Nigerian SEC rules on offering platforms, issuance & custody of digital assets

The Nigerian Securities and Exchange Commission (SEC) on May 20, 2022, released rules aimed at formalizing the digital asset space. The new rules were to set a standard for regulating, among others, digital currencies and virtual assets. The new SEC rules of May 2022 are named the “Issuance, Offering Platforms, and Custody of Digital Assets Rules” (new SEC rules). 

Before the new rules, the SEC had issued the Virtual Assets Providers rules and the Digital Assets rules in April 2022.

The public’s response to the new SEC rules was conflicting. A large portion of the population opposed the idea of regulating the issuance of digital asset-backed securities. Before the coming of the new rules users engaged in services rendering digitally backed assets without registration, that has changed with the new rules.

According to SEC rules, digital assets are defined as digital tokens that represent assets like equity or debt claims from an issuer. Cryptocurrencies were the main focus of regulation by the rules, even though the SEC definition of digital assets extends beyond them.

The need for regulation dates back to February 2021, when the Central Bank issued a circular prohibiting Nigerian banks from accepting, transacting, or trading in cryptocurrencies. The majority of people disliked the CBN’s ban on cryptocurrency transactions. Lovers of cryptocurrencies switched to the peer-to-peer trading of digital assets as a result of the ban. The new SEC regulations were implemented as a direct response from the government to the peer-to-peer trading model used by cryptocurrencies and other digital asset-backed securities lovers. 

This article aims to highlight the key SEC new rule changes and their potential effects on the market for digital assets.

Changes under the SEC rules

Digital assets Issuer’s maximum fundraising amount

According to the new SEC regulations, issuers of digital assets are only allowed to raise a total of ten billion Naira over a calendar year. The regulations also stipulate that issuers of digital assets may choose to raise twenty times as much money from their shareholders’ fund. 

When compared to the proposed twenty billion Naira that industry players had suggested, this limitation is a significant decrease.

Digital assets investment limit

The maximum investment by retail investors is 200 thousand Naira, with a combined investment limit of 2 million Naira per calendar year. Investors and market participants have sharply criticized this change, which is mandated by Part A, Paragraph 8.0 of the SEC rules. 

Previously, an individual retail investor may typically invest up to several millions of Naira in this sector. This practice is stopped by the change made under paragraph 8.0.

Furthermore, the Commission set the cap on investments at five million Naira for single investments by retail investors and twenty million for 12 months under the SEC’s proposed Digital Asset rules released in April 2022. 

Industry players had hoped the SEC would raise the benchmark when the new rules were released in May 2022, but their hopes were dashed by the decrease.

Application fee for digital asset offering platforms

All digital asset offering platforms must be registered with the Commission in accordance with Part B, Paragraph 11.5 of the new SEC regulations. When attempting to register a digital asset offering platform, the same rule demands application fees be paid. These are the costs:

1. Filing Fees at one hundred thousand Naira;

2. Registration Fees at thirty million Naira;

3. Sponsored Individuals Fees at one hundred thousand Naira; and

4. Registration Fees at thirty million Naira.

Additionally, digital asset offering platforms must have a fidelity bond covering at least 25% of their minimum paid-up capital, which is at least 500 million Naira. 

Assets that can be registered

The new SEC regulations divide digital asset registration entities into five general categories. According to the new regulations, each of these categories has distinctive characteristics. These groups include:

1. Digital Assets Exchange(s);

2. Digital Asset Custodians;

3. Virtual Asset Service Providers;

4. Digital Assets offered as securities; and

5. Digital Assets Offering Platforms.

Previously, the classification of virtual asset providers in the sector was unclear. Virtual asset service providers were not sufficiently defined in the Virtual Asset Service Providers rules because the rules described natural persons as virtual asset service providers.

The clarification has been made by explicitly removing natural persons from the list of Virtual Asset Service Providers under the new SEC rules.

On Digital Assets Exchange, the new SEC rules refer to the provisions of the Virtual Asset Service Providers rules. All participants in digital asset exchanges must abide by the provisions of the virtual asset providers’ rules to be registered under the new SEC regulations. 

Also, all principal officers of the Digital Assets Exchange are required to have at least five years of experience in the industry. This is a significant change from the ten years of industry experience that the major players in the industry previously required. 

Conclusion

Long unregulated, the digital asset market has prospered. The main players contend that the free and unregulated nature of the digital asset space distinguishes it from the major business operations in the larger society. The major gain of plug-and-play in the digital market space allows players the freedom to operate without having to deal with the difficulties associated with regulating the industry.

Despite the benefits of unregulated digital assets, experts worry about the worst if the sector is not regulated. The list of complaints is endless and ranges from supporting terrorism claims to giving fraudsters a field day of funding. The industry professionals’ worries would be allayed, it is thought, by the new SEC regulations.

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