The Position before the SEC Statement

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”) pursuant
to the powers conferred on it by the Investment and Securities Act
20071 (“ISA”).

Before the release of the Statement that has altered the way
cryptocurrency will be treated In Nigeria, regulators warned
citizens about the effects of dabbling with cryptocurrency and
advised that the general public should tread
cautiously.2

The Commission also decided to establish a Fintech Roadmap
Committee in November 2018 to explore the impact of Fintech on
investments and securities in Nigeria and how to properly classify
and regulate cryptocurrencies and virtual assets. This led to the
recommendation that SEC should classify cryptocurrency as a
security or a commodity and other pertinent recommendations by the
Fintech Roadmap Committee3. 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 SEC Statement

The Commission explained that the general objective of the
regulation is not to hinder technology or stifle innovation, but to
create standards that encourage ethical practices that ultimately
make for a fair and efficient market4.

The SEC Statement Is divided into three parts which are examined
below:

1. Definition and Categorization of
Cryptocurrency

Cryptocurrency was not defined by the Statement, so until
regulations regarding cryptocurrency have been published by the
Commission, the general description of cryptocurrency still applies
In Nigeria5. However, Crypto Assets were defined in the
Statement as:

a digital representation of value that can be digitally
traded and functions as:

  1. a medium of exchange; and/or
  2. a unit of account; and/or
  3. a store of value,

but does not have legal tender status in any
jurisdiction.

The Statement goes further to establish that a virtual
instrument or asset will qualify as a Crypto Asset if it is neither
issued nor guaranteed by any jurisdiction, and fulfils the
functions aforementioned only if the community of users of the
assets agree that the Crypto Asset will serve the functions
mentioned above. The Commission also highlighted the fact that
Crypto Assets are distinguished from Fiat Currency and E-money
meaning that there is a fundamental difference between Crypto
Assets and cryptocurrency under the Nigerian regulatory
landscape.

Furthermore, SEC characterized virtual assets into four
categories:

  1. Crypto Assets
    The Statement provides that Crypto Assets will be treated as
    commodities If they are traded on a Recognized Investment Exchange
    and issued as an investment pursuant to part E of the SEC Rules and
    Regulations 2013 (the “Regulations”)6 and any
    other relevant rules that will be Issued In the future.
    We are not certain what SEC would consider as a “Recognized
    Investment Exchange” since most virtual assets are exchanged
    on crypto asset trading platforms. Hopefully, more clarity would be
    given in future rules and guides issued by the Commission.
  2. Utility Tokens
    Utility Tokens have functionalities that can be used to access a
    product or service built on a blockchain and can be exchanged with
    the use of the virtual currency native to the
    blockchain7. Utility Tokens will be treated as
    commodities as well but spot trading (Over the Counter) of Utility
    Tokens will not fall under the scope of SEC unless It Is conducted
    on a Recognized Investment Exchange compliant with part E of the
    Regulations.
  3. Security Tokens
    These are tokens with functionalities similar to securities such
    as shares. They are used to represent underlying assets and even an
    ownership stake in the issuing entity. They also bring in dividends
    or Interest payments for holders. The Commission according to the
    statement will treat such crypto assets as securities pursuant to
    section 315 of the ISA.
  4. Derivatives and Collective Investment Funds of Crypto
    Assets, Security Tokens and Utility Tokens

    Derivatives are usually contract between parties backed by an
    underlying asset, in this situation, the underlying asset would be
    crypto assets. Collective Investment Funds on the other hand are
    pools of Investments being managed for Investors.
    Section 153 of ISA defines Collective Investment Schemes as a
    scheme in whatever form, including an open-ended investment
    company, in pursuance of which members of the public are invited or
    permitted to invest money or other assets in a portfolio. The
    Collective Investment Funds envisaged by the SEC Statement would be
    schemes used to pool money to invest In crypto assets.
    According to the Statement, Derivatives and Collective Investment
    Funds involving crypto assets would be regulated as Specified
    Investments under the ISA and the Regulations. Capital Market
    Operators dealing with the aforementioned need to be approved by
    the Commission.

2. What will be regulated?

The Statement sets out the position of SEC regarding virtual
assets. The Commission will now treat crypto assets as securities
unless the issuer or sponsor of the virtual asset proves
otherwise.

This burden of proof will only be satisfied if the Issuer or
Sponsor makes an Initial Assessment Filing with
the SEC to enable it determine whether the assets are under its
regulatory purview. Where the findings of the Commission Is that
the virtual assets are indeed securities, the sponsor must register
the assets as securities.

The effect of this is that all virtual assets will now be
registered by the 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
sponsor.

Where the Commission believes the crypto asset is under the
regulatory scope of SEC and is a security, a subsequent filing will
be carried out by the issuer to comply with the SEC rules.

OR

Option 2: the issuer can directly register the virtual assets
with SEC without the Initial Assessment Filing.

Also, all Digital Assets Token Offerings (“DATOs”),
Initial Coin Offerings (“ICOs”), Security Token ICOs and
any offering of digital assets on a blockchain;

  1. within Nigeria or;
  2. by Nigerian Issuers or;
  3. foreign Issuers targeting Nigerians,

will be regulated by the Commission. Existing offerings or ICOs
currently ongoing have three months to either submit their Initial
Assessment Filing or documents for registration.

3. Who will be regulated?

Any person, (Individual or corporate) whose activities Involve
any aspect of Blockchain related and virtual asset services must be
registered by the commission and as such, will be subject to the
regulatory guidelines. The services envisaged by the Commission
that will have to comply with the guidelines are:

  1. Reception;
  2. Transmission;
  3. Execution of orders for crypto assets on behalf of potential
    Investors;
  4. Dealers in crypto assets;
  5. Portfolio management with crypto assets making up the
    portfolio;
  6. Investment advice regarding crypto assets; and
  7. custodians or nominees Involved with virtual assets.

The services to be regulated by the Commission are not limited
to the ones aforementioned.

Issuers will also be regulated by the Commission and SEC may
require a foreign or non-residential Issuer to establish an office
in Nigeria. However, if there is a reciprocity agreement in place,
foreign issuers need not establish an office and they will be
recognized by the Commission.

A recognition status will also be given, where the foreign
issuer Is a member of the International Organization of Securities
Commissions (“IOSCO”).

Conclusion

The classification and categorization of crypto assets In
Nigeria is a step in the right direction as the nation seeks to tap
into the digital economy and believes that there is a promising
future for blockchain In Nigeria8. Since crypto assets
and the use of blockchain is becoming increasingly popular within
the Nigerian populace, the SECs position is a guide for all
stakeholders in the crypto Industry as there was no regulatory
framework to hold the growing crypto economy in Nigeria. It is
expected that in the coming months, the Commission will release
more robust guidelines that will shape the Fintech ecosystem.

Footnotes

1. Section 13 of the Investment and
Securities Act 2007.

2. The Central Bank of Nigeria on 12
January 2017, issued a Circular stating that because transactions
with cryptocurrencies or virtual currencies are almost untraceable
making them susceptible to abuse by criminals and terrorists, there
is a need to protect the integrity of the Nigerian financial
framework.

Read our article on Cryptocurrency and Initial Coin
Offerings to understand the Nigerian regulatory landscape on
cryptocurrency before the SEC Statement.

3. the Final Report of the Fintech
Roadmap Committee of the Nigerian Capital Market by the SEC, lists
out recommendations that the Capital Market Community should take
into consideration regarding Initial Coin Offerings as well. Please
read the second part of our article on Cryptocurrency and Initial Coin
Offerings on our analysis of the Fintech Roadmap Committees
recommendations.

4. The Introductory Paragraph of the

5. Read our article on Cryptocurrency and Initial Coin
Offerings to understand the general description of
cryptocurrency.

6. Part E of the Regulations are the
rules for the Regulation of Securities Exchanges and Transactions
on Exchanges, Capital Trade Points and other Self-Regulatory
Organizations

7. Read our article on Cryptocurrency and Initial Coin
Offerings to understand how tokens work.

8. See the National Blockchain Strategy
released by the Federal Ministry of Communications and Digital
Economy.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.