On 14 September 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) published an official statement on its website communicating its position on the regulation of digital assets (also referred to as crypto assets) in Nigeria (the “Statement”)
By virtue of the Statement, the SEC has taken the view that unless proven otherwise, crypto assets are securities which are subject to the regulatory purview of the Commission; and where investments in crypto assets qualify as securities transactions, such investments will be regulated by the Commission. The powers of the SEC to regulate securities are derived from Section 13 of the Investment and Securities Act 2007 and in its capacity as the apex regulator of the Nigerian capital markets.
Issuers or sponsors of crypto assets have the obligation to prove that their virtual assets do not constitute securities by making an initial assessment filing with the SEC, for the Commission to determine the nature of those assets. Upon the Commission’s consideration of a filing and a determination that the crypto assets indicated in such filing are indeed securities, the issuer or sponsor will be required to register the assets with the Commission.
In addition to crypto-assets, all Digital Assets Token Offering (DATOs), Initial Coin Offerings (ICOs), Security Token ICOs, including other blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors will be subject to the regulation of the SEC. It is important to note that securities structured to be exclusively offered through crowdfunding portals or other exempt methods will not be treated as digital assets and subject to the regulatory oversight of the Commission.
The Statement contemplates that the SEC will release regulatory guidelines that will provide further guidance and clarity on the regulation of digital assets in Nigeria (the “Regulatory Guidelines”). Any individual or corporate organisation whose activities involve any aspect of blockchain-related and digital asset services must be registered by the SEC and as such, will be subject to the Regulatory Guidelines. Such services include but are not limited to the reception, transmission and execution of orders on behalf of other persons, dealers on own account, portfolio management, provision of investment advice, custodian or nominee services in relation to blockchain or digital assets.
Existing digital assets offerings in operation prior to the implementation of the Regulatory Guidelines will have a 3-month window during which issuers or sponsors of such offerings are required to either submit an initial assessment filing to the Commission or submit documents for full registration. It is unclear when the 3-month period will begin to count, but it will be safe to assume that the timeline starts from the date of the Statement, which is 14 September 2020.
In the Statement, the Commission defines “crypto-asset” 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, which does not have legal tender status in any jurisdiction.
A crypto asset is neither issued nor guaranteed by any jurisdiction and fulfils the above functions only by agreement within the community of users of the crypto asset. The Commission notes that crypto assets are distinct from fiat currency and e-money.
The Commission may require foreign or non-residential issuers or sponsors to establish a branch office within Nigeria. However, foreign issuers or sponsors will be recognised by the Commission where a reciprocal agreement exists between Nigeria and the country of the foreign issuer or sponsor. Where a foreign issuer or sponsor is a national of a member country of the International Organisation of Securities Commissions, such foreign issuer or sponsor will also be accorded recognition status by the Commission. The Statement is not clear as to what would constitute “recognition status” and the benefits that this will accrue to such persons. We anticipate that these will be clarified when the Regulatory Guidelines are issued.
The Commission also categorises forms of digital assets and highlights the treatment to be accorded to them. The categories are as follows:
- Crypto Assets – which will be treated as commodities where they are traded on a recognised investment exchange or issued as an investment;
- Utility / Non-security Tokens – which will be treated as commodities. However, spot trading and transactions in utility tokens do not fall within the purview of the SEC unless conducted on a recognised investment exchange;
- Security Tokens – which are deemed to be securities as defined under the ISA; and
- Derivatives and Collective Investment Funds of Crypto Assets, Security Tokens and Utility Tokens – which will be regulated as specified investments under the ISA and rules of the SEC. Market intermediaries and market operators dealing in such derivatives and collective investment funds will need to be registered/approved by the SEC.
In our view, the recent efforts of the Commission to regulate digital assets and blockchain-based offerings of digital assets are welcome and long overdue. Despite the risks associated with them, less traditional investment options are fast becoming more appealing to members of the investing public. The proper regulation of digital assets is therefore important to safeguard the interest of investors, to create standards that encourage ethical practices among stakeholders, and to promote a fair and efficient market.
While there is no indication as to when the Regulatory Guidelines will be issued, it is expected that the Regulatory Guidelines will provide better clarity on the regulation and treatment of digital assets, and the extent of collaboration with other relevant regulatory agencies.