In our earlier article, we had highlighted the intention of the primary regulator of investments and securities in Nigeria, the Securities and Exchange Commission (the "Commission") to regulate virtual/digital assets in Nigeria. These intentions were, however, put on hold, (as highlighted in our article) , after the Central Bank of Nigeria ("CBN") issued a directive to banks and other financial institutions instructing them to close the accounts of all persons or entities transacting in or operating cryptocurrency exchanges (the "CBN Directive").
Notwithstanding the subsistence of the CBN Directive, the Commission recently released Proposed Rules for the Registration of Virtual Assets Service Providers ("VASP") in Nigeria. (the "Proposed Rules").
In this article, we have set out below useful information for companies/startups who intend to conduct business as a VASP in Nigeria, in view of the Proposed Rules.
1. Which Entities are Subject to the Proposed Rules?
The Proposed Rules upon finalization will be applicable to platforms that facilitate the trading, exchange and transfer of virtual assets. It will also be applicable to all entities whose activities involve, blockchain-related and virtual asset services; and entities that provide portfolio management services, investment advice, custodian or nominee services, amongst others. In addition, foreign and non-residential operators that actively target Nigerian investors directly or indirectly through agents, promotions, publications in Nigeria or direct emails to Nigerian addresses will be subject to the Proposed Rules.
2. What is a Virtual Asset?
The Proposed Rules define a virtual asset as a digital representation of value which can be used as a medium of exchange/payment, or a unit of an account and is traded digitally. Virtual assets unlike legal tenders (or digital representations of a legal tender e.g e-naira or mobile money) gain their status upon agreement within the community of users of virtual assets and therefore, are not issued or guaranteed by any country or state and therefore, are not legal tender.
3. What is a VASP?
A VASP is any entity that conducts: (i) exchange between virtual assets and fiat currencies i.e legal tenders; (ii) exchange between one or more forms of virtual assets; (iii) transfer of virtual assets; (iv) safe keeping and/ or administration of virtual assets or instruments; and (v) participation in and provision of financial services related to an issuer's offer and/or sale of a virtual asset, for or on behalf of another entity. Examples of VASPs include virtual asset exchanges, wallet providers, brokers etc.
4. What are the registration requirements for VASPs?
The Proposed Rules require all entities that conduct business as VASPs to be registered with the Commission. Application for registration is to be made by filling the appropriate SEC form and submitting required documents including:
i. the rules of the applicant which should principally provide for the protection of investors and public interest;
ii. a business model;
iii.an approval letter or a letter of no objection (if any ) from the relevant sectorial regulator of the applicant;
iv. sworn undertakings that the applicant will comply with the Proposed Rules and that all information furnished by the applicant are not false or misleading;
v. documents which show or attest to the following amongst others;
- that the applicant will be able to operate an orderly, fair and transparent market in relation to the securities that are offered or traded on or through its platform;
- that the applicant is still a going concern; and
- that the applicant, its directors, chief executive and other persons primarily responsible for its operations or financial management are fit and proper
5. What is required from Entities Conducting Business as Digital Assets Exchange Operators?
Digital Assets Exchange Operators ("DAX Operators") are essentially VASPs that operate platforms (electronic) that facilitate the trade of virtual assets. Some of the salient requirements of the Proposed Rules for DAX Operators are stated below.
i. Application for registration– VASPs that intend to conduct business as DAX Operators are required to apply to the Commission to be registered as a DAX Operator. The DAX Operator is required to provide (i) information technology (IT) assurance of the readiness of its platform; and a written declaration by its internal auditors confirming that it has sufficient resources (human, financial and IT ), adequate security measures, systems capacity and other checks in place to ensure the protection of investors and the general public.
ii. Minimum paid-Up Capital- the Proposed Rules require entities who intend to conduct business as a DAX Operator to have a minimum share capital of N500,000,000 (Five Hundred Million Naira) and to provide evidence of such amount to the Commission. The DAX Operator is also to take up a Fidelity Insurance Bond covering at least 25% of the minimum paid-up capital as stipulated by the Commission's Rules and Regulations.
iii. Trading of Virtual Assets- the Proposed Rules require DAX Operators to apply to the Commission for approval to facilitate the trading of any virtual asset. Transaction fees payable to a DAX are also subject to the prior review and approval of the Commission.
iv. Commission Fees- The Commission is entitled to charge fees on virtual assets transactions carried out on a DAX at a percentage to be determined by the Commission from time to time .
The Proposed Rules (though still in draft form) provides hope to local and foreign companies/startups desiring to trade in virtual assets in Nigeria, that the government is taking intentional steps to create an enabling environment for such transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.