On the 11th of May, 2022, the Securities and Exchange Commission (SEC) issued new rules on the issuance, registration and custody of Digital assets.
The rules define “Digital assets” as digital tokens representing an asset such as a debt or equity claim on an issuer. This can be seen as a type of Cryptocurrency-based Investment security.
“Virtual Assets” are then defined in the rules as digital representations of value that can be traded, transferred, able to be used for payment and Investment purposes and which exclude items like digital representations of Fiat currencies (such as Stablecoins).
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“Digital Asset Offerings” are defined in the rules as Initial Coin Offerings (or ICOs) which are simply digital equivalents of Initial Public Offerings to subscribe to Securities regulated by SEC and which are based on digital tokens instead of subscription-based Investment units.
“ICOs” are defined here as digital Capital raising for business projects (called “ICO” projects) based on distributed ledger technology involving token issuing to the public as digital securities in exchange for cash, Cryptocurrencies and other assets. ICOs subject to exceptions cannot go beyond a ceiling of 10 Billion Naira in a 12-month period.
ICOs can only be conducted by DAOPs(Digital Assets Offering Platforms) which are corporate entities dedicated to facilitating the offer of Digital assets.
“DACs” or Digital Asset Custodians, are basically digital equivalents of Assets custodians found in traditional Collective Investment Schemes and are charged by the SEC to render safe-keeping of digital assets invested in ICOs. DAOPs can, subject to approval and licensing by SEC, also render their own internal digital asset custodian needs.
DAOPs differ from “DAXs”(Digital Asset Exchanges) which are defined in the guidelines as digital platforms facilitating the trading of Virtual and Digital assets. This seems to be a roundabout way of bringing Crypto marketplaces like Patricia and Binance to the mainstream of Nigeria’s Capital Market.
“VASPs” or Virtual Asset Service Providers which are defined in the guidelines as platforms that conduct of behalf of other parties :-
a) exchanges between Cryptocurrencies and Fiat currencies;
b). exchanges between virtual assets;
c). the transfer of Virtual assets;
d). the safe-keeping of Virtual assets;
e). the provision of financial services related to an issuer’s offer or sale of a virtual asset.
This is also a return of Cryptocurrency brokerage services.
This is where the SEC cooked up an entirely new set of problems. While the licensing requirements for VASPs did not include any cost implications, the requirements for DAOP and DAX Licensing are as follows :-
a). A filing/application fee of 100,000.00Naira;
b). A processing fee of 300,000.00 Naira;
c). A registration fee of 30 million Naira;
d). A minimum paid up Capital requirement of 500 million Naira.
Observations & Recommendations.
- The SEC guidelines on digital assets, while presenting a cloak of full legality over what was a grey area left by the Central Bank of Nigeria ban on Cryptocurrency support services being provided by Banks. However, these rules point to a rather worrying lack of coordination among government agencies because the Central Bank of Nigeria (CBN) has still not revoked its Cryptocurrency ban. So how do interested companies pay the SEC fees?
There may be a way out as the SEC never expressly provided for Cryptocurrency legalization but provided for the full legalization of Blockchain Technology and Virtual Assets which are far more than just Cryptocurrencies, some of them being Non-fungible tokens(NFTs). This is a nuanced area that might be latched onto by Banks.
- The SEC guidelines with its Registration & Capital requirements simply replaced one problem with another by potentially creating an enabling environment for monopolies to spring up, killing opportunities for start-ups, seed funding, Tech incubation and lTechpreneurs who are usually most responsible for the innovation quality on which Tech and especially Fintech depends. This will most likely also lead to clumsy mergers by lots and lots of Fintech companies just to meet license qualifications and a subsequent increase in fees to justify the huge starting costs.
This attempts to almost eradicate the very reason for Cryptocurrencies being a thing – decentralization of individual control over personal finances. The Nigerian state has been known to sometimes greatly limit financial freedoms for almost any reason.
There’s still an amount of ambiguity over the existence or presence of further Capital requirements for the Registration/Licensing of VASPs, which might be included in a schedule to be released later.
The SEC rules might turn out to be seen as very counter-productive, designed to permanently destroy and severely limit Nigeria’s Fintech space, very discriminatory, anti-financial inclusion, and might witness more Cryptocurrency trading companies going deeper and operating underground using alternative legal structures.
It remains to be seen if the SEC is actually operating out of its jurisdiction because it’s not in the place of the agency to determine what constitutes legal tender, but that of the CBN which also has jurisdiction over legal tender trading rules, lending rates, and inclusion of alternative legal tender in the country’s Banking and Capital Market system. The SEC needs to be called to order by a lawsuit seeking a clear interpretation of its functions under the Investment and Securities Act.
The SEC should get its act together, review its Capital requirements, and work on a more grassroot oriented Regulatory framework in collaboration with the Central Bank of Nigeria and the Nigerian Financial Intelligence Unit (NFIU).