Why fintechs are not allowed to trade forex, FMDQ CEO explains

FMDQ Group's Managing Director and CEO, Zeal Akaraiwe, has clarified why financial technology companies (fintechs) are prohibited from trading directly in Nigeria's foreign exchange market. This restriction is due to regulatory limitations, licensing demands, and the nation's exchange control system. At a CBN investor forum in Singapore, Akaraiwe disclosed that any entity wishing to directly trade in the foreign exchange market must first secure authorization as a dealer under the current regulatory conditions.

According to him, Nigeria's exchange control regulations mandate that at least one counterparty in every foreign exchange transaction must be an authorized dealer, with transactions involving two unlicensed parties falling under the definition of the black market. Akaraiwe explained that direct involvement in the foreign exchange market entails regulatory responsibilities beyond those of a standard payments business.

As Nigeria's monetary policy authority, the CBN dictates the extent of a dealer's capital that can be allocated to foreign exchange trading. Authorized dealers must also adhere to prescribed limits on their net open positions, reflecting their exposure to foreign currencies. Market participants are also required to obtain necessary statutory documentation and have access to regulatory portals for verifying the legitimacy of these documents.

These prerequisites render direct participation challenging for fintechs, especially since they are not presently governed by the CBN for foreign exchange transactions like they are for payments. Furthermore, uncertainty surrounding the regulatory body overseeing fintechs in foreign exchange trading adds complexity to the possibility of granting them direct market access.

Although fintechs are not entirely barred from Nigeria's foreign exchange market, they can buy and sell foreign exchange through their banking partners, provided they comply with applicable regulations. This arrangement differs from obtaining direct trading access, which would permit a fintech to participate in the market as an authorized dealer independently.

The distinction implies that fintechs can facilitate or execute foreign exchange transactions through authorized banks without necessarily possessing the regulatory approval required to trade directly in the market. Akaraiwe suggested that broadening participation in the foreign exchange market necessitates a comprehensive review of Nigeria's regulatory framework and exchange control laws.

He argued that resolving this issue cannot be achieved by a single institution as it involves the country's overall approach to foreign exchange regulation and the legal prerequisites governing market participation. Additionally, Akaraiwe highlighted that advancements in the global financial landscape, such as the increasing significance of stablecoins, necessitate policymakers to reassess how existing rules apply to emerging financial services and market participants.

Earlier at the forum, Akaraiwe advocated for the development of deeper hedging markets in Nigeria while foreign exchange conditions remain stable, rather than waiting for another market shock. He commended the CBN for enhancing credibility and predictability in Nigeria's financial markets over recent years. However, he argued that improved market stability should serve as the foundation for innovation, particularly in products that enable investors and businesses to manage currency and other financial risks.