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).