How Nigerian fintechs can take advantage of DeFi in the face of regulatory inconsistency – Nairametrics

Nairametrics reported that a Federal High Court in Abuja granted the Central Bank of Nigeria (CBN) request to freeze the accounts of four FinTech companies for 180 days. These companies include Rise Vest, Bamboo, Chaka, and Trove.

According to some reports, the freezing of accounts results from the fact that the umbrella bank investigated these companies for “illegal foreign exchange transactions”. CBN Alleged FinTech Companies Operate Without License As Asset Management Companies “And using currencies from the Nigerian currency market to buy foreign bonds / stocks in violation of the CBN circular referenced TED / FEM / FPC / GEN / 01/012, dated July 1, 2015.”

Apex Bank has claimed that fintech companies are helping to weaken the naira against the US dollar due to currency trading on their platforms.

Due to the court order, fintech companies, which primarily provide Nigerians with the platform to buy shares listed in foreign companies such as the NYSE or NASDAQ, are unable to accept deposits during the freeze period, thus limiting their progress in terms of gaining market share. For those who have deposited but have not yet invested, it is also likely that their investments will be affected by the freeze, especially if they have not yet transferred them to their brokerage account.

Investment One

This freeze comes just 2 months after the Securities and Exchange Commission issued its first fintech license to Chaka as a digital sub-broker / sub-broker serving multiple brokers via a digital platform.

Why fintechs should take advantage of DeFi

Decentralized Finance (DeFi) is a term used to describe a range of financial applications in cryptocurrencies, aimed at disrupting financial intermediaries such as CBN and facilitating peer-to-peer transactions. Blockchain networks such as Ethereum Blockchain are 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 ensure business continuity for their clients, regardless of the regulatory status quo in the country. This means that investors do not have to worry about the central government or the regulator freezing the accounts of their investment platforms as their funds are always available to them in the form of cryptocurrencies, and the fintech platforms also don’t have to worry about a bank. execute or lose market share because the business function operates through smart contracts, which are a self-executing contract, with the terms of the agreement between buyer and seller being written directly into lines of coded. This is possible because DeFi does not refer to a predefined financial system or regulatory framework.

For example, fintech companies can take advantage of DeFi to offer tokenized stocks. Tokenized stocks are tokenized derivatives that represent traditional securities, especially shares of public companies traded on regulated exchanges such as Tesla, Apple and Facebook or ETFs like SPDR S&P 500. Basically, tokenized stocks work the same. way that listed stocks except these stocks are in the digital form of crypto coins or tokens, and instead of going to your broker’s account, they are credited to your blockchain hosted account.

Note that the possibility of buying tokenized shares already exists. The Bittrex and FTX exchanges currently offer this product for certain stocks. Binance started offering Tesla and Coinbase shares but stopped.

Ultimately, leveraging DeFi means that clients are not panicked by the regulatory climate, as the CBN will have no scope or rights over their investments.

What the future holds for fintech companies

Many FinTech companies in Nigeria will seek to build their blockchain networks that have certain features that may include smart contracts to ensure the business continuity of their clients, as many analysts believe that the Nigerian regulatory climate is more volatile than to invest in cryptocurrencies.

Many have called cryptocurrencies a peaceful revolution and that could be how fintech is doing it. Switching to technologies that are outside the purview of regulators carries risks such as piracy and illegitimacy. Just two weeks ago, a DeFi platform named Poly Network was hacked and over $ 600 million was transferred from the platform. Although the hacker returned the money and refused a reward of $ 500,000, this risk cannot be ignored. Significant investments will have to be made in the development and security of networks.

Getting all of these things in place for FinTech companies may require more expense, but in the long run, the benefits go beyond just business continuity. This gives these companies an opportunity to grow at an exponential rate as the target market is no longer limited to Nigeria but to the whole world. Apart from this, their scope of activity can be easily extended, moving from offering token stocks, for example, to other products such as lending and staking.

At the end of the line

The Nigerian regulatory environment appears to be harsh for fintechs in the country, however, this article does not advocate that fintech companies stop seeking regulatory clarity as by definition the CBN is required to maintain the country’s monetary policy.

While the CBN’s mode of approach may be better, ultimately Nigerians still rely on the supreme regulator to keep the financial sector orderly. FinTech firms, while leveraging DeFi and cryptocurrencies to tackle challenging regulatory climates, should also seek common ground with industry regulators, which they can do by expanding their teams of compliance and increasing communication with regulators.

Jaiz Bank

So far, Rise Vest and Bamboo have issued statements to assure their clients that their investments are safe. While the current dilemma is expected to finally be resolved, the question remains: what happens when regulators throw another key in the works?

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