Regulation
Nigeria’s Cryptocurrency Dilemma: Taxing the Forbidden Fruit
Just a week ago, major cryptocurrency exchange KuCoin announced that its KYC-certified Nigerian users would be subject to a 7.5% VAT on every cryptocurrency transaction starting July 8, 2024. In other words, Nigeria’s tax agency, the Federal Inland Revenue Service (FIRS), is putting comprehensive plans in place to regulate the country’s burgeoning cryptocurrency sector by charging a flat fee on every cryptocurrency transaction.
With the ongoing outright ban on cryptocurrencies and the prolonged legal battle with Binance, the world’s most popular cryptocurrency exchange, Nigerian regulators appear to have lost sight of the fundamental principles of cryptocurrency regulation, to the point of unwittingly putting the cart before the horse.
Although Nigeria, a country with over 12 million cryptocurrency users, has not officially imposed a cryptocurrency ban, its central bank, the Central Bank of Nigeria (CBN), has continued to maintain anti-crypto policies with the tacit cooperation of the country’s capital market regulator, SEC Nigeria, making the West African country one of the most ambiguous countries in the world when it comes to cryptocurrency regulation.
Recent moves to restrict peer-to-peer (P2P) cryptocurrency trading in Nigeria have highlighted the government’s determination to address what it saw as palpable concerns about the cryptocurrency’s potential impact on the national currency, the Naira. These concerns were based on allegations of Naira manipulation on cryptocurrency exchanges.
However, in a surprising move, the Tinubu-led government is now focusing its efforts on taxing cryptocurrency transactions despite the restrictions that have been put in place. This development not only alters its course of action altogether, but also raises a valid question as to whether the government’s plan to tap into the endless possibilities of cryptocurrency taxation can coexist with the unofficial recognition of cryptocurrencies in the country.
The new VAT policy introduced on cryptocurrency transactions apparently stems from the notable absence of a cryptocurrency tax framework in Nigeria, as revealed by the dispute between Binance and Nigerian authorities, particularly the failure of the FIRS to find credible evidence to support tax evasion allegations against a mid-level Binance executive, Tigran Gambrayan, who spent several months in one of the worst prisons in the country.
(Gambrayan, a former US federal agent, along with his colleague Nadeem Anjarwalla, were arrested and held by the Office of the National Security Advisers (ONSA) after being invited to a speech in Abuja.)
The sudden use of cryptocurrency, which is what the 7.5% VAT represents, is reckless and ill-advised. It is the latest in a series of ridiculous cryptocurrency policies enacted by Nigeria. Is it any wonder that in the space of a year, Nigeria has gone from charging exorbitant licensing fees on cryptocurrencies to imposing a 7.5% VAT on cryptocurrency transactions while maintaining a ban on cryptocurrencies? Is the government suddenly realizing that there are millions of dollars in unrealized taxes outside the FIRS province?
One must pay attention to the event that preceded the introduction of the VAT policy. A few months ago, the CBN made a shocking discovery: P2P cryptocurrency trading had been responsible for the steady decline of the Naira and it promptly responded by launching a week-long war against cryptocurrency exchanges operating in the country.
These actions signaled a tough stance on cryptocurrency. Binance, the most popular centralized cryptocurrency exchange (CEX), was the first scapegoat. Two of its executives found themselves under investigation for Binance-related activities in Nigeria. They were later dragged to court on charges bordering on tax evasion, money laundering, and currency manipulation.
The Nigerian press further amplified concerns by widely publicizing the unverified claim by the governor of the Central Bank of Nigeria (CBN) of a $26 billion outflow from Nigeria via Binance. Many news outlets described cryptocurrency as a threat to national security, potentially prompting the Nigerian government to respond urgently.
How come, in such a short span of time, cryptocurrency has become an integral part of the FIRS’s grand plan to expand the nation’s revenue base?
While the VAT policy indicates a regulatory approach to cryptocurrency regulation, it can afford to wait until there is a much broader and clearer regulatory framework governing Nigeria’s burgeoning cryptocurrency sector. In other words, there must be clearly defined rules that address key issues surrounding cryptocurrencies before a tax policy is activated, taking a cue from countries like South Africa and Kenya, which have made significant progress in this regard.
Not only is establishing a clear regulatory framework for digital assets a non-negotiable cryptocurrency adoption strategy, but it is also at the forefront of cryptocurrency regulation principles. Countries that are willing to leverage this technology are not taking a leap into the unknown, but rather creating a regulatory environment where cryptocurrency rules are clearly defined and established.
The rationale behind VAT on cryptocurrency transactions, while well-intentioned, may be overshadowed by the urgency of addressing Nigeria’s broader economic challenges. For decades, Nigerians have struggled with a struggling national economy coupled with pockets of insecurity. Today, inflation is a national concern, further fueled by President Tinubu’s removal of fuel subsidies in May 2023.