SEC Draft Regulatory Guide on Digital Assets

In the past few years, regulators have had to keep pace with the explosive growth in digital assets - from cryptocurrencies to initial coin offerings, NFTs and what have you. Just as many regulators around the globe have been at the heels of the paradigm shifting technology, Nigeria is not left behind in the quest to understand, utilize and maximize the offspring of blockchain technology.

Nigeria’s Securities and Exchange Commission (SEC) recently shared guidelines that will regulate and serve as a regulatory framework for the issuance of digital assets and providers in the Nigerian terrain:

• Rules for Registration of Virtual Asset Service Providers (VASPs); and
• Rules on Issuance, Offering Platform and Custody of Digital Assets.

Digital assets are anything of value that can be stored and transmitted electronically through a computer or other digital device and associated with ownership or use rights. They are items you can buy, sell, and hold virtually, but typically can’t physically see or touch. Well-known examples include cryptocurrencies and non-fungible tokens (NFTs). 

The Rules on Issuance of Digital Assets as Securities defines ‘Digital Assets’ as a digital token that represents assets such as a debt or equity claim on the issuer, while the Rules for Registration of Virtual Asset Service Providers explains it as a digital representation of value that can be digitally traded and functions as a medium of exchange; a unit of account or a store of value, but does not have legal tender status in any jurisdiction.

Some Pertinent Provisions of the Rules on Issuance, Offering Platform and Custody of Digital Assets 

• For digital assets to qualify as securities, platforms issuing digital assets in Nigeria or targeting Nigerians must submit an assessment form, containing the description of the digital asset offering, use of proceeds from sales of tokens, target market, whitepaper, among others.
• A whitepaper is a compulsory requirement for every digital asset offering in Nigeria. It is a document that describes a digital asset project and the technology behind it. It also details information on the market cap, technical details, the team and advisors.
• After identifying a digital asset as a security, the issuer must file a registration with the SEC. Requirements for the registration include a Registration statement of the digital assets, fulfillment of KYC procedures, adequate corporate governance disclosures, establishment of an escrow arrangement and payment of applicable fees.
• Issuer’s directors and senior management must own at least 50% equity holding in the digital assets company.
• Individual investor can invest in digital assets up to a maximum of NGN5 million per issuer with a total investment limit not exceeding NGN20 million within a 12-month period, however, qualified institutional and high net worth investors have no investment limit.
• Provisions on the registration, governance, internal audit and risk management of the Digital Assets Offering (DAO) Platform is also clearly contained in the Rules.
• The registration of a DAO Platform will be canceled if it ceases to carry on business or activities for a consecutive period of six (6) months and fails to pay any fee prescribed by the SEC.

Some Pertinent Provisions of the Rules for Registration of Virtual Asset Service Providers (VASPs)

• The Rules for Registration of Virtual Asset Service Providers (VASPs) cover Requirements for registration of Digital Asset Exchanges, Custodians, Offering Platforms and Providers.
• The Rules apply to any person or all platforms that facilitate trading, exchange and transfer of Blockchain-related and virtual digital asset services.
• The Rules provide for a DAX, which means an electronic platform that facilitates the trading of a virtual asset or digital asset.
• Before the DAX is allowed to fully facilitate the exchange of virtual assets, the SEC requires that the DAX Operator provide an IT assurance regarding the system readiness of the proposed DAX, an internal audit of financial resources, adequate security measures and business continuity plan, sufficient IT and technical support arrangements etc.
• To set up the DAX, the Operator has to pay an application fee of NGN100,000, processing fee of NGN300,000 and registration fee of NGN30,000.000.
• It is mandatory that the DAX Operator have a minimum paid-up share capital of NGN500,000,000 (Five Hundred Million Naira)which can be in the form of bank balances, fixed assets or investment in quoted securities. There must also be in place a Fidelity Insurance Bond covering at least 25% of the capital.
• A DAX Operator must periodically submit to the SEC: a weekly and monthly trading statistics, AML/CFT/PF requirements filing, quarterly and annual financials as well as compliance reports, audited financial statements within three months after the close of each financial year.
• All transaction fees payable to a DAX by its users are subject to prior review and approval of the SEC.

Our Thoughts 

The regulation of digital assets in Nigeria is a step in the right direction seeing as the country has the highest adoption of digital assets in Africa. The SEC has stated that the intention of the proposed Rules is to safeguard the interest of investors in digital assets and enable the growth of technology.

Both Rules, if implemented with these factors in mind, will ensure the protection and transparency of digital asset transactions in Nigeria. It will ensure compliance with relevant Anti-Money Laundering and Counter Terrorist Financing obligations while ensuring adequate protection of investors and public interest.

It looks like a bright future for both regulators and would-be investors that doubt the security of the virtual asset class. Let us all see how this proposed regulatory era rolls out. Fingers crossed.