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With the increased adoption of cryptocurrencies and other digital assets globally, more regulatory authorities are developing newer laws to guide the activities linked to cryptocurrencies in their countries. Some countries, like China, have outrightly banned crypto transactions and mining. In some countries, crypto-related companies are required to obtain the requisite approval before they can set up shop and operate. For example, the United States requests that crypto exchanges obtain approval from the US Securities and Exchange Commission before they can offer crypto trading products to residents.

This article examines how Nigerian authorities perceive cryptocurrencies and blockchain technology, as well as the implications of the new Nigerian SEC Crypto Rule Book.

How Do The Nigerian Authorities View Cryptocurrencies?

In Nigeria, the Central Bank of Nigeria (CBN) has banned banks from allowing their clients to use the banking channels in the country to participate in crypto activities. This means residents can’t use bank cards to purchase cryptocurrencies on a crypto exchange. They are also prohibited from receiving funds from crypto exchanges in their bank accounts.

Some banks that flouted this rule were penalized and fined by the CBN. According to reports, Stanbic Bank was fined N200 million, while Access Bank was fined ₦500 million. Fidelity Bank was slated to pay ₦14.3 million, and UBA was fined ₦100 million.

Though the Central Bank may have banned using banking channels to conduct cryptocurrency-related transactions, residents can still conduct crypto-related activities as no law prohibits it.

The Central Bank of Nigeria has shown significant interest in blockchain technology and the concept of central bank digital currencies (CBDCs). They became one of the first countries to launch a CBDC called the e-Naira. The CBN engaged Bitt Inc., a global fintech company, as a technical partner in executing the project.

The Federal Government also recently entered into an exclusive agreement with a UK-based software company, Developing Africa Group, to create a wallet that allows individuals to commercialize different types of intellectual property internationally. This will be built on the Algorand blockchain and create an ecosystem for Nigerians to publish their IP rights and have them recognized internationally, i.e., trade, sell, or exchange them globally.

How Does The Nigerian SEC View Cryptocurrencies

The CBN may have outrightly prohibited the use of banking infrastructure to conduct cryptocurrency transactions in the country. Nonetheless, the Nigerian Securities Exchange Commission (SEC) appears to have taken a different approach by releasing a rule book containing new guidelines for the issuance, exchange, and custody of digital assets in Nigeria.

The rule book, titled “New Rules on Issuance, Offering Platforms, and Custody of Digital Assets,” was released on Friday, May 13, 2022. This document contains the rules that govern licensing for organizations that deal with digital assets, categorizing these organizations and submitting guidelines for how they operate.

The SEC defines digital assets as “a digital token that represents assets such as a debt or equity claim on the issuer.”

Any organization in Nigeria that offers crypto or digital asset-related services is called a virtual asset service provider (VASP). Comprehensively, the SEC defines a VASP as any institution or individual that “conducts one or more of the following activities or operations for or on behalf of another person:

Exchange of virtual assets and fiat currencies;
Exchange of one or more forms of virtual assets;
Transfer of virtual assets;
Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

Before a VASP can offer any digital asset, they have to obtain approval from the SEC. They are divided into different categories according to the SEC.

Digital Assets Offering Platform (DAOP)

The Nigerian SEC defines a Digital Assets Offering Platform as an “electronic platform operated by a DAOP operator for offering digital assets.”

The DAOP’s role is to raise funds through an Initial Coin Offering. An ICO is a method of raising funds that is similar to traditional companies’ IPOs during their fundraising stage. Typically, a crypto project offers its native tokens in exchange for the capital raised.

Before a DAOP can operate in Nigeria, it must fulfill the general requirements for VASPs as well as some additional criteria.

Before a VASP can offer any digital asset, it must first obtain approval from the SEC. According to the SEC, VASPs are classified into several categories.

Digital Assets Exchange (DAX)

A DAX is any organization or platform that is involved in exchanging cryptocurrencies and other digital assets in Nigeria. According to the SEC, it “means an electronic platform which facilitates the trading of a virtual asset or digital asset.”

Every crypto exchange is expected to follow the rules created for VASPs, as well as extra guidelines, such as:

₦100,000 application fee ($240)
₦300,000 processing fee ($722.46)
₦30 million registration fee ($72,000)
Minimum paid-up capital of ₦500 million ($1.2 million)

The exchange must also be registered with the Corporate Affairs Commission (CAC).

Digital Asset Custodian (DAC)

DACs are those in charge of holding users’ crypto assets, such as crypto wallets. The Nigerian SEC defines a Digital Asset Custodian as a “person who provides the services of providing safekeeping, storing, holding or maintaining custody of virtual assets/digital tokens for the account of another person.”

A DAC has to follow the general requirements of a VASP as well as additional requirements such as:

Satisfy eligibility requirements for registration as a Custodian or Trustee and any additional requirements that the Commission may prescribe from time to time.
Where a registered Custodian or registered Trustee seeks to provide DAC services, such CMO shall apply to the Commission for approval.
Payment of fees as prescribed by the Commission.

How To Register For Digital Asset Offering in Nigeria?

The Nigerian SEC defines Digital Asset Offering as any activity that includes “ICOs and other Distributed Ledger Technology (DLT) offers of digital assets.”

Any entity who wishes to “conduct initial digital asset offerings within Nigeria or targeting Nigerians shall first submit the assessment form and the draft whitepaper.” The Nigerian SEC also specified the features that should be included in the draft whitepaper. An important aspect is the disclaimer section, which highlights the risks of participating in the project.

The whitepaper is then reviewed by the SEC, and if any changes have to be made, they will have to be made by the digital asset issuer. Suppose the issuer decides to change anything in the whitepaper. In that case, it has to be done “during the initial assessment, at any time before the Commission determines whether the digital assets are securities.” If any review is conducted after this timeframe, it has to be analyzed and reviewed by the Nigerian SEC.

A VASP must obtain approval from the Commission before issuing any digital asset classified as a security. Failure to do this comes with penalties. The SEC reserves the right to approve or reject any such application.

Benefits of the SEC’s Rule Book to Nigerians

Individuals, businesses, and governments benefit from the Nigerian SEC’s rule book.

Standardization

The publication of a rule book provides different VASPs with a standardized operation guide.

They know what is expected of them, which eliminates uncertainty.

Companies can innovate in the crypto economy because clear-cut rules exist.

Safeguarding the interests of investors

Before the introduction of the rule book, regulation of cryptocurrencies and crypto platforms was almost nonexistent. Anyone could issue cryptocurrencies in the country. This can result in investors losing money to scam projects.

The regulation protects investors’ interests by monitoring the activities of crypto platforms and reducing the number of scam cases.

Reduced governance activities

Individuals and businesses have lost a lot of money to scam projects due to the lack of appropriate rules to guide activities in the crypto space.

This implies that the government must expend significant resources to track down the anonymous individuals behind a fraudulent project and bring justice to their victims. This could be costly in terms of money, time, and effort. Because the identities of those behind a VASP are now known from the onset, issues like those mentioned above are significantly reduced.

In Conclusion,

The Nigerian Securities and Exchange Commission rule book that governs the activities of virtual asset service providers (VASPs) in Nigeria is titled “New Rules on Issuance, Offering Platforms, and Custody of Digital Assets.”
VASPs must obtain approval from the SEC before conducting any digital asset offering.
The publication of the rule book is poised to result in rule standardization, safeguarding investors’ interests, and reducing governance activities.
It is essential to read the SEC’s guidelines and retain the services of a legal expert before providing any digital asset services in Nigeria.
This article is for informational purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies poses a considerable risk of loss. Always conduct due diligence.

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