By virtue of Section 13 of the Investment and Securities Act, 2007 The Securities and Exchange Commission (SEC), is the apex regulatory organization for the Nigerian capital market, which is empowered to regulate investments and securities business in Nigeria. In line with these powers, the SEC released a statement made on the 14th of September 2020 on Digital Assets and their classification and treatment. The statement entirely bothered on cryptocurrency regulation in Nigeria.
According to the Commission, it will be taking a three-pronged approach to regulate innovation in the crypto currency sector; these include safety, market deepening, and providing solutions to problems that will guide its regulations, strategy, and its interaction with innovators seeking legitimacy and relevance in this emerging industry.
Consequently, SEC issued regulatory guidelines for digital currencies and crypto-based companies or startups stating that they will regulate crypto-token or crypto-coin investments when the character of the investments qualifies as securities transactions.
According to the statement released by the Commission, the objective of the regulations is not to hinder technology or stifle innovation but to create standards that encourage ethical practices. In an earlier statement, SEC warns stakeholders and the investing public against dealing with fraudulent, unregistered investment schemes and capital market operators, especially those with bogus investment and unjustifiable return claims, and advised the public to tread carefully to avoid been swindled.
Definition and categorization of virtual assets
Cryptocurrency was not defined in the statement, so the general dictionary meaning still applies while "Crypto Asset" was defined as a digital representation of value that can be digitally traded and functions as a medium of exchange; and or a unit of account; and or a store of value, but does not have legal tender status in any jurisdiction.
Crypto Asset is neither issued nor guaranteed by any jurisdiction, and fulfills the above functions only by agreement within the community of users of the Crypto Asset and was distinguished from Fiat Currency and E-money.
The SEC went further to categorizes the following virtual assets as follows:
- Crypto Asset – They will be treated as commodities if traded on a Recognized Investment Exchange and are issued as an investment, and is subject to Part E of SEC Rules & Regulations, and any other relevant sections and subsequent Rules that will be enacted in future.
- Utility Tokens or "Non-Security Tokens" - These tokens provide users with a product and service e.g., virtual tokens, they are treated as commodities but will only fall under the purview of the commission if conducted on a Recognized Investment Exchange.
- Security Tokens – These are token with features and characteristics analogous to securities such as shares and represent assets such as underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments, they have economic functions similar to equities and bonds, using security tokens means investors can expect that their ownership stake is preserved on the blockchain ledger. They are treated as Securities pursuant to PART XVIII (315) of Investment and Securities Act.
- Derivatives and Collective Investment Funds of Crypto Assets, Security Tokens, and Utility Tokens –A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset while Collective Investment Funds also known as Collective Investment Trust is a group of pooled accounts held by a bank or trust company for investors. They will be regulated as specified investments under the ISA & SEC Rules and Regulations while market intermediaries and operators dealing in such derivatives and collective investment funds will need to be registered and approved by the Commission.
What will be regulated?
Every virtual crypto asset in Nigeria will be treated as securities and as such must be registered unless the company or startup proves otherwise. Thus, the burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC is placed on the issuer or sponsor of the said assets. This burden can be discharged if the issuer or sponsor makes an initial assessment filing with the Commission to prove whether or not such assets are securities, where there is a finding by the commission that that virtual assets are indeed security they must be registered.
Thus, the registration for virtual crypto asset can be done using any of the two-prong approaches
An initial assessment filing to satisfy the burden of proof and a filing for registration proper, either made directly by the issuer or sponsor or direct filing for registration without the initial assessment.
The commission went further to state that it will regulate all Digital Assets Token Offerings (DATO), Initial Coin Offerings, Security Token ICOs, and other Blockchain-based offers within Nigeria by Nigerian issuers or by foreign issuers targeting Nigerian investors.
Existing digital assets offerings before the implementation of these regulatory guidelines will have three (3) months to submit the initial assessment filing of documents for registration proper, as the case may be.
Who will be Regulated?
Any person, (individual or corporate) whose activities involve any aspect of Blockchain-related and virtual digital asset services, must be registered by the Commission and shall follow its regulatory guidelines.
The services as envisaged by the Commission include, but are not limited to reception, transmission, and execution of orders on behalf of other persons, dealers on own account, portfolio management, investment advice, custodian, or nominee services.
While these regulations seem to regulate residential issuers or sponsors, the Commission went further to state that it may require foreign or non-resident startups or companies to establish a branch office within Nigeria.
Foreign issuers or sponsors will be recognized if they are either from a country that has a reciprocal agreement with Nigeria or is a member of the International Organization of Securities Commissions (IOSCO).
In conclusion, the above steps by the commission to regulate digital assets in Nigeria is a welcome development in the right direction, as it has become relevant to improve safety for crypto users in Nigeria, and also a good signal to investors who need clarity on the existing legal framework, especially with the rapid adoption of cryptocurrency. The present statement does not seem to have any strict entry requirements but it is expected that in the nearest future a more robust and strict guidelines will be released to regulate the cryptocurrency space, blockchain technology and Fintech in general in Nigeria.
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.