The Securities Exchange Commission (SEC) of Nigeria has recently released new rules regarding the issuance, exchange and custody of digital assets (i.e digital token that represents assets such as debt or equity claim on the issuer) in Nigeria. Digital assets here refer to all types of crypto assets.
The rules shall apply to all issuers seeking to raise capital through digital asset offerings.
The new rules for digital assets are part of the SEC’s effort to regulate digital assets such as BITCOINS and NFTs.
The new rules cover the issuance of digital assets as securities, the registration of platforms and digital asset custodians, exchanges and virtual assets service providers.
In 2020, CBN directed financial service providers to halt cryptocurrency transactions, but SEC’s new regulations mandate the registration of the offering and sale of digital tokens that are considered securities.
It is crucial that SEC tackles the growing cases of crypto scams and dubious entities taking advantage of Nigerian investors in the crypto market. The crypto market is volatile, so this new regulation on the National level may bring about structure and stability to the market.
The new SEC’s regulations cover 5 major items ranging from issuance of digital assets to rules that govern digital asset exchanges in the country.
In the new guidelines, SEC requires crypto issuers or sponsors to register their digital assets with the commission. The issuers are also required to make an initial assessment filing with it to prove that the assets they issue are securities, followed by filing for proper registration.
According to the new guidelines, those that have already issued assets or engaged in “Initial Coin Offering (ICO) will be given 3 months to comply with the stated registration requirements.”
Every individual or corporate organization which engages in any aspect of Blockchain-related and digital asset services must register with the SEC and follow its regulatory guidelines.
The Regulations provide that: “Such services 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.”.
SEC stated that it might require foreign or non-resident startups or companies to establish a branch in Nigeria, adding that foreign entities will be recognized if they belong to a country that either has a reciprocal agreement with Nigeria or is a member of the International Organization of Securities Commissions (IOSCO).
With the new guidelines, SEC mandates entities seeking to offer any kind of crypto products and services in Nigeria or to Nigerians to secure a virtual asset service provider (VASP) license.
This is besides relevant category licenses, implying that an exchange would need a digital asset exchange license in addition to the VASP permit.
The VASP license has underlining obligations, including a requirement that license holders should obtain self-declared risk acknowledgement forms from users while also issuing a disclaimer that losses from investments are not covered by any protection fund.
VASPs are also required to employ anti-money laundering/combating the financing of terrorism (AML/CFT) standards.
Apart from the VASP rules, the new SEC rules cover areas such as operating a digital asset exchange, token issuance, operating digital assets offering platform, and requirements for digital asset custodians. Under the new guidelines, all crypto exchangers providing service to Nigerians are now required to secure a permit, which mandates the commission to have access to their records. Such exchanges are also expected to submit weekly and monthly trading information as well as quarterly and annual financial and compliance reports.
The new rule restrains an exchange from facilitating the trading of any digital asset unless SEC has first issued a “no objection” about such asset. This implies that an exchange will need to submit applications for every asset it intends to list, and the application should prove that the exchange has sufficient information about the project and its associated risks.
The new guidelines stated that the SEC will allow projects to raise up to N10 billion — based on the official exchange rate.
On token issuance, the SEC states that any project seeking to conduct initial coin offerings within Nigeria or targeting Nigerians must register its intent with the Commission by filing an assessment form and submitting a detailed copy of its whitepaper.
Should the SEC consider the proposed token security, the issuer has to comply with the country’s securities laws.
According to SEC, a DAOP operator must of necessity conduct due diligence on any project seeking to offer digital assets through its platform and exercise its judgment on whether the project is fit to raise funds.
SEC postulates a review of applications within 30days before determining if the digital asset proposed to be offered constitutes a “security”.
According to the commission, the new guidelines shall apply to all issuers seeking to raise capital through digital asset offerings, adding that it provides that issuers may only raise funds within a limit of N10 billion.
The commission, however, added that it could adjust the ceiling from time to time.
It revealed that digital asset actors include Digital Asset Offering Platforms (DAOPs), Digital Asset Custodians (DACs), Virtual Assets Service Providers (VASPs), and Digital Assets Exchange (DAX).
According to the new regulation, SEC said it would accommodate DAOPs provided it tendered evidence of a minimum paid-up capital of N500 million and a current fidelity bond covering at least 25 per cent of the minimum paid-up capital.
The regulation requires applicants seeking to register a DAOP to pay NGN100,000 for the filing or application fee, NGN300,000 for the processing fee, NGN30 million for the registration fee, and NGN100,000 for sponsored individuals.
Despite the SEC’s new regulations, it is still not certain whether Nigeria is ready to fully regulate cryptocurrency activities. This is because the Nigerian apex bank, the Central Bank of Nigeria (CBN) has continued to mandate all financial institutions in Nigeria to steer clear of cryptocurrencies and should not allow any crypto-related entities to open bank accounts in financial institutions, this has pushed virtually all individuals engaging in cryptocurrency activities in Nigeria to engage only in what is known as peer-to-peer trading. However, it is expected that the new SEC regulations may force the CBN to reconsider its stance on cryptocurrency transactions in the near future.
