By Oyetola Muyiwa Atoyebi, SAN, FCIArb. (UK).
The innovations of the digital age have caused a paradigm shift in every aspect of our lives. In the financial markets, these innovations have brought about the emergence of a digital asset market. With the high amount of people interacting with digital assets daily; either from investing in crypto or the Digitization of existing investment assets, the digital assets market is becoming integrated into the existing fabric of traditional financial markets. Specific guidelines and regulations are relevant now more than ever in order to protect crypto users and investors, and also to, as stated by Hanu Fejiro Agbodje (CEO of Patricia), bring sanity to a space that is rapidly proliferating.
Background of the Guidelines
The SEC’s new guidelines; “New Rules on Issuance, Offering Platforms and Custody of Digital Assets” (the “Rules”), released 21st May, 2022, came after the commission, in a statement made on September 14, 2020, declared that it would be taking a three-pronged approach to regulating innovation in the crypto sector. The SEC Rules were published despite the Central Bank of Nigeria’s (“CBN”) outright ban on crypto-related transactions, and this welcomed development has gone on to generate excitement for innovations in Nigerian digital and virtual assets.
The rules are divided into five parts and address various aspects of dealings in digital and virtual assets. The parts are briefly discussed below;
Part A: Rules on Issuance of Digital Assets as Securities
This part of the rules applies to all issuers seeking to raise capital through digital asset offerings. It defines Digital asset as “a digital token that represents assets such as a debt or equity claim on the issuer.” The rules do not expressly state who can issue digital asset securities to the public, but it can be inferred that only those who are permitted to issue securities by virtue of the Investments and Securities Act (“ISA”) 2007; and any other such rules made by the SEC, can issue digital assets to the public.
The digital asset must first be registered, and the process begins with an initial assessment filing in accordance with Rule 4. The SEC then determines if the proposed digital asset qualifies as “securities” under the ISA 2007. After such confirmation, the security is then to be registered in accordance with Rule 5. This is pivotal as the SEC only seeks to regulate digital assets that qualify as securities.
PART B: Registration Requirements for Digital Assets Offering Platforms (DAOPs)
The Rules define a Digital Assets Offering Platform (“DAOP”) as an electronic platform operated by a DAOP operator for offering digital assets. DAOPs must be registered with the SEC and Rule 11 provides for the requirements for registration which must be complied with in addition to the general requirements for the registration of Virtual Assets Service Providers (“VASPs”).
The requirements include making an application via the appropriate form; and paying the prescribed fees stated in Rule 11.2. The applicant also needs to have a minimum paid-up capital of N500 million, and a current fidelity bond covering at least 25% of the minimum paid-up capital (Rule 11.4). Furthermore, the board members, the CEO and Principal Officer are subject to the approval of the SEC (Rules 13 & 14).
PART C: Registration Requirements for Digital Asset Custodians (DACs)
Prior to the Rules, only custodians in relation to custody of equity and debt instruments were recognized. The growth in dealings with digital assets made it necessary for the SEC to recognize and regulate Digital Asset Custodians (“DAC”). The SEC defines DAC 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 to be registered. The applicant must comply with the general requirements for VASPs; and in addition, satisfy the eligibility requirements for registration as a Custodian or Trustee; and make payment of fees as prescribed by the Commission. Existing registered Custodians or trustees and foreign DACs seeking to provide DAC services in Nigeria can also apply to the SEC for approval.
PART D: Rules on Virtual Assets Service Providers (VASPs) (the “VASP Rules”)
VASP is described by the SEC as an entity that conducts any of the following activities or operations for or on behalf of another person; the exchange between virtual assets and fiat currencies; or between one or more forms of virtual assets; the transfer of virtual assets; safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
A VASP must obtain a license from the SEC to lawfully operate in the country. It is worthy to note that the requirements provided under The VASP Rules have a wider applicability than other parts. As you might have noticed, VASP Rules and requirements are to be complied with by DACs, DAOPs, Issuers of Digital/Virtual Assets and Digital Asset Exchanges (“DAXs”). The VASP Rules however do not apply to those specified in Rule 1.3 of the VASPs Rules.
The requirements are spelt out in Rule 4 and the process for the registration as a VASP includes the need to be structured as a cooperate body, and to have an office in Nigeria managed by the company director. The SEC is however empowered to, upon application, grant an exemption from or a variation to the requirements of these Rules, provided certain conditions are satisfied.
Part E; Rules on Digital Assets Exchange (DAX) (the “DAX Rules”)
Under the VASP Rules, a DAX is defined as an electronic platform which facilitates the trading of a virtual or digital asset. The DAX Rules provide that an applicant seeking to apply as a DAX operator must comply with the general requirements for VASPs, and in addition, must comply with the requirements stated under the DAX Rules.
The requirements are quite similar to that of DAOPs discussed earlier. The applicant is to make an application via the appropriate form and pay the prescribed fees. The applicant must also have a minimum paid-up capital of N500 million (five hundred million naira only), and a current fidelity bond covering at least 25% of the minimum paid-up capital.
The SEC’s rules are a solid move towards the right direction, albeit its efficacy is in question. This is in light of CBN’s Circular that prohibits financial institutions under its regulatory purview from engaging in or facilitating payments for transactions involving cryptocurrencies and virtual assets. DAOPs, DACs, DAXs and Issuers of digital assets will need to interact with such financial institutions in order to comply with the Rules such as evidencing the requisite funds. This will be somewhat difficult with the CBN’s ban in effect. To fully achieve the purpose of the rules, there will be a need to relax the ban. The rule is however in its infancy, and issues are bound to pop up with regard to its implementation. Nevertheless, we can hope the SEC will triumph over these issues and achieve its objectives.
Key terms: Digital Assets, SEC, Securities and Exchange Commission
Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).
Mr. Atoyebi has expertise in and vast knowledge of Corporate Practice and this has seen him advise and represent his vast clientele in a myriad of high-level transactions. He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.
He can be reached at firstname.lastname@example.org
CONTRIBUTOR: Patrick Emmanuel
Patrick is a member of the Dispute Resolution Team at OMAPLEX Law Firm. He also holds commendable legal expertise in Investment Practice
He can be reached at email@example.com
 PWC, ‘Digital Assets – an emerging trend in capital markets’
 Emmanuel Paul, ‘Nigeria issues regulations on cryptocurrency, crypto startups, ICOs, others’
 Ndubusui Francis, ‘SEC Issues New Guidelines on Digital Assets’