Crypto Taxation and Regulation for Nigeria's Development

Crypto taxation and regulation approaches are as diverse as the peoples and countries on Earth. That's also the case when it comes to respecting any existing rules governing the use of various physical or digital assets. In many developing countries, little attention is paid to taxes especially in small businesses.

A study by the Inter-American Development Bank (IDB) revealed that Europe had the most tax revenue while Africa, Latin America recorded the least. This may not be too shocking when considering the large number of systems and policies yet to be put in place.

For centuries, taxes have been the single most important source of governmental revenue that should ensure growth, welfare, and services that improve the economic standing of the population. Taxes for key services offered by the government like electricity and water supply are standard in all developed countries. This is not the case in emerging markets and economies struggling to be stable in the world of global commerce and free competition.

Crypto assets enable a completely different approach to taxation, finance and digital transfers. The crypto industry is young and the guidelines on the use of cryptocurrencies and tokens don't exist in many developed countries, as well as in most African, Latin America and the Caribbean jurisdictions. This article highlights some specific reasons why crypto should be taxed in relation to development/innovations in emerging economies.

Adopting Crypto Assets

In the crypto world, value is represented by digital coins and tokens which could be exchanged, staked, swapped and borrowed using both centralized (CeFi) and decentralized platforms (DeFi). DeFi aims to make transfer of value more seamless and there is a good chance that in time it could overtake centralized solutions which need to solve their own set challenges.

This open-to-all digital finance infrastructure could be exceptionally beneficial in developing countries where access to the internet is widespread, while a wide range of basic financial services are not. Embracing new technology and tapping into the endless possibilities of open, blockchain-based finance is already happening.

15 percent of the 25 crypto economies in 2021 were in emerging markets. Those countries are experiencing a growth in the adoption of decentralized finance services, the emergence of large blockchain communities, and crypto assets-related ventures by tech-savvy entrepreneurs from the space. Africa is unmatched in crypto adoption. There is a considerable interest in new technologies and disruption of currently existing but often unreliable systems. This makes it very easy for technology development to penetrate across different sectors.

• The central African republic became the first African country to legalize crypto as a form of payment in 2021.
• El Salvador accepted bitcoin as a form of legal tender.
• Nigeria issued the eNaira central bank digital currency (CBDC) for making digital transactions both globally and within the country.
• The eNaira recorded 700,000 transactions with a total value of 8 billion naira in October 2021.

And these are only some of the examples. Crypto projects help lift up the younger, more tech-educated population out of poverty by hiring locally as community managers, project leads, and communication experts.

Challenges

Despite the large number of legitimate projects in the crypto space, there are also many scams. For example, the play-to-earn model that became popular in the space with games like Axie Infinity, was found to incentivize users to primarily extract value without really contributing to the community or the development of the game. That lead to a boom and bust cycle that negatively affected the users that believed in the project.

Inexperienced users are are frequently forwarded into fake crypto mining platforms which are frequently a little more than pyramid schemes. One such example was OneCoin which gained a lot of attention in Africa. OneCoin salespeople targeted remote farmers at harvest time. Families sold land and cattle to buy into the scheme that had little to do with crypto assets, despite its name. Such practices lead to millions of personal tragedies and tarnish the reputations of the genuine innovations and projects in the space (by association).

A major setback for the crypto asset industry was the collapse of the Terra stablecoin - UST - and the Luna cryptocurrency early this year. The depegging of the supposedly stable asset that earned a whooping 20% of interest led to over $40 billion in losses for Terra ecosystem token holders and in turn led to the abrupt collapse of the asset that collateralized it - the Luna cryptocurrency.

CBDCs or DeFi?

According to a research by CoinTelegraph, Nigeria became the country with the most searches including the keyword "invest in crypto" in 2021. That shouldn't be a surprise since a large portion of the youth population and entrepreneurs find ways to invest in crypto assets, despite warnings by the Central Bank of Nigeriathat expressed its non-acceptance of cryptocurrencies as a means of exchange in Nigeria on grounds that it is not legal tender. The CBN has urged banks and individuals to stay away from its use and adoption.

However, taking into consideration that people in emerging markets are frequently experiencing high inflation, costly remittances, and lack of access to rudimentary bank services, the adoption of available crypto asset-related services is only natural.

Furthermore, it seems that the eNaira is not being able to fulfil its promises of improving the issues that Nigerians are experiencing. According to Foreign Policy:

"Despite the eNaira’s many benefits, the general public lacks awareness of its exact uses (and whether it’s a cryptocurrency or not), and the rollout has been plagued by problems. Already, there have been negative reviews on the Google Play Store about the dysfunction of the eNaira speed wallet app, and the app has been taken down due to “technical glitches,” only to reappear a few days later. The Central Bank says it will not be held financially responsible for errors arising from usage of the eNaira website—a surprising declaration that did not boost public confidence in the currency."

That has led to the exploration of bitcoin and decentralized finance as genuine solutions caused by authentic necessity. Crypto assets are much more than what the media and bad actors often portray them to be. If we look closely, we find that blockchain technology has the potential to address issues in finance, supply chain, agriculture, business organization, and societal development beyond self-gratification and quick gains.

The road ahead is clear - crypto assets must not be abolished, but properly regulated.

Emerging economies (and the majority of developed countries) need an effective regulatory framework to streamline the adoption of Web3 technologies.

When digital assets are regulated and taxed accordingly, consumers will be better protected, governments will enjoy additional flows or revenue, and entrepreneurs will be free to innovate and create the useful products/services that modern economies require.

Learn more about crypto assets and international crypto taxation with @o2k.tech.

With the recent events and crucial discussions happening in the world of crypto, you'll discover that education and technological literacy go a long way in driving better decision-making, innovations, and transparency in the space.

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