The Publisher Nigeria that a Federal High Court in Abuja granted the request of the Central Bank of Nigeria (CBN) to freeze accounts of four financial technology (Fintech) companies for 180 days. These companies include Rise Vest, Bamboo, Chaka and Trove.
According to reports, the freezing of the accounts is a result of the apex bank investigating these companies for “illegal foreign exchange trading.” The CBN alleged that the fintech companies were operating without license as asset management companies “and utilizing FX sourced from the Nigerian FX market for purchasing foreign bonds/shares in contravention of the CBN circular referenced TED/FEM/FPC/GEN/01/012, dated July 01, 2015.”
The Apex bank claimed that the fintech companies are contributing to making the naira weaker to the United States dollar because of the foreign exchange deals carried out on their platforms.
Because of the court order, the fintech companies, which majorly offer Nigerians the platform to purchase stocks listed in foreign companies such as the NYSE or NASDAQ, are unable to take on deposits for the period of the freeze, thereby limiting their progress in terms of gaining market share. For those who may have deposited but have yet to invest, it is also likely that their investments might be affected by the freeze especially if they are yet to transfer it to their brokerage account.
This freeze comes barely 2 months after the Securities and Exchange Commission issued its first fintech license to Chaka as Digital Sub-Broker/Sub-Broker Serving Multiple Brokers through a Digital Platform.
Why fintechs need to leverage DeFi
Decentralized Finance (DeFi) is a term used to describe a range of financial applications in cryptocurrencies, geared towards disrupting financial intermediaries such as the CBN and facilitating peer-to-peer transactions. Blockchain networks such as the Ethereum Blockchain is used in DeFi to create “smart contracts” through which users can manage financial transactions such as lending, borrowing and trading outside the purview of traditional financial institutions such as regulators, banks, brokerage firms and centralized exchanges. Users interact with DeFi software protocols through non-custodial digital wallets that allow users to store their assets without having to depend on third parties.
With DeFi, fintech companies in Nigeria can guarantee that their operations have continuity for their customers regardless of the regulatory status quo in the country. This means that investors do not have to worry about the central government or regulatory body freezing the accounts of their investment platforms as their funds are always accessible to them in the form of cryptocurrencies, and the fintech platforms also do not have to worry about a bank run or losing market share as the company function operates through smart contracts which is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. This is possible because DeFi does not refer to a predefined financial system or regulatory framework.
For instance, fintech companies can leverage DeFi to offer tokenized equities. Tokenized equities are tokenized derivatives that represent traditional securities, particularly shares in publicly firms traded on regulated exchanges such as Tesla, Apple and Facebook or ETFs like SPDR S&P 500. Basically, tokenized equity works the same way as listed equities, except that those shares are in the digital form of crypto coins or tokens, and instead of going into your broker’s account, they are credited to your blockchain-hosted account.
Note, the ability to buy tokenized equity already exists. Bittrex, FTX exchanges currently offer this product for certain stocks. Binance started offering Tesla and Coinbase stocks but stopped.
Ultimately, leveraging DeFi means customers are not panicked by what the regulatory climate is as the CBN will have no reach or claim on their investments.
What the future holds for fintech companies
Many fintech companies in Nigeria will be looking to build their blockchain networks that would have certain functionalities which may include smart contracts in order to ensure business continuity for their clients as many analysts believe that the Nigerian regulatory climate is more volatile than investing in cryptocurrencies.
Many have referred to cryptocurrencies as a peaceful revolution and this could be the fintech’s way of doing this. Switching to technologies that are outside the purview of regulatory bodies do have risks such as hacking and illegitimacy. Just two weeks ago, a DeFi platform named Poly Network got hacked and over $600 million was moved from the platform. Although the hacker returned the money and turned down a $500,000 reward, this risk cannot be ignored. Significant investments will have to be made in network development and security.
Having all these put in place for fintech companies may require more spend but in the long run, the benefits go beyond just business continuity. It gives these businesses an opportunity to grow at an exponential rate because the target market is no longer limited to Nigeria but the whole world. Asides from this, their business scope can be easily expanded from offering tokenized stocks for example to other products such as lending and staking.
The Nigerian regulatory environment appears to be coming down hard on fintechs in the country, however, this article is not advocating for fintech companies to stop seeking regulatory clarity because, by definition, the CBN is required to maintain the country’s monetary policy.
Although the manner of approach can be better from the CBN, ultimately, Nigerians still rely on the apex regulator to ensure order in the finance sector. Fintech companies, while leveraging DeFi and cryptocurrencies to push against harsh regulatory climates, should also seek common ground with the sector regulators and this they can do by expanding their compliance teams and increasing communication with regulators.
So far, Rise Vest and Bamboo have issued statements to assure their customers that their investments are safe. While it is expected that the current quandary would eventually be resolved, the question remains: What happens when regulators throw another spanner in the works?