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Despite Implicit Ban, Nigeria Rules Crypto as Securities; Can It Stand?

In February last year, the Central Bank of Nigeria (CBN) sparked widespread criticism after it ordered commercial banks in the country to close down accounts of cryptocurrency traders in the country.

To implement the order, the apex monetary authority slammed N814.3 million (nearly $2 million) in fines on four commercial banks, for permitting cryptocurrency transactions. Two other lenders were also sanctioned.

This order, considered an implicit ban, has not been lifted. Yet, the Nigerian Securities and Exchange Commission (SEC) last week issued new rules on the issuance, offering and custody of digital assets.

Lamido Yuguda, the Director General of SEC Nigeria, signed the new rules in Abuja, Nigeria’s capital, although the Commission had initially put off its cryptocurrency regulatory preparations following CBN’s order.

The rules list instructions on the issuance of digital assets as securities. In addition, it outlines the requirements that digital assets offering platforms (DAOPS), digital asset custodians (DACs), virtual assets service providers (VASPs) and digital assets exchanges (DAX) must meet to operate in the country.

The New Rules: An Overview

The rules define a digital asset as “a digital token that represents assets such as a debt or equity claim on the issuer.”

This means that digital assets such as cryptocurrencies are now considered securities in the country.

Therefore, digital assets are to be bought and sold through digital asset offerings, such as an initial coin offering (ICO ) or a securities token offering (STO).

Moreover, the new rules state that issuers of a digital token cannot raise more than N10 billion (about $25 million) within a year.

The directors and senior management of an issuer are also expected to hold at least a total of 50% equity in their company at the date their tokens are issued.

Although, a DAOP’s shareholding in any of the issuers hosted on its platform cannot exceed 30%.

While the regulation permits qualified institutional and high net worth investors to invest as much as they want, it limits retail investors to N200,000 ($482) per issuer with a total investment limit not exceeding N2 million ($4,820) within a year.

Among other fees, the new rules require digital asset exchanges (DAX) and virtual assets service providers (VASP) to pay N30,000 million ($72, 250) in registration fees. Further, it requires that they have N500 million ($1,205,000) in minimum paid-up capital which could be in bank balances, fixed assets or investment in quoted securities.

Also, their current fidelity bond is expected to cover at least 25% of the minimum paid-up capital.

Additionally, a VASP is expected to have an office in Nigeria managed by a director of the company.

In contrast, digital assets custodians (DACs), among other duties, are expected to ensure compliance with all relevant laws, regulations and guidelines, including but not limited to, anti-money laundering and combating the financing of terrorism and proliferation financing laws and regulations.

Among other provisions, the rules outline guidelines for risk management, internal audit, conflict of interest management, and outsourcing.

Criticism: ‘Lots of Grey Areas’

A common criticism echoed by critics of the new rulings is that they are not encouraging for early-stage startups in the cryptocurrency and digital asset space in the country.

The Financial Market Analyst, Olumide Adesina, told Finance Magnates that SEC Nigeria as a financial body established to protect investors does not take the country’s large crypto retail investor market into consideration.

Adesina explained, “While the SEC has a lot of good intentions, it left a lot of things grey. For example, it never spoke about Nigerians having exposure to certain unregulated assets.

“In terms of exchange fees and all those things, the SEC forgot we have decentralized exchanges that lack central jurisdiction; it failed to address the implication of that. It failed to address non-custody wallets.

“So, while it made specific rulings on what retail investors can use, it created more loopholes than saving them.”

Emmanuel Ogbuka, a Lagos-based lawyer specializing in fintech regulatory compliance, believes the rules will only serve to create an enabling environment for monopolies to spring up.

“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,” Ogbuka wrote in an analysis on Tekedia.

On top of that, Ndubuisi Ekekwe, a Nigerian-born professor, entrepreneur and Lead Faculty at Tekedia Institute, USA, believes the CBN order that banks stop providing cryptocurrency support services to crypto traders is a stumbling block.

“The experts have explained the new cryptocurrency regulations in Nigeria. Of course, I am still waiting for the Central Bank of Nigeria to withdraw its directive which paused or froze the ability to operate a bank account as a crypto-related business in Nigeria. Until that is done, the new Securities and Exchange Commission (SEC) regulations will not have the immediate impact in the sector,” Ekekwe wrote in a LinkedIn post.

Furthermore, Adesina pointed out to Finance Magnates that the classification of digital assets as securities creates a problem for assets like Bitcoin that lack central authorities.

He noted that crypto exchanges cannot interact with a securitized asset, citing the delisting of XRP from Coinbase and other exchanges after the US SEC filing against Ripple, a blockchain-based digital payment network and protocol with its own cryptocurrency, XRP.

“The crypto community in Nigeria needs to brace up for more lobbying in stakeholders’ meetings,” Adesina added.


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