CBN Bans Interest On Stablecoins, Demands Form M For Import Payments

The Central Bank of Nigeria (CBN) has banned stablecoin issuers from paying interest to people who hold their tokens. It has also ruled that anyone paying for imported goods with a foreign-currency stablecoin must have a valid Form M.

These were disclosed in the Regulations for the Operations of Non-Security Virtual Assets in Nigeria, released by the CBN on Friday, which set out how stablecoins and related service providers are to operate in Nigeria.

The regulation stated in Section 13.3 that: “An issuer shall not pay, offer, arrange or facilitate interest, yield, dividends, returns or other financial benefits to holders by reason of holding or depositing its stablecoin.”

The rule also addressed arrangements that could be used to provide returns indirectly. It stated: “A service provider shall not be used to circumvent this prohibition.”

Section 27.7 made a similar point for exchanges, wallet providers and distributors.

It stated: “Issuer-specific disclosures, redemption protections and the no-yield rule shall not be diluted by use of an intermediary.”

Issuers were also required to inform buyers in writing that holding the token did not entitle them to interest or yield.

Their disclosures has to state that the token “is not a bank deposit and is not covered by the Nigeria Deposit Insurance Corporation (NDIC) guarantee scheme.”

The definitions section described the type of stablecoin intended to fall outside securities law as one that “confers on its holder no right other than a right of redemption at par in the reference currency and no interest, return or other financial benefit.”

It also identified products that provide returns as falling outside the payment-stablecoin category. “A return to holders makes the product an investment. It is prohibited as a payment stablecoin.”

The listed products included yield-bearing tokens, tokenised money market funds and staking-return products.

Reserve safeguards

The CBN also set conditions for the assets backing stablecoins. Section 13.4 stated: “Reserves shall not be used for operating expenses, lending, staking, collateral for borrowing or other prohibited leverage or encumbrance.”

On redemption, Section 13.5 stated that it “shall remain available at par, within the prescribed period and without standard redemption charges.” It further stated: “No new tokens shall be minted unless equivalent Eligible Reserve Assets have been received.”

Form M for imports

For cross-border payments, Section 11.10.5(a) stated: “A payment for imported goods made in a Class 2 Stablecoin shall be supported by a valid Form M. A payment for imported services shall be supported by the documentation required under the FX Regulations.”

Class 2 stablecoins were tokens tied to a foreign currency, such as the US dollar.

The same section directed the licensed firm to “record the reference in the transaction record and pay only the foreign supplier or its VASP.” VASP meant virtual asset service provider.

The CBN treated cross-border crypto payments in a manner similar to foreign-exchange transactions.

Under Section 11.10.2, such a transaction “shall be treated as a foreign-exchange transaction of the corresponding current-account or capital-account category.” It was also “subject to the same eligibility, documentation, reporting and settlement requirements as the equivalent transaction in foreign currency.”

Section 11.10.3 provided that a licensee “shall not carry out a Cross-Border Virtual Asset Transaction on documentation, verification or reporting less than would be required for the equivalent transaction through an Authorised Dealer.”

Section 11.10.4 added that a firm could process such a payment only where “the transaction falls within the scope and conditions of its approval to conduct cross-border activity” and “the underlying purpose is permitted under the FX Regulations.”

The regulations also addressed export earnings. Section 11.10.5(b) stated that where proceeds were received in a Class 2 stablecoin, “the relevant Form NXP shall be referenced.”

The proceeds were treated as brought home where they were “redeemed or converted and credited to the exporter’s export-proceeds domiciliary account with an Authorised Dealer within the period prescribed by the FX Regulations.”

It added: “Holding the export proceeds on-chain in a wallet, in Nigeria or elsewhere, shall not constitute repatriation.”

Reporting obligations

Licensed firms were required to report cross-border transactions. Section 11.10.12 required reporting “at the regulated gateway,” including “the purpose code, the Form M, Form NXP or eCCI reference where applicable, the corridor, the counterparty VASP identifier, the wallet type, the fiat and token legs, and the rate.”

Firms were also required to submit “monthly aggregates by corridor, purpose, token and direction… for foreign-exchange and balance-of-payments monitoring.”

Compliance and penalties

The regulations set out penalties for non-compliance. For paying interest or yield to holders, the fine was “equivalent to twice the amount of the prohibited payment or benefit.”

For using reserves as collateral or for leverage contrary to the rules, the fine was “not less than two hundred and fifty million naira (N250,000,000) and not more than five hundred million naira (N500,000,000) per breach.”

For failing to file suspicious transaction reports or conduct customer due diligence, the fine was “not less than fifty million naira (N50,000,000) per breach, plus restitution of any amounts processed in violation of the obligation.”

Existing operators had 180 days from the commencement of the regulations to apply for a licence.