Nigeria's Crypto Conundrum: Taxing The Forbidden Fruit

Barely a week ago, popular cryptocurrency exchange KuCoin announced that its KYC’d Nigerian users would be eligible to pay a 7.5% VAT on every crypto transaction starting the 8th of July, 2024. In other words, Nigeria's tax agency, the Federal Inland Revenue Service (FIRS), is comprehensively setting plans in motion to regulate the country’s burgeoning crypto industry by charging a flat rate on every crypto transaction.

With the outright ban on cryptocurrency still ongoing and the protracted legal battle with the world's most popular cryptocurrency exchange Binance, the Nigerian regulators appeared to have missed the point about the fundamentals of cryptocurrency regulation, so much so that they have unwittingly put the cart before the horse.

While Nigeria, a country with over 12 million crypto users, has not officially imposed a ban on cryptocurrency, its apex 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 crypto regulating countries in the world.

Recent actions to restrict peer-to-peer (P2P) crypto trading in Nigeria highlighted the government's resolve to address what it saw as palpable concerns about the potential impact of cryptocurrency on the national currency, the Naira. These concerns were based on the allegations of the Naira manipulation on cryptocurrency exchanges.

However, in a surprising move, the Tinubu-led government is now focusing its effort on taxing cryptocurrency transactions despite the restrictions that have been put in place. This development does not only alter its course of action altogether, but it also raises a valid question as to whether the government's plan to tap into the endless possibilities of crypto taxation can coexist with the unofficial recognition of cryptocurrency in the country.

Apparently, the newly introduced VAT policy on crypto transactions emanated from the noticeable absence of a tax framework for cryptocurrency in Nigeria, as revealed by the Binance tussle with the Nigerian authorities, most especially from the failure of the FIRS to find credible evidence to support the tax evasion charges it leveled against a mid-level Binance executive Tigran Gambrayan, who has spent several months in one of the nation's worst prisons.

(Gambrayan, a former US federal agent alongside his colleague Nadeem Anjarwalla, was arrested and detained by the Office of the National Security Advisers(ONSA)after they were invited for a talk in Abuja).

The sudden recourse to cryptocurrency, which is what the 7.5%  VAT represents, is ill-advised and inopportune. It's the latest in a list of several ridiculous crypto policies that have come out of Nigeria. Is it not surprising that within a year, Nigeria has gone from charging exorbitant crypto licensing fees to imposing a 7.5% VAT on crypto transactions while maintaining its ban on cryptocurrency? Is the government now suddenly realizing that there are millions of dollars of unrealized taxes lying outside of the province of the FIRS?

One must pay attention to the event preceding the introduction of the VAT policy. A few months ago, the CBN made a shocking discovery that crypto P2P trading had been responsible for the steady decline of the Naira and promptly responded by waging a week-long war on crypto exchanges operating in the country.

These actions signaled a harsh stance on cryptocurrency. Binance, the most popular centralized crypto exchange (CEX), was first scapegoated. Two of its executives found themselves under investigation for Binance-related activities in Nigeria. Later, they were dragged to court on charges bordering on tax evasion, money laundering, and currency manipulation.

The Nigerian press further amplified concerns by heavily publicizing the Central Bank of Nigeria (CBN) governor's unverified claim of a $26 billion outflow from Nigeria through Binance. Many news reports portrayed cryptocurrency as a national security threat, potentially prompting an urgent response from the Nigerian government.

How, within a short window of time, is cryptocurrency now part of the FIRS’ grand design to expand the nation’s revenue base?

While the VAT policy signifies a regulatory approach toward crypto regulation, it can afford to wait until there is a much broader and clearer regulatory framework governing Nigeria’s burgeoning cryptocurrency industry. In other words, there have to be clearly defined rules in place addressing the key issues surrounding cryptocurrency before a tax policy is activated, borrowing a leaf from countries like South Africa and Kenya, which have made significant progress in this regard.

Not only is the establishment of a clear-cut policy framework for digital assets a non-negotiable cryptocurrency adoption strategy, but it is also in the first order of cryptocurrency regulation principles. Countries that are intentional about leveraging this technology don't take a leap of faith but rather create a regulatory environment where crypto rules are clearly defined and established.

The rationale behind the VAT on crypto transactions, however well-intentioned, might be overshadowed by the urgency of addressing Nigeria's broader economic challenges. For decades, Nigerians have grappled with a struggling national economy alongside pockets of insecurity. As of today, inflation is a nationwide concern, further fueled by President Tinubu's removal of fuel subsidies in May 2023.