An Analysis Of The New SEC Regulations on Cryptocurrency In Nigeria: A New Dawn

By Akorede Folarin

INTRODUCTION
Cryptocurrency is no longer a new concept in the global economy. It is quickly revolutionising the financial sector globally. And it is no secret that despite the hitherto uncertain legal and regulatory framework for it, Nigeria’s young vibrant populace has been massively embracing this new and exciting financial technology. The country has undoubtedly been a leader in crypto adoption globally. Nigeria led the rest of the world in crypto adoption in the first quarter of 2020 and was ranked eighth overall in the second quarter according to the 2020 Global Crypto Adoption Index compiled by blockchain data analytics firm, Chainalysis.
Naturally, the regulatory authorities have been taking interest in the developments in this sector for a while.(1) With no existing regulation on digital assets in the country and an ever-increasing acceptance by the populace, the Securities and Exchange Commission (“SEC”/“the Commission”) swung into action in 2019 when it set up the Fintech Roadmap Committee of the Nigerian Capital Market to analyse the impact of fintech on investments and securities in Nigeria and to make recommendations on possible regulatory moves. One of the recommendations in the Final Report of the Committee is that the SEC should be responsible for the regulation of Virtual Financial Assets (VFAs) Exchanges in Nigeria and should develop a regulatory framework for it.(2)

Consequently, in a laudable development, the SEC has now released a statement on 14th September 2020 that it would begin to regulate digital assets offerings in Nigeria.(3) This is a very welcome development from the Commission which, as the apex regulator of the Nigerian capital market, has the powers to regulate securities and investment business in Nigeria.(4)

WHAT CRYPTO ACTIVITIES WILL BE REGULATED?
The regulation seeks to regulate all digital crypto assets offerings within Nigeria. It will apply to all Digital Assets Token Offerings (DATO), Initial Coin Offerings (ICOs), Security Token ICOs, and other Blockchain-based offers within Nigeria by Nigerian issuers or foreign issuers targeting Nigerian investors.
The Regulation defines a 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 but does not have legal tender status in any jurisdiction. It goes further to provide that such a crypto asset is one that (a) is neither issued nor guaranteed by any jurisdiction, (b) fulfils the above-stated functions merely by agreement within its community of users, and (c) is distinguished from fiat currency and e-money.

WHAT IS REGISTERABLE?
The SEC takes the position that all virtual crypto assets are securities and so are to be registerred unless the contrary is proved. Therefore, the burden of proving that the crypto assets sought to be offered are not securities and are, therefore, not under the jurisdiction of the SEC or liable to be registered is placed on the issuer or sponsor.
To determine whether or not the digital crypto assets an issuer or sponsor is offering to the public are securities within the purview of the regulation and consequently registerable or not, the issuer or sponsor is required to make an initial assessment filing to the SEC. Where it is decided that the virtual crypto assets are indeed securities, the digital assets must be registered with the Commission.
Also, all digital assets offerings in existence before the introduction of the Regulations will have three (3) months to either submit the initial assessment filing, or documents for registration proper, as the case may be.(5)
Therefore, by the new Regulation, the Commission will regulate and require to be registered crypto-token or crypto-coin investments whose character qualifies as securities transactions.(6) As a guiding principle, Section 315 of the Investment and Securities Act will be of relevance here. The section defines securities to include securities that can be transferred through any electronic mode approved by the SEC and which may be deposited, kept, or stored with any licensed depository or custodian company as provided under the ISA. In view of this, the Regulations adds that crypto-assets (which include coins and tokens and other non-fiat currencies) are categorized as commodities if they are traded on a Recognized Investment Exchange and/or issued as an investment, and will be subject to Part E of the SEC Rules and Regulations and any other relevant sections and subsequent Rules that will be enacted in the future.

WHO WILL BE REGULATED?
Persons who will be subject to the regulation include any person (individual or corporate) whose activities involve any aspect of blockchain-related and virtual digital asset services, including issuers or sponsors (start-ups or existing corporations) of virtual digital assets. Foreign issuers or sponsors will be recognized by SEC where a reciprocal agreement exists between Nigeria and the country of the foreign issuer or sponsor and where the country of the foreign issuer or sponsor is a member of the International Organization of Securities Commissions (IOSCO).(7)

COMMENTS
Cryptocurrency is truly quickly revolutionising the global financial system. There is currently a rapid transition from physical currencies to the virtual currencies being engendered by fintech. But while cryptocurrencies have been lauded for their ease, efficiency, and decentralization attractions, they have no doubt also brought to fore certain ambiguities and uncertainties globally especially concerning the usage, operation, and regulation of such a peculiar new value tender. 
Along with the emerging trends in the global financial sector, therefore, it is great to see Nigerian regulatory authorities beginning to take the initiative to develop a robust regulatory framework that will accommodate these evolving financial technologies. According to the SEC itself, for the fact that digital assets offerings provide alternative investment opportunities for the investing public, it is important to ensure that they operate in a manner that is consistent with investor protection, the interest of the public, market integrity, and transparency. For the Commission, the main aim of the Regulation is to create standards that encourage ethical practices that ultimately make for a fair and efficient market. And this is done not to hinder technological development or stifle innovation in fintech but to regulate it in a way that ensures safety, market deepening, and provision of adequate solutions to pertinent problems.
Overall, going forward, digital crypto assets offerings that qualify as securities under the Regulations will need to be registered with the SEC in line with the Investment and Securities Act and the Rules and Regulations of the Security and Exchange Commission. I believe that the new Regulations and others to follow will bring sanity and serenity to a space that is rapidly proliferating and also help the general public to identify legitimate and trustworthy cryptocurrency dealers for their investments.

REFERENCES
1. The Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) have in the past warned Nigerians about the risks in cryptocurrency as a new investment terrain and the occasional scams perpetrated by some fraudulent entities. For example, in 2019, two Initial Coin Offerings (“ICOs”) operated by a company based in Vietnam allegedly swindled around 32,000 investors of the sum of sixty-six million dollars ($660,000,000). It was, therefore, becoming glaring that for all the ease, efficiency and decentralization attractions of crytocurrencies, they have also have their own lapses which necessitates regulatory intervention .
2 See Report of the Fintech Roadmap Committee of the Nigerian Capital Market https://sec.gov.ng/report-of-the-fintech-roadmap-committee-of-the-nigerian-capital-market/ accessed on 16th September 2020
3 See Statement on Digital Assets and their classification and Treatment by SEC available at https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/ accessed on 15th September 2020.
4 Section 13 of the Investment and Securities Act 2007.
5 Ibid.
6 See Statement on Digital Assets and their classification and Treatment by SEC available at https://sec.gov.ng/statement-on-digital-assets-and-their-classification-and-treatment/ assessed on 15/09/2020.
7 Ibid.

Akorede Folarin is an Associate Counsel in the Corporate/Commercial/Dispute Resolution Practice Group at Kevin Martin Ogwemoh Legal, Lagos. He is an avid reader and writer, and an ardent commentator on social and political issues in Nigeria and across the globe. He can be reached by mail at a.folarin@kmo.legal or akinakoredef@gmail.com or on Twitter at @koredele_