Over the years virtual digital assets, commonly referred to as cryptocurrencies, have become ubiquitous prompting the authorities to grapple with a suitable form of regulation or supervision. The regulation of cryptocurrencies and crypto assets has been a worldwide debate in the legal-tech space with countries all over the world opting for or against the regulation of crypto currency.
Like some other countries, the Nigerian Government through the Securities and Exchange Commission (SEC) on the 14th of September 2020, have now issued an official statement on its stance to regulate crypto-token or crypto-coin investments in Nigeria1. This becomes particularly relevant when considered in the light of the fact that Nigerian youth, in Q1 2020, led the rest of the world in crypto adoption, and according to Chainalysis2, Nigeria was eight overall in crypto adoption in Q2 2020.
According to SEC, virtual digital asset is 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, but does not have legal tender status in any jurisdiction.3
From a careful review of the Investments and Securities Act (ISA) 2007, the SEC being the apex regulatory organization for the Nigerian Capital Market is empowered in Section 13 of ISA to regulate investments and securities business in Nigeria with the aim of protecting investors and maintaining the integrity of the capital market – See the case of Securities and Exchange Commission v Big Treat Plc & Ors.4 To properly contextualize the powers of the commission above, Section 315 of ISA defines securities to include (a) debentures, stocks or bonds issued or proposed to be issued by a government; (b) debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate; (c) any right or option in respect of any debentures, stocks, shares, bonds or notes; or (d) commodities futures, contracts, options and other derivatives, and the terms securities in this Act including those securities in the category of the securities in (a) – (d) above which may be transferred by means of any electronic mode approved by the Commission and which may be deposited, kept or stored with any licensed depository or custodian company as provided under this Act.5
Based on the above authorities, it is clear that virtual digital asset is one of the activities that falls under the regulatory powers of SEC.6 Recognizing its power to regulate virtual digital assets, the commission noted that the general objective of its regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices to enable a fair and efficient market.
In its statement, the commission defined all virtual crypto assets such as crypto-token and crypto-coin as securities until proven otherwise. The legal implication of this is that the onus of proving that such crypto-asset are not securities and therefore not under the jurisdiction of the SEC lies with the issuer or sponsor of the asset. To discharge this burden of proof, an Issuer or sponsor is expected to (1) make an Initial Assessment Filing with the commission and (2) where SEC determines otherwise, then the issuer or sponsor must register the digital assets (except such assets are exclusively offered through the crowdfunding portals or other methods as provided by the commission).
Therefore, existing digital assets offerings prior to the implementation of the Regulatory Guidelines will have three (3) months to submit the initial assessment filing or the required documents for registration as the case may be. For the avoidance of doubt, this regulation relates to any persons (individual or corporate) involved in blockchain and virtual digital asset activities, such as – reception, transmission and execution of orders on behalf of other persons, dealers on own account, portfolio management, investment adviser, custodian, nominee services, etc.
According to the commission, the virtual digital assets subject to regulation are Crypto Asset, Utility Tokens or Non-security tokens, Security tokens, and Derivatives and Collective Investment Funds.
Nigeria's SEC regulatory statement on Digital Assets and Their Classification and Treatment comes as a timely move in growing the fintech space in Nigeria. The regulation promotes market transparency and integrity even in an industry that is very volatile and subject to high risk of fraud. Asides the regulation of the blockchain industry to reduce fraud and financial malpractices, the regulation also seeks to provide investor's confidence.
Footnotes
1. Statement on Digital Assets and their Classification and Treatment https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/ Accessed on September 14, 2020
2. Kevin Helms, Ukraine, Russia, South Africa, Nigeria Among Top Countries by Cryptocurrency Adoption https://news.bitcoin.com/ukraine-russia-south-africa-nigeria-cryptocurrency-adoption/ Last accessed on September 16, 2020.
3. Statement on Digital Assets and their Classification and Treatment https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/ Accessed on September 14, 2020
4. (2019) LPELR-46520(CA)
5. See also Part I & II of the Second Schedule of the Investment and Securities Act (ISA) 2007 on the types of investment and activities that constitute investment business in Nigeria.
6. Apart from the provision of the ISA, SEC also regulate the activities within the Nigerian Capital Market through the issuance of guidelines, directives, rules and regulations. See the Securities and Exchanges Commission Rules and Regulations 2013 & 2017.
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