Nigeria: SEC Issues New Guidelines on Digital Assets

The apex regulator of Nigeria’s capital market, the Securities and Exchange Commission (SEC), has issued fresh guidelines on the issuance and custody of digital assets in the country, a move that could bolster the adoption of cryptos in the country.
This is coming as the International Monetary Fund (IMF) has called for the development of a new public infrastructure to connect various payment systems, including digital currencies.

SEC’s latest guidelines: “New Rules on Issuance, Offering Platforms and Custody of Digital Assets,” released weekend, are coming after the commission had declared on September 14, 2020, that it would be taking a three-pronged approach to regulating innovation in the crypto sector, including safety, market deepening and providing solutions to problems.
According to the commission, a digital asset is “a digital token that represents assets such as a debt or equity claim on the issuer.”
Divided into five parts, Part A of the new guidelines dwells on Rules on Issuance of Digital Assets as Securities; Part B is on Rules on Registration Requirements for Digital Assets Offering Platforms (DAOPs), while Part C is on Rules on Registration Requirements for Digital Asset Custodians (DACs).
Part D dwells on Rules on Virtual Assets Service Providers (VASPs) and Part E captures Rules on Digital Assets Exchange (DAX).

In the new guidelines, SEC requires crypto issuers or sponsors to register their digital assets with the commission. The issuers are also required to make an initial assessment filing with it to prove that the assets they issue are securities, followed by filing for proper registration.
According to the new guidelines, those that have already issued assets or engaged in
“Initial Coin Offering (ICO) will be given three months to comply with the stated registration requirements.”
Every individual or corporate organisation which engages in any aspect of Blockchain-related and digital asset services must register with the SEC and follow its regulatory guidelines, according to the SEC.
It stated: “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.”.

The commission stated that it might require foreign or non-resident startups or companies to establish a branch in Nigeria, adding that foreign firms will be recognised if they belong to a country that either has a reciprocal agreement with Nigeria or is a member of the International Organisation of Securities Commissions (IOSCO).
With the new guidelines, SEC mandates entities seeking to offer any kind of crypto products and services in Nigeria or to Nigerians to secure a virtual asset service provider (VASP) licence.
This is besides relevant category licences, implying that an exchange would need a digital asset exchange licence in addition to the VASP permit.
The VASP licence has underlining obligations, including a requirement that licence holders should obtain self-declared risk acknowledgement forms from users while also issuing a disclaimer that losses from investments are not covered by any protection fund.

VASPs must also employ anti-money laundering/combating the financing of terrorism (AML/CFT) standards.
Besides the VASP rules, the new SEC rules cover areas such as operating a digital asset exchange, token issuance, operating digital assets offering platform, and requirements for digital asset custodians.
Under the new guidelines, all crypto exchanges providing service to Nigerians are now required to secure a permit, which mandates the commission to have access to their records.
Such exchanges are also expected to submit weekly and monthly trading information as well as quarterly and annual financial and compliance reports.
The new rule inhibits an exchange from facilitating the trading of any digital asset unless SEC has first issued a “no objection” about such asset.

This implies that an exchange will need to submit applications for every asset it intends to list, and the application should prove that the exchange has sufficient information about the project and its associated risks.
The new guidelines stated that the SEC will allow projects to raise to N10 billion — based on the official exchange rate.
On token issuance, the SEC states that any project seeking to conduct initial coin offerings within Nigeria or targeting Nigerians must register its intent with the Commission by filing an assessment form and submitting a detailed copy of its whitepaper.
Should the SEC consider the proposed token security, the issuer has to comply with the country’s securities laws.

According to SEC, a DAOP operator must of necessity conduct due diligence on any project seeking to offer digital assets through its platform and exercise its judgment on whether the project is fit to raise funds.
Following the October 2020 #EndSARS protests, the Central Bank of Nigeria (CBN) had on February 5, 2021, issued a circular to banks and other financial institutions prohibiting the dealing in cryptocurrencies and facilitating payment for cryptocurrency exchanges.
The apex bank further instructed all banks and other financial institutions to identify individuals or entities who transact in cryptocurrency or operate cryptocurrency exchanges and close the accounts of such persons or entities.
The letter had elicited major concern among the public with many concerned about the potential negative effect it could have on Nigeria’s growing cryptocurrency market and innovation in the fintech industry.
There were calls on the commission to clarify whether there was a contradiction in the policies of the two regulators.

SEC had on September 14, 2020, issued a statement announcing its intention to regulate “digital assets” which include cryptocurrencies.
Consequently, SEC on February 11, 2021, stated the effect that it would partner with the CBN to analyse and better understand the identified risks of cryptocurrency to ensure that appropriate regulations are put in place if cryptocurrency transactions were allowed in future.
The capital market regulator said it would not stifle innovation but would work with the CBN to ensure stability.

The Commission said it had suspended the approval of cryptocurrencies and related products after the CBN ordered banks to terminate accounts connected to digital assets.
The new guidelines by SEC on digital assets are coming after the October 25, 2021 launch of Nigeria’s central bank digital currency (CBDC), the eNaira by the CBN.
Meanwhile, the IMF has called for the development of a new public infrastructure to connect various payment systems, including digital currencies.
The Managing Director, Kristalina Georgieva, said countries need to work together to build new ‘roads, railways, bridges, and tunnels’ – using public digital platforms to connect payment systems.
Georgieva said this in a report on the IMF’s website, themed “Confronting Fragmentation: How to Modernise the International Payment System”.
According to her, the new payment system would help counter the fragmentation of the international monetary system.

“It would be a new way of connecting people, markets, and economies in the digital world,” she said.
She said this would make international payments more efficient, safer, and more inclusive.
“Crucially, it would reduce the risk of fragmentation,” she added.
“That is a tall order, but not an insurmountable one. Scaling this mountain is well worth it.
“And for that, our Swiss friends again can be our guides — with their history of cooperation and, quite literally, their mountaineering expertise.”
The IMF said the world must think like a mountaineer by using state-of-the-art equipment, adapting to the existing terrain, and “relying on our team”.
The Bretton Woods institution said the platform must connect various forms of money countries will use and legally support.

“That includes commercial bank deposits, but potentially also central bank digital currencies, and even some stablecoin arrangements — if they are well-designed and regulated,” it said.
“Such a platform is especially important for economies with less advanced payment systems. By embracing diverse forms of money, we can make payments work for all people, in all countries.”
Furthermore, IMF added that as payments become more efficient, capital flows would also continue to evolve.

Ndubuisi Francis in Abuja

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