Introduction
The Securities and Exchange Commission (SEC) is the primary regulatory agency in the capital market in Nigeria. Before now, the common form of securities we were aware of were stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs). However, with the evolution of blockchain and cryptocurrency transactions, most Nigerians are now investing in digital assets such as; cryptocurrency, digital tokens, Non-fungible tokens (NFTs), etc.
Charged with the responsibility of protecting members of the public who invest in public and private companies, the SEC on May 13th, 2022, issued its first rule regulating digital assets in Nigeria titled; Rules on Issuance, Offering Platforms and Custody of Digital Assets.
In this article, we will be highlighting the key provisions of the new rules.
TO WHOM DO THESE RULES APPLY?
The new rules address the following categories of digital asset operators;
1. Digital Asset Issuers
2. Digital Asset Offering Platforms (DAOP)
3. Digital Asset Custodians (DACs)
4. Virtual Asset Service Providers (VASP)
5. Digital Assets Exchange (DAX) Operators
We will define these categories of operators below.
KEY DEFINITIONS
WHAT ARE DIGITAL ASSETS?
The SEC broadly defines a digital asset as “a digital token that represents assets such as a debt or equity claim on the issuer”. From this definition, it is safe to presume that cryptocurrencies, digital tokens, etc. are good examples that satisfy the criteria within this definition.
WHO ARE DIGITAL ASSET ISSUERS?
The new rules do not provide a specific definition of who qualifies as a digital asset issuer. However, it can be inferred from Part A of the SEC rules, that issuers are business entities seeking to raise capital through digital asset offerings.
WHAT ARE DIGITAL ASSET OFFERING PLATFORMS (DAOPs)?
According to the rules, DAOPs are electronic platforms operated by digital asset offering platform operators for the purpose of offering digital assets such as ICOs (Initial Coin Offerings).
WHO ARE DIGITAL ASSET CUSTODIANS (DACs)?
The new rules define DACs as “a person who provides the services of safekeeping, storing, holding or maintaining custody of virtual assets/digital tokens on the account of another person”.
A custodian could be a corporate entity as well.
WHO ARE VIRTUAL ASSET SERVICE PROVIDERS (VASPS)?
The new rules define Virtual Asset Service Providers as “any entity who conducts one or more of the following activities or operations for or on behalf of another person:
- Exchange between virtual assets and fiat currencies
- Exchange between one or more forms of virtual assets
- Transfer of virtual assets
- Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
- participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.”
Virtual assets on the other hand are defined as a digital representation of value that can be transferred, digitally traded, and can be used for payment or investment purposes. It does not however include digital representations of fiat currencies, securities, and other financial assets.
WHO ARE DIGITAL ASSET EXCHANGE OPERATORS?
They are operators who facilitate the trading of virtual or digital assets on an electronic platform
KEY PROVISIONS OF THE SEC RULES DIGITAL ASSET OPERATORS SHOULD TAKE NOTE OF
Before we proceed, it is important to note that all entities looking to offer any kind of crypto-related product or service must secure a Virtual Asset Service Provider (VASP) license in addition to any specific service category license required.
A. Issuers
WHAT ARE THE PROCEDURES AND REQUIREMENTS TO BE LICENSED AS AN ISSUER UNDER THE RULES?
Qualifying as an issuer under the new rules occurs in two stages;
- Initial Assessment Filing
- Registration of digital asset offering
A promoter, entity, or business wishing to issue digital assets to Nigerians to raise capital, must submit alongside other required documents, an assessment form, and a document that states the technology behind the project (also known as a “White Paper”).
The Commission would upon receipt of Initial Assessment Filling, review the application to determine whether the digital asset proposed to be issued to the public, qualifies as “security” under the Investment and Securities Act 2007.
Where the proposed digital asset is determined to be a security, the issuer may proceed to the next stage, which is the registration of the digital asset.
The Commission, however, reserves the right to reject an application for digital assets if, in its opinion, the proposed activity infringes public policy, is injurious to investors, or violates the laws, rules, or regulations of the Commission.
The following are exempted from registration as digital asset offerings;
- Securities structured to be offered through crowdfunding portals or intermediaries
- A judicial sale or sale by an executor, administrator, or receiver in insolvency or bankruptcy
- Isolated transactions in which any digital token is sold on the owner’s account and such sale or offer for sale not being made in the same manner in subsequent transactions.
- Where a sale is made by a pledged holder or mortgagee, selling to liquidate a bonafide debt
B. Digital Assets Offering Platform
WHAT ARE THE PROCEDURES AND REQUIREMENTS TO BE LICENSED AS A DIGITAL ASSETS OFFERING PLATFORM UNDER THE SEC RULES?
A Digital Assets Offering platform (DAOP) must satisfy the general requirement of having a Virtual Asset Service Provider (VASP) license before registration as a DAOP.
Upon application for registration, a DAOP must satisfy the minimum paid-up share capital requirement of N500,000,000 (five hundred million naira) only. Such an entity must also have a current fidelity bond covering at least 25% of the minimum paid-up capital requirement.
A DAOP may either appoint a licensed Digital Asset Custodian or provide its own custody services to token holders. Should it opt for the latter, it must comply with the license requirements for Digital Asset Custodians as set out by the rules.
The Commission reserves the right to cancel the registration of a DAOP on the following grounds;
a) It is discovered at any time that the DAOP has submitted false or misleading information or there is a material omission of information.
b) The DAOP fails to satisfy the requirements as provided in the Investment and Securities Act 2007, the new SEC rules on digital assets, or other relevant laws or guidelines issued by the Commission.
c) The DAOP contravenes any obligation, condition, or restriction imposed under the rules
d) The DAOP fails or ceases to carry on business activities for which it was registered for a consecutive period of six (6) months
e) The DAOP fails to pay any fee prescribed by the Commission
C. Digital Asset Custodians
WHAT ARE THE PROCEDURES AND REQUIREMENTS TO BE LICENSED AS A DIGITAL ASSET CUSTODIAN (DAC) UNDER THE SEC RULES?
A digital assets custodian must satisfy the general requirement of obtaining a Virtual Asset Service Provider (VASP) license.
To register as a DAC, such an entity must comply with the following requirements;
- Satisfy eligibility requirements for registration as a custodian or trustee, and any additional requirements that the Commission may prescribe from time to time.
- Where a registered custodian or trustee seeks to provide DAC services, such custodian must apply to the Commission for approval.
- Pay all required fees as prescribed by the Commission.
The Commission reserves the right to cancel the registration of a Digital Asset Custodian on conditions prescribed by the SEC Rules and Regulations on cancellation of registration.
D. Virtual Asset Service Providers (VASP)
WHAT ARE THE PROCEDURES AND REQUIREMENTS TO BE LICENSED AS A VIRTUAL ASSET SERVICE PROVIDER (VASP) UNDER THE SEC RULES?
As stated earlier, all entities (local or foreign) involved in crypto-related services or products for the Nigerian market must have a VASP license. Specifically, entities involved in the following activities must obtain a VASP license:
(a) all platforms that facilitate trading, exchange, and transfer of Virtual assets;
(b) any person, (individual or corporate) whose activities involve any aspect of Distributed Ledger Technology (DLT)-related and virtual digital asset services. 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, etc.;
(c) issuers or sponsors of virtual/digital assets, including foreign or non-residential;
(d) foreign or non-residential operators that actively target Nigerian investors directly or through their agents, through promotions, publications in Nigeria, or direct e-mails to Nigerian addresses;
The following categories of operators do not qualify for a VASP license:
(a) a technology service provider who merely provides the infrastructure, software, or the system to a Digital Asset Exchange (DAX);
(b) an operator of a communication infrastructure that merely enables orders to be routed to an Exchange;
(c) an operator of a financial portal that aggregates content and provides links to financial sites of service and information providers.
E. Digital Assets Exchange (DAX)
WHAT ARE THE PROCEDURES AND REQUIREMENTS TO BE LICENSED AS A DIGITAL ASSET EXCHANGE (DAX) UNDER THE SEC RULES?
In addition to satisfying the general requirement of obtaining a VASP license, a DAX operator must satisfy other registration requirements as provided by the rules.
An applicant seeking to register as a DAX operator must satisfy the minimum paid-up share capital requirement of N500,000,000 (five hundred million naira) as well as the current fidelity bond covering at least 25% of the minimum paid-up share capital.
The Commission reserves the right to suspend or cancel the registration of an exchange as prescribed in the SEC rules and regulations on suspension/cancellation of registration.
CONCLUSION
The attempt by the SEC to regulate digital and virtual asset transactions in Nigeria is a step in the right direction considering the restrictions placed by the apex bank of Nigeria on crypto transactions. It is hoped that other agencies will borrow a leaf from the commission in providing the needed framework for digital and virtual asset operators in Nigeria.
The new rules, though a welcome development, have been met with reservations on some of its provisions such as; the huge capital requirement for licensing, vague definitions of digital asset offering platform (DAOP), the restriction on the amount of funds to be raised by issuers, the restriction on investment limits to the general investing public, etc.
However, bearing in mind the fact that this is new terrain for regulators, it is hoped that a revised version of the rules which is in touch with current trends within the space, would be made available in no time.
If you need advice on digital assets company formation, and or application for the required license(s), you may CONTACT US as we will be delighted to serve you.
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