace its disruptive nature and proactively participate in same, the FRN has now approved the Strategy on May 3, 2023.
This publication highlights some of the salient provisions of the Strategy.
A. WHAT IS BLOCKCHAIN?
According to the Strategy, blockchain technology is defined as a decentralized and distributed ledger that records and validates the authenticity of digital assets. Its technology allows individuals and organisations to record information which cannot be altered without the authorization of the persons or organisations who share the network. Any alterations done to any entry in any ledger without the prior approval will automatically corrupt the entire ledger. This dispenses with the need for the employment of any third party to supervise or validate transactions and address the issues of compromise and vulnerability of this third party.
Blockchain technology is often and most popularly known to be used in financial transactions and transactions involving the transfer of digital assets. This technology however is also used in various other sectors and for various purposes ranging from healthcare to voting, national identity management, internal revenue monitoring, and registries. The Strategy also provides for additional use cases that can benefit from the deployment of blockchain technology in various sectors of the Nigerian economy, such as:
- Data management: this includes cloud storage; identity data management; contract management; Internet of Things (IoT) sensor data purchasing, etc.
- Data verification: this includes document notarization; identity verification; product quality verification by the Standard Organisation of Nigeria (SON) and the Nigerian Agency for Food and Drug Administration (NAFDAC); proof of origin for products, etc.
- Financial sector: this includes currency exchange and remittance; crowdfunding; peer-to-peer (P2P) transactions; insurance; and supply chain management in e-commerce.
- Other additional uses can be found in lottery systems; gaming; social rating creation and monitoring; outsourcing of computational power for scientific purposes; etc.
B. THE GOVERNMENT’S STRATEGY FOR BLOCKCHAIN ADOPTION
Through the Strategy, the government has formulated three main pillars upon which the strategy for blockchain adoption is built. They are initiatives; strategic objectives; and consideration for existing government policies, frameworks, and strategies. The goal is to increase the contribution of information and communications technology (ICT) to the country’s gross domestic product (GDP).
- Initiatives: there are six (6) key initiatives upon which the adoption of blockchain would be built. They include:
- Establishment of Nigerian Blockchain Consortium- the primary objective of the consortium will be to drive the initiatives. It will be designated with the responsibility of formulating plans to effectively implement the use of blockchain technology in providing products and services in the public sector. Some of its activities will include the support of blockchain research, development, and education; promotion of legal certainty for blockchain applications; facilitation of collaboration with private sector and citizens; and assistance in the creation of a flexible regulatory environment that allows for experimentation.
- Regulation and Legal Framework- a regulatory environment conducive to innovation and growth will be created, which will address issues such as cybersecurity, privacy, legal, ethical and regulatory issues, incentives system, data storage and immutability, and interoperability. The outcome of this regulatory regime will be modeled after the Oxford Blockchain Regulation Framework which seeks to focus on outcomes, protect all stakeholders, foster trust, balance competition and promote innovation.
- National Digital Identity Framework- the blockchain technology upon adoption is expected to support in harmonization of biometrics and identification (ID) such as National Identity Number (NIN), Bank Verification Number (BVN), voter IDs and sim-card registration details.
- Blockchain Business Incentives- this will ensure the prioritization of digital entrepreneurship and innovation. By this initiative, preference will be given to digitally skilled Nigerians for government-funded projects.
- Blockchain Digital Literacy and Awareness- this initiative proposes the inclusion of blockchain learning and awareness in school curricula.
- National Blockchain Sandbox- this initiative will ensure that developers and non-developers alike are given a platform to innovate and test-run their ideas without fear of sanction or breach. This will be championed by key regulators of the technology and financial technology sectors.
ii. Strategic Objectives: there are five (5) strategic objectives for the adoption of blockchain technology. They are to:
- Provide regulatory oversight- in the adoption of blockchain technology, the government intends to achieve a balance between the need to promote and properly use new technology and enhance innovation, on the one hand, and the need to avoid money laundering and safeguard the rights of consumers on the other hand.
- Stimulate innovation and entrepreneurship- the aim is to increase opportunities for innovation and entrepreneurship, by introducing new models of businesses using blockchain technology. This will involve the integration of blockchain proficiency skills in school curricula, and a mandate on government institutions to acquire blockchain solutions to address their needs.
- Ensure the security, trust, and transparency of digital assets and value chain.
- Increase investment opportunities and create jobs.
- Increase efficiency in governance.
iii. Consideration of Existing Government Policies and Regulatory Frameworks: existing frameworks such as the National Digital Economy Policy and Strategy 2020-2023, the E-Govt. Master Plan, Nigeria Data Protection Regulation 2019, Nigeria Cloud Policy 2019, National ICT Policy, 2012, National Broadband Plan 2020-2025, etc. will need to be put into consideration in the implementation of the initiatives under the Strategy.
C. WHO ARE THE STAKEHOLDERS FOR IMPLEMENTATION?
Some of the government institutions with key roles to play in the implementation of the Strategy include SEC, CBN, the Fintech Association of Nigeria, the Corporate Affairs Commission (CAC), NITDA, Federal Ministry of Communication and Digital Economy, Nigerian Bar Association (NBA), Stakeholders in Blockchain Technology Association of Nigeria (SIBAN), Nigerian Bureau of Statistics (NBS), etc.
While the government remains somewhat skeptical about the adoption of blockchain, there is no denying that the government recognizes the inevitable role it must play in the global economy.
It is important to note also that the approval of the Strategy has in no way changed any of the existing regulations or directives earlier issued by SEC and the CBN in relation to crypto transactions and crypto offerings. The status quo remains the same until officially recalled by the regulators.
We anticipate, however, that the implementation of the Strategy and the consequent issuance (and amendment where necessary) of regulations and policies will herald a positive shift in the Nigerian technology and financial technology sectors.