Introduction
It is not uncommon for people to misconceive the use, relevance or applicability of new and emerging technologies – this has been the case with the Blockchain technology as a lot of people only have a vague or inaccurate understanding of what it really means and what it can do. Some have even gone as far as saying “Blockchain is the future” and “Blockchain will save Nigeria”, etc.
In real terms, while some of these statements for now may be far reaching, there is still a case to be made for the potential impact of blockchain on the global economy and importantly, on developing economies such as Nigeria – a country which has been accused of missing out on the Industrial Revolution.
This article seeks to educate and demystify the blockchain technology and other related innovations – and present a practical overview of how the technology works; the potential use cases in the Nigerian economy; the legal risks and the role of regulatory agencies in aiding the adoption and growth of the technology.
Rise in Blockchain related activities in Nigeria
Notwithstanding that the legal and regulatory regime still remain uncertain, the past two (2) years have witnessed significant rise in blockchain and cryptocurrency related activities in Nigeria. According to data from LocalBitcoins, Nigeria came second in the world’s peer-to-peer (P2P) Bitcoin transactions in 2017, outpacing major European countries, the United Kingdom and the United States of America.
Relatedly, a number of blockchain and Virtual Currency Exchange (VCE) startups have gained traction; the most notable one being BuyCoins which was accepted into Y-Combinator in 2018. In 2018, Interswitch announced a partnership with Microsoft to launch an innovative blockchain-based supply chain financing service. The blockchain service is built and hosted using the Microsoft Azure blockchain technology, and is expected to provide a proven security, compliance and scalable cloud platform that accelerates and supports the next generation of blockchain applications. Following this trend, early this year, Binance, one of the biggest cryptocurrency exchange platforms in the world announced that Yele Bademosi, the founder of Microtraction was joining them as a director of Binance Labs (established in Nigeria). In this role, Yele is expected to develop the blockchain ecosystem in Africa, source for blockchain projects and lead a blockchain Incubation Program in Lagos, Nigeria.
Explanation of Key Terms
What is Distributed Ledger Technology?
Distributed Ledger technology (DLT) is simply a computer software that allows for transactions and data to be recorded, shared, and synchronized across a distributed network of different network participants.
As a peer-to-peer (P2P) technology, DLT allows participants on the network to store, record and exchange “information” in digital form across different, self-interested counterparties without the need for a central record keeper and without the need for trust among the counterparties. This requires that an asset is to be transferred only by its true owner and such asset can only be transferred once (i.e. no double spend). These are the core elements of a DLT infrastructure.
DLT is the underlying technology upon which the Blockchain technology operates; thus, blockchain is just one type of distributed ledger that organizes data on the DLT into blocks and are chained together chronologically by a cryptographic hash function.
To put this in context: There are 10 participants on a DLT network, each participant keeps a digital ledger (record) which is the same as what the other 9 participants keep (distributed ledger), thus, if participant 8 makes any addition (containing transaction records) to its own ledger, the change will be shared (in an encrypted manner) on the entire network (i.e. ledgers of the other participants) and all participants must collectively determine the validity of the change (in accordance with pre-defined algorithmic validation method) (consensus mechanism), once they validate, the change will be added to the ledgers of all the other 9 participants. Thus, all the participants have a full, identical copy of the entire ledger at any point in time.
DLT can be permissionless (i.e. there is no central owner who controls network access, thus anybody with a computer server and the relevant software can join the network) or permissioned (i.e. network members are pre-selected by an owner or an administrator of the ledger who controls network access and enforces the rules of the ledger). It could also be private or public depending on whether the ledgers can be accessed by anyone or only by the participants in the network.
It has been argued that DLT could effectively be relevant to cross-border payments and remittances, securities markets, registries, etc. Beyond the financial sector, DLT can also be used in identity management products/solutions such as birth, marriage and death records, supply chain, etc.
The advantages of the technology include decentralization and disintermediation, greater transparency and easier auditability, gain in speed and efficiency, cost reductions, and automation and programmability.
Some of the legal and regulatory risks and challenges of the technology include; operational security, cyber security, data protection and privacy, transaction disputes and recourse frameworks; and importantly, difficulty in developing a suitable legal and regulatory framework for the implementation of the technology.
Blockchain defined
Quite simply, blockchain is a decentralized software mechanism that enables a public distributed ledger system. The ledger is immutable, incorruptible, admirably transparent and allows the tracking and recording of assets and transactions without the presence of a central trust authority such as a bank. Importantly, it relies on public key encryption, or cryptography which makes it difficult for hackers and other cyber criminals to change or steal data. It enables peer-to-peer exchange of data, assets and currencies through rules-based smart contracts in a more efficient, transparent and cost-effective manner.
The blockchain is made up of a series of data blocks, each containing transaction data, and is securely hashed and then strung together into a chain and broadcast across the network to various nodes. The blockchain, among other things serves as a database for recording transactions and removes the possibility of tampering by a malicious party. Anything of value can be tracked on a blockchain network, reducing risk and cutting costs for all involved.
Blockchain is the underlying digital foundation that supports applications such as Bitcoin, and it serves as Bitcoin’s shared ledger. In this wise, blockchain could be described as an operating system, such as Microsoft Window or MacOS, and Bitcoin as only one of the software that can run on that operating system. Blockchain provides the means for recording Bitcoin transactions, through the shared ledger (which can also be used to track other non-Bitcoin assets). Therefore, Bitcoin is only the first use case for Blockchain.
Bitcoin
Bitcoin, the popular crypto- or virtual currency and one of the many use cases for Blockchain is built on the foundation of Blockchain. It is a digital medium of exchange that is meant to serve the same purpose as a fiat currency (as a legal tender) in that users should be able to exchange the Bitcoin for value. However, it is different from fiat currency given that; it can only be exchanged through the blockchain network; it is not backed by any regulatory institution; and it is not backed by any underlying asset.
Blockchain technology was invented as the underlying technology of Bitcoin with the objective to allow two willing parties to transact directly with each other without the need for a trusted third party.
Bitcoin was specifically created to oust third party control in transactions, particularly, the government, thus, it anonymizes the identities of the network participants. This presents a great risk as it may be used for fraud and illegal activities by criminals who find same attractive.
Smart Contracts
A Smart Contract is a computer code that has been programmed to self-execute, to this extent, upon the occurrence of a specified condition or conditions, the contract is capable of running automatically according to pre-specified functions. The code can be stored and processed on a distributed ledger and would write any resulting change into the distributed ledger.
The main objective of a Smart Contract is to remove the need for an intermediary and to enable anonymous parties conduct business over the internet.
Potential Use Cases for Blockchain in Nigeria
Many have consistently argued that given that Nigeria missed out on the Industrial Revolution, it can take advantage of the blockchain revolution which is already in motion in some countries. Therefore, an adoption of the technology in the key sectors of the economy can unlock economic growth and also address some of the core challenges facing the country as a whole.
In this regard, some of the use cases identified for blockchain technology in Nigeria are discussed below:
Financial Services: Some of the use cases include local remittances and cross-border transfer; access to funds through secured credit scoring mechanism; obtaining approvals and making payments for cross-border import and export of goods; post-trade clearing and settlement of FX transactions.
Digital Identity: provision of digital credentials (birth, death, marriages, etc.) for Nigerians for secured use on different online channels and other social uses.
Government Revenue: Implementing a blockchain solution that tracks all remittances to the Federal Government’s account and also tracks the disbursement of monies to different sectors of the economy to curb waste, corruption, etc.
Tax Collection: blockchain technology can also make it easy for organisations to resolve transfer pricing issues by tracking the flow of transactions and identity of all the parties involved; other uses include VAT, etc.
Government Registries: such as land registry, corporate registry and identity registry, can use the blockchain technology to create a database/ledger of all transactions going on in the registry; this gives more visibility and can also curb corruption.
Supply Chain Management: large organisations with complex supply chains can leverage blockchain technology to simplify the supply of goods within and outside the country.
Beyond the use cases identified above, there still remains the need to develop a framework for the adoption of blockchain technology in Nigeria, particularly, as there are legal risks that may arise from the use of the technology.
The Nigerian Landscape
Some of the potential legal risks that may arise from the use of blockchain technology include;
The uncertainty that arises from the absence of any regulatory framework for blockchain technology in Nigeria – asides from publicly notifying Nigerians that cryptocurrency is not a legal tender, Nigerian regulators have not taken any stance yet on the adoption of blockchain technology. Thus, there is uncertainty and unpredictability as to the rules that apply in the space and frameworks for using blockchain, this would generally limit investments and adoption of the technology. This framework would also cater for AML/CFT and KYC standards that must be enforced by the participants in the blockchain network and the protection of Intellectual Property Rights, amongst other things.
Enforceability of electronic transactions and smart contracts – Smart Contracts are at the core of blockchain technology, however there is the issue as to whether it will be enforceable in Nigeria. It is noteworthy that while electronic signatures are enforceable in Nigeria, the law is still silent on Electronic Transactions which are still governed by the traditional principles of contract law. This may not be robust enough to deal with the issues that arise from the use of e-channels. We are aware there is an Electronic Transaction Bill, which is yet to be passed into law, there is still need for the country to develop a clear structure for electronic transactions in Nigeria; this is beyond blockchain and would generally the growth of digital economy in the country.
Cybersecurity and Data protection: The decentralised nature of blockchain makes it susceptible to cyber-attacks/threats and data protection issues/policies, thus, there is need for a cybersecurity framework that addresses these issues. The Cybersecurity Act, 2015 needs an overhaul, given that when it was enacted, it did not contemplate some of the complex threats and risks arising from the use of technologies in the 21st Century. Relatedly, earlier this year, the National Information Data Protection Agency (NITDA) published Data Protection Guidelines, 2019; the Guidelines provide a framework for protecting the data of Nigerian subjects. However, there is also the issue of the enforceability of these Guidelines given that it generally does not prescribe any criminal offence asides the penalty for breach. This derogates from best practices in other jurisdictions where there are provisions that criminalise data breach. Nigeria still lacks a very comprehensive legislation that prescribes offences for data breach, among other things and this has to be addressed by the regulators.
Conclusion
The blockchain terrain in Nigeria is fast evolving. While the number of early adopters of the technology may still be limited, we foresee an expansive market in the near future which will be driven by improved user knowledge; development of a regulatory framework; and the unavoidable need to take part in this global digital revolution.
No doubt, blockchain is already in use in different quarters of the economy, particularly, in the financial services sector (as some traditional financial institutions and other payment companies already use it for payment transactions). In the absence of a framework, adopters of the technology still need to operate within the bounds of existing laws that regulate their industry sectors. We also hope that in 2019, regulators would gain a deeper understanding of the technology with a view to developing a framework that would be most suitable for Nigeria.
Rilwan Shittu and Damilola Oyebayo are Legal Practitioners at Olaniwun Ajayi LP, a tier-one law firm with offices in Lagos and Abuja.
