Understanding the Legal Implications of Nigeria’s SEC Guidelines for Digital Assets Regulation

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Understanding the legal implications of Nigeria’s SEC Guidelines for Digital Assets regulation is an important topic in the unclear regulatory environment on crypto in the country.

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Last year, the Nigerian Securities and Exchange Commission (SEC) released a statement indicating its intention to regulate digital assets which qualify as securities transactions under the Investment and Securities Act (ISA) 2007.

Consequently, SEC released new guidelines titled ‘New Rules on Issuance, Offering Platforms and Custody of Digital Assets’ and dated 11th May 2022.

The CBN’s position has been one of hostility. The apex bank has restricted banks from processing transactions related to digital assets. 

There is currently an outright ban on the Banks and Other Financial Institutions (BOFIs) from dealing and facilitating payment for cryptocurrency exchanges. 

It directed the BOFIs to close all accounts involved in cryptocurrency transactions. Nigerians have resorted to peer-to-peer crypto transactions at this time. 

Overview of the Nigeria SEC Rules on Cryptocurrency. 

I: Rules on Issuance of Digital Assets as Securities:

This part of the rules is applicable to all issuers seeking to raise capital through digital asset offerings, and defines digital asset to mean ‘a digital token that represents assets such as a debt or equity claim on the issuer’. 

The process begins with the submission of an assessment form and a draft white paper, which should include information regarding the initial digital asset offering projects, business plan and feasibility study. A disclaimer should also be endorsed on the whitepaper indicating that it does not represent an offer to sell. If the Commission, within 30 days, determines that the digital asset is a security under ISA, the issuer can then apply to register the said digital assets.

II: Registration Requirements for Digital Assets Offering Platforms (DAOPs)

According to the Nigeria SEC, DAOP means an electronic platform operated by a DAOP operator for offering digital assets.

An applicant seeking to register as a DAOP must make an application via Form SEC 2 and 2D, and pay the prescribed fees, including a registration fee of N30,000,000 (Thirty Million Naira only). It needs to have a minimum paid-up capital of N500 million (five hundred million naira only) which can include bank balances, fixed asset or investment in quoted Securities); and a current fidelity bond covering at least 25% of the minimum paid-up capital.

III: Registration Requirements for Digital Asset Custodians (DACs): 

It defines Digital Asset Custodian as ‘a person who provides the services of providing safekeeping, storing, holding or maintaining custody of virtual assets/digital tokens for the account of another person’. 

The rules require a DAC applicant to comply with the general requirements for VASPs, in addition to the following: (a) Satisfy eligibility requirements for registration as a Custodian or Trustee; (b) Where a registered Custodian or registered Trustee seeks to provide DAC services, such CMO shall apply to the Commission for approval. 

A foreign DAC may be registered by SEC provided it is authorized to carry out an activity of a similar nature in the foreign jurisdiction; and is from a comparable jurisdiction with whom SEC has regulatory arrangements on enforcement, supervision and sharing of information.

IV: Rules on Virtual Assets Service Providers (VASPs): 

The rules detail the requirements for registration of Digital Asset Exchange, Digital Asset Custodian, Digital Asset Offering Platform, and Issuance of Digital Assets. They are applicable to platforms that facilitate or are involved, including on behalf of other persons, in any aspect of the trading, exchange and transfer of virtual assets. 

It also applies to issuers or sponsors of virtual/digital assets, including foreign or nonresidential. Operators that actively target Nigerian investors directly or through their agents, through promotions, publications in Nigeria or direct emails to Nigerian addresses are also captured under the rules including foreign operators.

All VASPs are required to be structured as corporate bodies. Though the rules are not applicable to a technology service provider who merely provides the infrastructure, software or system to a Digital Asset Exchange (DAX); an operator of a communication infrastructure that merely enables orders to be routed to an Exchange; and an operator of a financial portal that aggregates content and provides links to financial sites of service and information provider.

V: Rules on Digital Assets Exchange (DAX):

This explained that applicants seeking to register as a DAX must make an application via Form SEC 2 and 2D, and pay the prescribed fees, including a registration fee of N30,000,000 (Thirty Million Naira only). 

It needs to have a minimum paid-up capital of N500 million (five hundred million naira only) which can include bank balances, fixed assets or investment in quoted Security, and a current fidelity bond covering at least 25% of the minimum paid-up capital. 

DAX applicants are to provide corporate documents including copies of their certificate of incorporation, Memorandum and Articles of Association, tax clearance and audited accounts. Furthermore, a copy of its draft rules and sworn undertakings to keep proper records and abide by SEC rules and regulations.

In 2020, Nigeria’s National Information Technology Development Agency (NITDA) released the draft on national blockchain adoption strategy for the national adoption of Blockchain Tech and DLT in the region.

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