The buzz around the regulatory document on crypto assets released by the Securities and Exchange Commission (SEC) is yet to rest and may likely not until the final legal framework is released.
As it stands, Nigeria now has the most clearer picture of its approach to the cryptocurrency market compared to other African markets. South Africa is the only country on the continent that comes close.
But players in the industry are hesitant to give a pass mark to the commission despite wild accolades from the public.
“One can possibly interpret this as a good development as it welcomes the regulated use of crypto assets,” tweeted Adetola Onayemi, Assistant Chief Negotiator for Nigeria & Head, Trade Remedies and Investigating Authority at the Nigerian Office for Trade Negotiations (NOTN).
Nathaniel Luz, lead for Dash Nigeria, told BusinessDay that it was a welcome development. Dash, an open-source cryptocurrency, from the SEC classification falls under the ‘Crypto Asset – non-fiat virtual currency.
“This is a welcome development since Dash as a virtual currency does not classify as a commodity or security and the existence of Dash since 2014 pre-dates the ICO days,” Luz said. “We at Dash Nigeria are open to working with the regulators should they require any clarifications regarding the classification of Dash.”
Read more Nigeria’s SEC classifies cryptocurrencies as securities in landmark regulatory document/
In the document released on Monday, the SEC classified cryptocurrencies as “securities.” A security is a term used for describing certain financial assets that can be traded. It can refer to any form of financial instrument, in the case of SEC, cryptocurrencies, and associated tokens.
The commission claims it is empowered by Section 13 of the Investment and Securities Act, 2007. The section confers powers on the Commission as the apex regulator of the Nigerian capital market to regulate investments and securities business in Nigeria.
However, some exchange operators told BusinessDay that the classification is not very clear and hence would be taking their time to study the material. They are also expecting a more detailed regulatory material.
While the SEC has different classifications for the various cryptocurrencies, it is not clear about how it intends to regulate them individually.
Another sore point for exchanges would likely be who gets regulated. According to the document “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. Such services include, but are not limited to reception, transmission and execution of orders on behalf of other persons, dealers on own account, portfolio management, investment advice, custodian or nominee services.”
The concerns are that if the provision is not well-specified cryptocurrency customers would get the wrong message since the regulation says “Any person, (individual or corporate).” Operators would want to know whether individual customers are expected to register with the SEC first before making any trade on cryptocurrency exchanges?
Also, given the uniqueness of cryptocurrencies which is far different from equities on the stock market, the SEC would do well to explain what constitutes a security in the context of cryptocurrencies? The Chairman of the US Securities and Exchange Commission, Jay Clayton, in 2018 while responding to similar concerns, said that considering a digital asset as a security depends on the circumstances and facts surrounding the original investment. Clayton gave an example: when investors (who have “pooled” assets to contribute to funding a project) no longer expect a developer (or group of developers) to carry out managerial or entrepreneurial efforts, their investment may no longer be considered a security.
Clarity around how it decides what is a security would likely aid the process of providing the burden of proof about a cryptocurrency project being one or not. Importantly would cryptocurrency exchanges be allowed to trade independently? Luz suggests that the classification is an attempt to reroute crypto activities via the SEC.
“I don’t see it doing much,” said Gauis Chibueze, founder and CEO of Abit Mobile Applications, the sponsors of Tatcoin, the utility token that powers the Abitnetwork. “I believe it (cryptocurrency market) will continue being a free market. I don’t see them doing anything differently.”
Stakeholders are also concerned that the SEC may be going over the head of the Central Bank of Nigeria which has in the past taken a hard stance on cryptocurrencies, at one point warning financial institutions do not have any business to do in the space.
In a January 2017 guideline, the apex bank had noted that pending substantive regulation or decision by the CBN, no financial institution was permitted to use, hold, trade, or transact in any way in cryptocurrencies. Banks were also required to ensure that existing customers that are virtual currencies exchanges comply with all necessary controls and KYC. In the case where the bank is assured the customer isn’t cooperating, the relationship should be terminated immediately.
“The question becomes does a substantive regulation by the SEC qualify as a “substantive regulation” to satisfy the CBN’s Jan 2017 circular or does the substantive regulation have to be one issued by the CBN? Is a financial institution’s registration with the SEC satisfactory?” Onayemi asked.
Rume Ophi, Partner and Brand Strategist of Vorem Nigeria, a blockchain company transacting digital assets to fiat, also known as over the counter (OTC) trade market, says despite what the obvious flaws are, the document is a good start.
“Before now a lot of doubting Thomases are always coming up with this narrative that it is not recognized by SEC so they cannot get themselves involved,” Ophi told BusinessDay.
