Emmanuel Inyada is the Managing Counsel at Aspen Sahel Legal in Lagos, Nigeria.
Since February 2021 after the Central Bank of Nigeria (the “CBN”) placed a ban restricting banks and other financial institutions from facilitating and enabling cryptocurrency transactions in Nigeria, there has been greater uncertainty on the state of the regulation of virtual and digital assets in Nigeria. This was further compounded by a statement of the Securities and Exchange Commission (the “SEC”) saying that they were still studying the space and warning those investing and trading in digital currencies to the effect that they were doing so at their peril.
Prior to the ban, there were no specific regulations and rules regulating cryptocurrency transactions. Legitimate participants looking at setting up cryptocurrency trading platforms and companies rather relied on the general law applicable to the formation of companies, and compliance with international best practices and sector-specific rules that best fit their business models and modi operandi. Many of these participants had to leave Nigeria for other jurisdictions like Dubai and Singapore which presented more accommodating regulations and provided them access to investors and high-level stakeholders.
This has, however, changed. On May 11 2022 the SEC took a definitive step to regulate cryptocurrency and digital assets in Nigeria by the issuance of the New Rules on the Issuance, Offering Platforms and Custody of Digital Assets (the “Digital Assets Regulation”). These are a set of five rules or regulatory frameworks for the operationalisation and regulation of different types of digital assets and different activities in the digital asset value chain. These rules include the: (i) Rules on the Issuance of Digital Assets as Securities; (ii) Rules on Registration Requirements for Digital Assets Offering Platforms (DAOPs); (iii) Rules on Registration Requirements for Digital Asset Custodians (DACs); (iv) Rules on Virtual Asset Service Providers (VASPs); (v) Rules on Digital Assets Exchange (DAXs). The Digital Assets Regulation brings some certainty to the regulatory landscape for fintechs, individuals and organisations looking at dealing with and investing in cryptocurrency and other digital assets.
The Scope of the New Rules
A common thread over the new Digital Assets Regulation is the definition of digital assets as “a digital token that represents assets such as a debt or equity claim on the issuer.” The Regulation, however, distinguishes between the meanings of digital assets and virtual assets. Virtual assets are defined 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 representation of fiat currencies, securities and other financial assets.” The distinction here is that while digital assets refer specifically to a digital token representing assets such as a debt or equity claim on the issuer which properly includes securities, virtual assets refer more broadly to any digital representation of value, a medium of exchange and a unit of account that can also be used for investment purposes excluding digital representation of fiat currencies, securities and other financial assets.
To make it simple, while digital assets can only be claimed upon the issuer of that asset or digital token like security tokens, a virtual asset applies much more broadly to be digitally traded, exchanged, transferred and can be used for payments and investments in dealings with any person looking at trading or investing on a digital platform.
In my considered view, looking at the scope of the definition of digital assets and virtual assets under the Digital Assets Regulation, it appears the SEC eliminates payment tokens and non-fungible tokens as digital assets referring only to security tokens and maybe utility tokens. Payment tokens and non-fungible tokens appear to be captured by the definition of virtual assets under the Regulation. Looking at examples of the types of digital and virtual assets the SEC seeks to regulate, ArCoin which is a digital security token issued by Arca Labs in July 2020 to represent shares in Arca’s U.S. Treasury Fund falls under the classification of a digital asset. On the other hand, virtual assets include cryptocurrencies like Bitcoin, Litecoin and Ethereum, and also different types of non-fungible tokens (NFTs) (if it is determined that the original work from which the NFTs are created are not financial assets).
No matter how it is looked at, the Digital Assets Regulation provides a regulatory framework for different types of digital and virtual assets.
This, however, raises the question as to whether the SEC is not exceeding the scope of its regulatory mandate by regulating payments and other forms of digital and virtual assets which are strictly not securities. This is because the role of the SEC as provided for by the Investment and Securities Act 2007 (the “ISA”) and the SEC Rules made pursuant to the ISA is limited to regulating investment and securities business. Also, one wonders if the Digital Assets Regulations regulate cryptocurrencies given that they are not digital representations of fiat currencies, securities and other financial assets, looking at how virtual assets are described in the Regulations, thereby making them fall within their regulatory ambit. And also looking at cryptocurrencies with regards to their use cases for payments and other transactions taking it out of the SECs regulatory reach, as they are not securities.
In my considered opinion, this depends on the business model of the issuer, as to whether it involves raising capital through a call for investment from the users of the platform as in an initial coin offering (ICO), or involves some trade in security tokens. In all, the procedure for approval and registration involves the SEC first determining, upon initial assessment on a submission of a white paper by the issuer, if a digital or virtual asset qualifies as a security or the business is an investment scheme thereby falling within its regulatory purview. It must also be noted that issuers are not free from the regulatory oversight of other regulators like the CBN and other relevant authorities by satisfying the requirements of the SEC alone.
