The SEC Rules on Issuance, Offering Platforms, and Custody of Digital Assets and Their Impact on Cryptocurrency Trading in Nigeria

Contributor: Betseabasi Asuquo

INTRODUCTION

Cryptocurrencies have undergone substantial development since the inception of Bitcoin in 2009, driven by the necessity for decentralized, transparent, and secure financial systems, particularly in the aftermath of the 2008 financial crisis.^[1] Originally spearheaded by Bitcoin, the cryptocurrency ecosystem has expanded to encompass a range of technologies such as smart contracts and decentralized finance (DeFi), presenting novel applications beyond the scope of digital currency.^[2] This progression has been propelled by advancements in technology, a burgeoning demand for financial inclusivity, and an escalating interest in digital assets as a distinct investment category.^[3] Nigeria has swiftly embraced cryptocurrency, emerging as a key global market for crypto trading.^[4] Fueled by economic hardships, currency devaluation, and constrained access to conventional financial services, numerous Nigerians have gravitated towards cryptocurrencies for investment, cross-border remittances, and alternative financial resolutions. The surge in crypto trading has positioned Nigeria as a prominent participant in the worldwide cryptocurrency arena, furnishing prospects for both financial inclusivity and innovation.

The oversight and regulation of Nigeria’s securities market, ensuring transparency, fairness, and investor protection, fall under the authority of the Nigerian Securities and Exchange Commission (SEC). This regulatory body is tasked with formulating and enforcing rules pertaining to the issuance, trading, and management of various securities, encompassing digital assets. A key focus of the SEC is the maintenance of market integrity, prevention of fraudulent practices, and the facilitation of a stable and efficient financial market within Nigeria. Given the burgeoning interest in cryptocurrencies, the SEC has adopted specific regulations governing digital assets, seeking to establish a structured and secure environment for their issuance, trading, and custody. These measures are designed not only to mitigate associated risks but also to foster innovation within the financial sector, emphasizing the SEC’s commitment to investor protection, market integrity, and adherence to financial laws.

The article aims to analyze the SEC’s rules on digital assets, focusing on their impact on cryptocurrency trading in Nigeria, particularly how these regulations shape market practices, investor protection, and the growth of the crypto sector.

AN ANALYSIS OF THE SEC RULES ON ISSUANCE, OFFERING PLATFORMS, AND CUSTODY OF DIGITAL ASSETS

The SEC’s rules cover the issuance, offering platforms, custody, and exchange of digital and virtual assets,^[5] ensuring they are regulated similarly to traditional financial instruments to protect investors and maintain market integrity. The scope of the rules extends to all digital and virtual assets that qualify as securities under Nigerian law, including those that represent equity, debt, or other financial interests.^[6] The Rules are designed to create a secure and transparent environment for investors and maintain market integrity. The Rule distinguished digital assets from virtual assets, defining a digital asset as “a digital token that represents assets such as a debt or equity claim on the issuer”^[7] and a virtual asset as “a digital representation of value that can be transferred, digitally traded and can be used for payment or investment purposes”^[8] A virtual asset, however, excludes digital representations of fiat currencies, securities, and other financial assets. From the above definition, cryptocurrencies are virtual assets within the Nigerian jurisdiction. In a loose sense, however, digital assets cover virtual assets.^[9]

The Rules require Digital Assets Offering Platforms^[10] to meet stringent registration, capital, and governance standards to ensure secure and reliable operations. DAOPs must have a minimum paid-up capital of N500 million, maintain proper risk management and internal audit functions, and ensure transparency and fairness in their dealings.^[11] In order to provide enhanced protection for investors, the SEC mandates that offering platforms furnish transparent and precise information regarding the digital assets they offer. This includes comprehensive details about the underlying technology, the credentials of the issuer, and any associated risks. Moreover, platforms are required to conduct due diligence on the digital assets they list, ensuring that only compliant and credible assets are accessible to investors. Also, DAOPs are obligated to establish mechanisms for dispute resolution and articulate clear procedures for addressing investor complaints. Adherence to anti-money laundering and combating the financing of terrorism regulations is also of paramount importance, with platforms mandated to enforce rigorous KYC protocols. These comprehensive regulations are meticulously designed to ensure that digital asset offering platforms operate in a manner that not only safeguards investors but also upholds the integrity of Nigeria’s financial markets.^[12]

Furthermore, the provisions of the Rules relating to the custody of digital assets in Nigeria demonstrate a significant focus on safeguarding investor funds and ensuring the security of digital assets.^[13] Custodians, tasked with the responsibility of securely holding and protecting digital assets on behalf of investors, are mandated to obtain explicit approval from the SEC to operate within the bounds of the law. This approval process entails a comprehensive evaluation of the custodian’s financial stability, technological infrastructure, and capacity to adhere to stringent security protocols.^[14] Custodians are further required to deploy advanced cybersecurity measures to mitigate the risks of hacking, theft, and unauthorized access.^[15] This encompasses the use of multi-signature wallets, cold storage solutions, and the implementation of routine security audits to uphold the secure and protected status of the digital assets under their custody. In addition to implementing security protocols, SEC imposes requirements for custodians to uphold transparent and detailed records of all transactions and holdings. This practice ensures the proper segregation and accounting of investor funds, furnishing regular reports to both the SEC and their clients, and providing comprehensive information regarding the status of the assets under their supervision. The establishment of this transparency is pivotal in cultivating trust between custodians and investors, as it grants investors a lucid comprehension of the management and protection of their assets. Moreover, the SEC necessitates custodians to possess extensive insurance coverage to mitigate potential losses resulting from cybersecurity breaches or unforeseen circumstances. These regulations are formulated to establish a secure and dependable framework for the custody of digital assets, thereby bolstering investor confidence and fostering the expansion of the digital asset market in Nigeria.

Going further, the Rules also aim to create a controlled and secure environment for digital asset exchanges.^[16] By mandating all platforms to obtain a license prior to commencing operations, the SEC ensures a thorough assessment of the exchange’s business model, governance structure, and adherence to regulatory standards. Furthermore, exchanges are required to exhibit robust technological infrastructure capable of securely and efficiently managing high transaction volumes. In addition to these requirements, the SEC enforces stringent AML and CFT measures, including the implementation of KYC procedures, to deter illicit activities on their platforms.

Virtual Asset Service Providers (VASPs)^[17] in Nigeria are required to be licensed and applicants must provide detailed undertakings, demonstrate financial and operational competence, and submit relevant documents such as business models and security measures. They must also adhere to obligations including fair treatment of users, accurate disclosures, AML compliance, and maintaining transparency in fees and operations. Additionally, VASPs must ensure that their platform remains secure, operational, and compliant with the SEC’s Technology Risk Management Guidelines. Through the enforcement of these provisions, the SEC endeavours to establish a well-regulated environment that cultivates trust, fortifies market stability and promotes the advancement of the digital asset industry in Nigeria.

ASSESSING THE IMPACT OF THE RULES ON CRYPTO TRADING IN NIGERIA

The SEC Rules represent a pioneer attempt at regulating cryptocurrency and other virtual assets transactions in Nigeria. The space had hitherto been largely unregulated and as a result, consumers and investors are exposed to endless risks which hamper confidence and stability in the market. However, with the introduction of the rules, the stage is set for a more structured regulatory environment and it is believed that the Rules will pave the way for more comprehensive and robust crypto-specific regulations.^[18] This is particularly important as stability, consumer assurance, and confidence in the space have the inherent potential to foster innovation within that space. The provisions also capture measures aimed at mitigating risks inherent within the crypto-space by mandating comprehensive KYC, AML, and other related measures from relevant players in the market. In effect, it will enhance transparency, and trust in the sector, security in transaction processes, legal protection for investors, etc.^[19]

However, it is opined that strict enforcement of the rules can stifle innovation as it may lead to increased costs and other associated compliance issues. It is therefore opined that the Commission, in overseeing the enforcement of the Rules, provide adequate support to innovators to enable them comply with the requirements of the law. Finally, to facilitate the growth of the cryptocurrency market in Nigeria while simultaneously ensuring the protection of investors, it is imperative for the SEC to adopt an adaptable regulatory framework that evolves in tandem with market advancements, fosters self-regulation, and promotes international collaboration. Crypto businesses should effectively navigate these regulations by comprehensively grasping the guidelines, implementing rigorous compliance protocols, and remaining abreast of regulatory modifications. Consequently, investors need to approach the market prudently by exercising due diligence, diversifying their investments, prioritizing security, and staying informed about their legal entitlements. Through the collective implementation of these strategies, a conducive environment can be cultivated, one that encourages innovation, compliance, and safe market involvement.^[20]

CONCLUSION

The Rules on issuance, offering platforms, and custody of digital assets aim to protect investors while fostering market growth and innovation. By adopting a flexible, adaptive regulatory framework, promoting self-regulation, and encouraging international cooperation, the SEC can support the evolving digital asset landscape. Cryptocurrency businesses and investors, by understanding the rules, prioritizing compliance, and managing risks, can thrive in this regulated environment, contributing to a secure and dynamic market that benefits all stakeholders.

SNIPPET

The Rules on issuance, offering platforms, and custody of digital assets aim to protect investors while fostering market growth and innovation. By adopting a flexible, adaptive regulatory framework, promoting self-regulation, and encouraging international cooperation, the SEC can support the evolving digital asset landscape.

KEYWORDS

Cryptocurrency, digital assets, virtual assets, sec rules on issuance, offering platforms, and custody of digital assets.

1. Corbet, S., Lucey, B., Urquhart, A. and Yarovaya, L. “Cryptocurrencies as a financial asset: A systematic analysis.” International Review of Financial Analysis 62 (2019): 182-199 available at https://centaur.reading.ac.uk/79186/1/CorbetLuceyUrquhartYarovaya2018.pdf ↑
2. Ibid. ↑
3. Ibid. ↑
4. Ogunode, O. A., A. T. Iwala, O. A. Awoniyi, B. O. Amusa, T. R. Omosebi, S. K. Kassim, and R. I. Akintoye. “Cryptocurrency and global practices: lessons for Nigeria.” South Asian Journal of Social Studies and Economics 15, no. 1 (2022): 7-28 available at https://www.academia.edu/download/90232410/57038.pdf ↑
5. See Securities and Exchange Commission New Rules on Issuance, Offering Platforms and Custody of Digital Assets available at https://sec.gov.ng/wp-content/uploads/2022/05/Rules-on-Issuance-Offering-and-Custody-of-Digital-Assets.pdf accessed on the 15th of September. 2024. ↑
6. Para 2 ↑
7. See Part D, para 3. ↑
8. Ibid. ↑
9. Kaal, W. A. “Digital Asset Market Evolution.” Journal of Corporation Law. 46 (2020): 909, available at https://jcl.law.uiowa.edu/sites/jcl.law.uiowa.edu/files/2021-08/Kaal_Final_Web_0.pdf accessed September, 2024. ↑
10. Also offering virtual assets. ↑
11. See Part B of the Rules ↑
12. Securities and Exchange Commission New Rules on Issuance, Offering Platforms and Custody of Digital Assets available at https://sec.gov.ng/wp-content/uploads/2022/05/Rules-on-Issuance-Offering-and-Custody-of-Digital-Assets.pdf accessed on the 15th of August 2024. ↑
13. See Part C of the Rules. ↑
14. Ibid. ↑
15. Ibid. ↑
16. See Part D of the Rules. ↑
17. Defined by the Rules as “…any entity who conducts one or more of the following activities or operations for or on behalf of another person: i. exchange between virtual assets and fiat currencies; ii. exchange between one or more forms of virtual assets; iii. transfer of virtual assets; iv. safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and v. participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.” See Part D of the Rules. ↑
18. See Onwuama, C. “An Examination of the Regulatory Framework for Initial Coin Offerings in Nigeria.” Available at SSRN 4251723 (2022) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4251723 ↑
19. See Ukwueze F.O. “Cryptocurrency: Towards regulating the unruly enigma of fintech in Nigeria and South Africa.” Potchefstroom Electronic Law Journal. 2021;24(1). ↑
20. See Magini G. and Erakpower J. “Digital Currencies and Socio-Economic Problems in Nigeria” 2022 GLOJACARF. Vol. 10 No. 1; available at https://assoprat.com/wp-content/uploads/2022/12/GLOJACARF-2022.pdf#page=110 ↑