Regulation Of Cryptocurrency In Nigeria – Technology

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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.

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