SEC, banks’ agreement on crypto rules uncertain
The new regulations recently released by the Securities and Exchange Commission (SEC) for the cryptocurrency industry may soon put the commission on a collision course with deposit money banks in the country.
This is as operators in the cryptocurrency industry are working towards compliance with the provisions of the regulations in order to become legitimate entities, BusinessDay has learnt.
SEC had on May 13, 2022, announced the release of a regulation titled ‘New Rules on Issuance, Offering Platforms, and Custody of Digital Assets’.
The regulations require that operators in the industry wishing to legitimise their business pay N100,000 for filing or application fee; N300,000 for the processing fee; and N30 million for registration fee and minimum paid-up capital of N500 million. All payments have to be made into the commission’s account.
However, banks and other financial institutions are banned by the Central Bank of Nigeria (CBN) from interfacing with crypto exchanges, and crypto products and services. The CBN had in 2021 mandated the financial institutions to close all accounts held by crypto-related entities.
Yinka David-West, a professor of Information Systems and Associate Dean of Lagos Business School, said it is important to differentiate between virtual assets, over which SEC rules apply, and cryptocurrencies. The CBN, according to her, only prohibits regulated financial institutions from transacting with cryptocurrency exchanges.
“The SEC defines a virtual asset as a digital representation of value that can be transferred, digitally traded, and can be used for payment or investment purposes. It shall not include digital representations of fiat currencies, securities, and other financial assets. Given this definition, it is our understanding that regulated banks will be duly authorised to facilitate payments for DAOPs or DAXs that meet SEC’s eligibility and registration requirements,” David-West said.
According to her, the policy guidelines recognises new asset classes enabled by distributed ledger technologies, while also providing Nigerian businesses with digital fundraising and investment opportunities.
Experts who spoke to BusinessDay say it only shows that SEC and the apex bank may not be on the same page. They say it is not just crypto businesses that are eager to know where things stand with their bank accounts, the commercial banks also would want to know whether SEC got the nod of the CBN before it issued its latest regulations.
“It shows that our regulators are not communicating among themselves. There is no internal mechanism where regulators are able to share among themselves; so everybody is working in silos,” Lucky Uwakwe, a crypto expert and founder of SaBi Exchange, told BusinessDay.
“Even if SEC says the rule stands and everybody is to obey, there is no part of the rule that says they have worked with the central bank to allow you to pay. If I decide to pay the minimum capital, banks have not been given counter information. Clearly, it is not in the best interest of any startup to comply or follow that rule.”
In the wake of the ban by the CBN in February 2021, SEC, which had already begun to interface with the crypto industry, retraced its steps. Lamido Yuguda, director-general of SEC had said in April 2021 that the suspension of the development of the guideline would remain valid until operators of the various crypto exchanges have access to their accounts in Nigerian banks that were closed by CBN.
Operators say the SEC has yet to clarify whether the CBN would allow them to regain access to their accounts. Moreover, the banks would likely not transact with them unless there is approval from the CBN authorising them to do so.
The SEC regulations also require crypto operators to keep investors’ funds in a trust account with a receiving bank. Senator Ihenyen, lead partner at Infusion Lawyers and president of Stakeholders in Blockchain Technology Association of Nigeria, said this would not be possible with the CBN ban still in place.
He said: “Two issues come up here: one, are banks now permitted by the Central Bank of Nigeria to provide banking and financial services to cryptocurrency or virtual asset service providers in Nigeria?
“Two, regarding investors for DAOP, are banks in Nigeria able to receive digital assets deposits or is the DAOP expected to convert these digital assets to the local currency? That is not quite clear,” Ihenyen said.
Uwakwe describes the SEC regulations as a “tentative statement” that only indicates that the regulator is willing to regulate the industry. The provisions of the regulatory guide, however, fall below his expectations.
According to him, the objective of any regulation should be to encourage and not hinder growth. The crypto industry is populated by mainly young people who should be encouraged to build successful and legitimate businesses.
He said: “There is no part of that regulation that will aid the startup industry. Are we talking about the minimum requirements, the legal requirements, or the part where SEC would need to help companies appoint board members or the part where SEC will determine how much your transaction fee will be or the required minimum capital paid up front?
“The registration and licence fee of both N30m and N100,000 respectively? It all comes to about N530 million, that does not aid the industry we are trying to build.”
Some experts say the SEC rules would encourage foreign players to overrun the startup ecosystem in the crypto industry. Rume Ophi, founder of CryptoPreacher, a platform that pushes education in the crypto industry, said the SEC should reconsider some of the fees and take a different approach to encourage local startups in the industry.
“We cannot bring foreigners to come and buy startups here and take their profits out of the country. We can also empower ourselves with regulations. Not with such regulations that will make these startups cease to exist. These monies are so much. Things like this will even make people poorer. If they can come up with a pilot scheme or a hub where they can incubate Nigeria startups to grow them in collaboration with the authorities, some of these fees can be slashed, so they can grow effectively,” Ophi said.
The new SEC rules recognise three major players in the virtual assets industry. As Ihenyen puts it, these include custodians that store and maintain digital assets; exchanges that enable the trading of digital assets; and platforms that enable projects to raise capital through the offering of digital assets and securities to the members of the public.
The new rules recognise virtual asset service providers. Ihenyen said by recognising these players, the rules officially made the virtual assets industry a sector in Nigeria’s economy.
“Particularly at this time when the country must harness opportunities for a globally competitive and vibrant economy, it is a big win for Nigeria,” he said.