Crypto Regulations in Nigeria: Deal or No Deal
One interesting aspect of the fast-growing cryptocurrency market in Nigeria is the fluidity of the terms used to describe the different products that fall within its ambit.
Intro
Key Players in the FinTech space believe this is a rare move by the apex capital markets' regulator in Nigeria but are confident that this marks the beginning of a new era where cryptocurrency and crypto assets will be properly regulated and offerings to the public in exchange for capital through the use of Initial Coin Offerings (ICOs), will be adequately scrutinized.
The Regulators Position Before the Regulation
The Security and Exchange Commission of Nigeria (the “SEC” or the “Commission”) on 14 September 2020, released their Statement on Digital Assets and their Classification and Treatment (the “Statement”) according to the powers conferred on it by the Investment and Securities Act 2007[1] (“ISA”).
Before the release of the Statement that has shifted the position of how crypto-currencies will be treated In Nigeria, regulators discouraged investors on the outcomes of investing in cryptocurrency and advised that the consumers should deal cautiously.
In Oct 2019, the Security Exchange Commission of Nigeria during the annual Fintech week launched the Fintech Roadmap committee. Which was to help shape and further think how best to manage fundamental issues like KYC, cryptocurrency adoption, etc. This led to the advice that the SEC should class cryptocurrency as a security or a commodity and other relevant recommendations by the Fintech Roadmap Committee. With the recommendations from the Fintech Roadmap Committee, the Commission has started putting in place a framework for virtual currency in Nigeria and the recently released Statement is the first step towards cryptocurrency regulations.
The Regulator Outlook
The Security Exchange Commission stated that the goal of the regulators is not to hinder technology or stifle innovation but standardize the market and create best practices for players and advance ethical practices, that in the end creates a fair and efficient market.
The Regulator Definitions
The statement didn’t define cryptocurrency. Until regulators define regulations on cryptocurrencies, the general description of cryptocurrency still applies In Nigeria. However, Crypto Assets were defined by the commission 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.
The Security Exchange Commission established that a virtual instrument or asset will measure up as a Crypto Asset if it is neither issued nor guaranteed by any jurisdiction and fulfills the functions above only if the community of users of the assets agrees that the Crypto Asset will serve the functions mentioned above.
Also, the Security Exchange Commission defined that Crypto Assets are distinguished from Fiat Currency and digital-money this means that there is a sharp difference between Crypto Assets and cryptocurrency under the Nigerian regulatory landscape.
Categorization of Virtual Assets by The Security Exchange
Crypto Asset – Will be addressed as commodities if traded on a Recognized Investment Exchange and are issued as an investment, and is subject to Part E of the Security Exchange Commission Rules & Regulations, and any other relevant sections and subsequent Rules that will be enacted in the future.
Utility Tokens or "Non-Security Tokens" - These tokens provide consumers with a product and service e.g., virtual tokens, they are treated as commodities but will only fall under the scope of the Security Exchange Commission, if conducted on a Recognized Investment Exchange.
Security Tokens – These are tokens with functionalities similar to securities such as shares. They are used in representing underlying assets and ownership stake in the issuing entity. They also bring in dividends or Interest payments for holders. The Security Exchange Commission according to the statement will treat such crypto assets as securities according to section 315 of the ISA.
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 are 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 Security Exchange Commission.
N.B: It’s not yet clear what The Security Exchange Commission considers as a “Recognized Investment Exchange” currently most virtual assets are exchanged on trading platforms.
Currently, The Security Exchange Commission treats virtual assets as securities unless the issuer or sponsor of the virtual asset proves otherwise.
This burden of proof can only be proved, if the Issuer makes an Initial Assessment Filing with The Security Exchange Commission to enable it to determine whether the assets are under its regulatory scope.
The effect of this is that all virtual assets will now be registered by The Security Exchange Commission with any of the following approaches:
Option 1:
An Initial Assessment Filing to determine whether the assets are securities and to satisfy the burden of proof on the Issuer.
In cases where the Commission believes the crypto asset is under the regulatory scope of The Security Exchange and is a security, a subsequent filing will be carried out by the issuer to comply with The Security Exchange rules.
OR
Option 2:
the issuer can directly register the virtual assets with The Security Exchange without the Initial Assessment Filing.
Also, all Digital Assets Token Offerings Initial Coin Offerings (“ICOs”), Security Token ICOs and any offering of digital assets on a blockchain;
within Nigeria or;
by Nigerian Issuers or;
foreign Issuers targeting Nigerians will be regulated by the Commission.
Parties of The Regulated
Individuals or corporate entities whose processes cut across any form of Blockchain-related and virtual asset offerings shall be registered with The Security Exchange Commission and as such, will be subject to the compliance guidelines.
Transmission
Reception
Execution of orders for crypto assets on behalf of potential Investors;
Dealers in crypto assets;
Portfolio management with crypto assets making up the portfolio
Investment advise regarding crypto assets; and
custodians or nominees Involved with virtual assets.
According to the Statement, services to be regulated by the Commission are not limited to the ones aforementioned.
Our View
The classification and categorization of crypto assets in Nigeria was a step in the right direction as the market seeks to tap into the digital economy and believes that there is a promising future for blockchain In Nigeria. Since crypto-assets and the use of blockchain are becoming increasingly popular among Nigerian consumers, The Security Exchange Commission’s view is a guide for all players in the crypto industry, nevertheless, we expect that in the coming months, the Commission will release more robust guidelines that will shape the Fintech ecosystem.