SEC Nigeria Issues Statement on Digital Assets, Their Classification and Treatment

Monday, September 14, 2020  / 03:20 PM  / By
SEC Nigeria / Header Image Credit: iPleaders Blog

Introduction

Digital assets offerings provide alternative
investment opportunities for the investing public; it is therefore
essential to ensure that these offerings operate in a manner that is
consistent with investor protection, the interest of the public, market
integrity and transparency. The general objective of regulation is not to
hinder technology or stifle innovation, but to create standards
that encourage ethical practices that ultimately make for a fair and
efficient market.

Section 13 of the Investment and Securities Act,
2007 conferred powers on the Commission as the apex regulator of the
Nigerian capital market to regulate investments and securities business in
Nigeria. In line with these powers, the SEC has adopted a three-pronged
objective to regulate innovation, hinged on safety, market deepening and
providing solution to problems. This will guide its strategy, its
regulations and its interaction with innovators seeking legitimacy and
relevance.

Consequently, the SEC will regulate crypto-token
or crypto-coin investments when the character of the investments qualifies
as securities transactions.

What Will Be Regulated?

1. The position of the Commission is that virtual crypto assets are
   securities, unless proven otherwise. Thus, the burden of proving that the
   crypto assets proposed to be offered are not securities and therefore not
   under the jurisdiction of the SEC, is placed on the issuer or sponsor of
   the said assets.
2. Issuers or sponsors are expected to satisfy the burden of proving that the
   virtual assets do not constitute securities by making an initial assessment
   filing. However, where the finding of the Commission is that the virtual
   assets are indeed securities (not structured to be exclusively
   offered through crowdfunding portals or other exempt methods), then the
   issuer or sponsor must register the digital assets.
3. The registration process for virtual assets will therefore involve a
   two-prong approach – an initial assessment filing to satisfy the burden of
   proof and a filing for registration proper, either made directly by the
   issuer or sponsor or where the burden of proof is not satisfied.
4. Similarly, all Digital Assets Token Offering (DATOs), Initial Coin
   Offerings (ICOs), Security Token ICOs and other Blockchain-based offers of
   digital assets within Nigeria or by Nigerian issuers or sponsors
   or foreign issuers targeting Nigerian investors, shall be subject to
   the regulation of the Commission. Existing digital assets offerings prior
   to the implementation of the Regulatory Guidelines will have three (3)
   months to either submit the initial assessment filing or documents for
   registration proper, as the case may be.

 Who Will
Be Regulated?

1. 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.
2. Issuers or sponsors (start-ups or existing corporations) of virtual
   digital assets shall be guided by the Commission’s regulation. The
   Commission may require Foreign or non-residential issuers or sponsors to
   establish a branch office within Nigeria. However foreign issuers or
   sponsors will be recognized by the Commission where a reciprocal
   agreement exists between Nigeria and the country of the foreign issuer or
   sponsor.
3. A recognition status will also be accorded, where the country of the
   foreign issuer or sponsor is a member of the International Organization of
   Securities Commissions (IOSCO).

For these purposes, the Commission has adopted
the following with respect to virtual crypto assets:

“Crypto Asset” means a digital representation of
value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status in any jurisdiction.
A Crypto Asset is – neither issued
nor guaranteed by any jurisdiction, and fulfils the above functions only
by agreement within the community of users of the Crypto Asset;
and Distinguished from Fiat Currency and E-money.”

The SEC hereby categorizes the following virtual
assets/instruments as follows: 

S/N	VIRTUAL DIGITAL ASSET	TREATMENT
1.	Crypto Asset- e.g non fiat virtual currency.	Treated as commodities if traded on a Recognized Investment Exchange and/or issued as an investment, and is subject to Part E of SEC Rules and Regulations and any other relevant sections and subsequent Rules which will be enacted in future
2.	Utility Tokens or “Non-Security Tokens” (e.g., virtual tokens. These tokens simply provide users with a product and/or service.	Treated as commodities. However, spot trading and transactions in Utility Tokens do not fall under SEC purview unless conducted on a Recognized Investment Exchange and therefore subject to Part E of SEC Rules and Regulations and any other relevant sections and subsequent Rules which will be enacted in future
3.	Security Tokens” (e.g., virtual tokens that have the features and characteristics of a security. Represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds, etc.	Deemed to be Securities pursuant to PART XVIII (315) of ISA, “definition of Securities”. All financial services activities in relation to Security Tokens, such as operating primary / secondary markets, dealing / trading / managing investments in or advising on Security Tokens, will be subject to the relevant regulatory requirements. Market intermediaries and market operators dealing or managing investments in Security Tokens need to be registered / approved by SEC as   CMOs, Recognized Investment Exchanges or Recognized Clearing Houses, as applicable.
4.	Derivatives and Collective Investment Funds of Crypto Assets, Security Tokens and Utility Tokens	Regulated as Specified Investments under the ISA & SEC Rules and Regulations. Market intermediaries and market operators dealing in such Derivatives and Collective Investment Funds will need to be registered / approved by SEC.

 

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