BusinessDay
NigeriaDecides2023

UPDATED: Nigeria’s SEC classifies cryptocurrencies as securities in landmark regulatory document

Nigeria’s Securities and Exchange Commission (SEC) on Monday designated the title of “securities” to crypto assets and hence will be regulated by it.

According to the capital market regulator, the power it has to regulate the crypt asset class derives from Section 13 of the Investment and Securities Act, 2007. The section conferred the powers on the Commission as the apex regulator of the Nigerian capital market to regulate investments and securities business in Nigeria.

“Consequently, the SEC will regulate crypto-token or crypto-coin investments when the character of the investments qualifies as securities transactions,” the SEC said.

It is the first time a Nigerian regulator is adopting any position on cryptocurrencies. In the past, the approach has been to warn investors off the cryptocurrencies which were seen as too volatile, risky, and prone to scams.

Several exchange operators told BusinessDay they were still studying the material and needed time to respond.

Read more Is cryptocurrency the key to defeating Nigeria’s adversarial government

Under the new regulatory regime, crypto asset issuers and sponsors are expected to satisfy the burden of proving that the virtual assets do not constitute securities by making an initial assessment filing.

However, where the SEC is convinced that the virtual assets are indeed securities (not structured to be exclusively offered through crowdfunding portals or other exempt methods), then the issuer or sponsor must register the digital assets.

There are two approaches to registering virtual assets. The first is an initial assessment filing to satisfy the burden of proof and a filing for registration proper, either made directly by the issuer or sponsor or where the burden of proof is not satisfied.

Similarly, all Digital Assets Token Offering (DATOs), Initial Coin Offerings (ICOs), Security Token ICOs and other Blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors, shall be subject to the regulation of the Commission. Existing digital assets offerings prior to the implementation of the Regulatory Guidelines will have three (3) months to either submit the initial assessment filing of documents for registration proper, as the case may be.

In terms of who comes under the regulatory purview, the SEC says any person, (individual or corporate) whose activities involve any aspect of blockchain-related and virtual digital asset services, must be registered by the commission and as such, will be subject to the regulatory guidelines. Others include issuers or sponsors (startups or existing corporations) of virtual digital assets. Also, foreign or non-residential issuers or sponsors could be asked to establish a branch office within Nigeria. Otherwise, foreign issuers or sponsors will be recognised by the commission where a reciprocal agreement exists between Nigerian and the country of the foreign issuer or sponsor.

Similarly, foreign issuers or sponsors from countries that are members of the Internal Organisation of Securities Commission will be accorded recognition status.

The latest development may not be unconnected to the rising profile of Nigeria as a top destination to cryptocurrency transactions.

BusinessDay had reported that in 2019, Lagos emerged the number one city based on online search volumes for bitcoin worldwide on Google. Nigeria also ranked fifth in the world with its 11 percent of people who own or are using cryptocurrencies, according to an Arcade Research released in May 2020.

In the same month, Coinmarketcap named nine countries with the highest increase in users between the ages of 18 and 24 in the first quarter of 2020 compared to the previous one. The nine countries with at least 80 percent user growth were led by Nigeria, which saw an increase of 210.6 percent, followed by Australia (158.07%), and Spain (120.71%). Other top countries were Canada (112.45%), Mexico (97.33%), the U.K. (91.48%), Colombia (85.07%), India (83.07%), and Pakistan (81.79%).

“Digital assets offerings provide alternative investment opportunities for the investing public, it is, therefore, essential to ensure that these offerings operate in a manner that is consistent with investor protection, the interest of the public, market integrity and transparency,” the SEC said. “The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices that ultimately make for a fair and efficient market.”

 

Many analysts see regulation of cryptocurrencies as the final jigsaw to conferring legitimacy on the space. Stakeholders have in the past told BusinessDay that regulation will grow the confidence of investors; this is despite the volatility that is associated with space. With regulatory backing existing and potential investors can have some level of guarantee that their investments are being protected.

Regulation could also mean increased user adoption for cryptocurrencies. Most financial institutions have primarily shunned cryptocurrencies because they were not backed by any regulations. The SEC’s backing could open the way for Nigerian banks to begin to probe into used cases for cryptocurrencies. Bank shareholders may be inclined to their investments diversified into cryptocurrencies. But this would be subject to approval from the Central Bank of Nigeria (CBN).

With the SEC’s backing, the CBN is likely to accelerate the process of approval for cryptocurrencies to be included in the country’s financial system.

However, it also means the country would require an expanded cybercrime policy that incorporates crypto assets. The cryptocurrency space is still plagued by cyber criminality and the ease of escape without being cut is high as transactions in cryptocurrencies remain largely anonymous.

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