Nigeria Issues Rules On Crypto Assets In A Move That Could Boost Adoption

Nigeria’s Securities Exchange Commission has issued new rules relating to the issuance, exchange and custody of digital assets in the country. This comes 20 months after the Commission initially issued a statement on how it would classify and deal with digital assets.

Digital assets are a catch-all term for all types of crypto assets.

The SEC’s position also contrasts sharply with that of the Central Bank of Nigeria (CBN), which currently bars local financial institutions from doing business with crypto-related firms. Notably, new SEC rules require token issuance platforms and exchanges to maintain trust accounts with receiving banks.

All in all, this development could lend legitimacy to crypto and related businesses and ultimately open new doors for the use of crypto in Nigeria, which is one of the leading countries for crypto adoption in the world. The SEC rules could also provide the CBN with a framework within which the country’s financial institutions can interact with crypto.

To begin with, entities looking to offer any kind of crypto products and services in Nigeria or Nigerians are now required to obtain a Virtual Asset Service Provider (VASP) license. This will be in addition to the relevant category licenses. For example, an exchange would need a digital asset exchange license in addition to the VASP license.

The VASP license comes with its own set of requirements. In particular, licensees must obtain self-declared risk acknowledgment forms from users while issuing a disclaimer stating that investment losses are not covered by any protection funds. VASPs must also apply anti-money laundering and anti-terrorist financing (AML/CFT) standards.

In addition to the VASP rules, the document published on May 13 covers the following areas:

  • operating a digital asset exchange
  • token issuance
  • mining digital asset offering platform
  • requirements for digital asset custodians

Here is an overview

On operating an exchange

Under the new SEC rules, all crypto exchanges providing services to Nigerians are now required to obtain a permit, which gives the Commission access to its records. Exchanges are expected to submit weekly and monthly trading information as well as quarterly and annual financial and compliance reports.

It should also be noted that an exchange cannot facilitate the trading of a digital asset unless the SEC has first issued a “no objection” to that asset. Essentially, an exchange will need to submit nominations for each asset it intends to list. The application must prove that the exchange has enough information about the project and the associated risks.

Additionally, exchanges are also required to perform real-time market monitoring.

On token issuance

Any project seeking to make initial coin offerings in Nigeria or targeting Nigerians must register its intention with the SEC by completing an evaluation form and submitting a detailed copy of its whitepaper. If the Commission considers the proposed token to be a security, the issuer must comply with the country’s securities laws.

There are a few instances where a project issuing security tokens may be exempt from applicable registration requirements. The exceptional provision relates to situations where the security tokens are structured for an exclusive offer on a crowdfunding platform.

Additionally, the SEC will allow projects to raise up to NGN 10 billion, or approximately $24.1 million based on the official exchange rate. The Commission may update this figure if it deems it necessary.

On operating a digital asset offering platform

A digital asset offering platform (DAOP) refers to portals where issuers can launch an initial offering of digital assets, such as an ICO. The Commission has drawn up a list of obligations linked to the operation of a DAOP. Here is a summary :

  • A DAOP operator must perform due diligence on any project seeking to offer digital assets through its platform and exercise its own judgment on the project’s ability to raise funds.
  • A DAOP is required to provide investors with up-to-date information on the projects it lists.
  • The platform must also monitor the use of funds by projects to ensure that they are used for the purposes set out in their respective white papers.

Custody of digital assets

Although the rules provide for the running of a digital asset custodial business in Nigeria, they do not appear to compel operators and DAOP exchanges to use independent custodians. According to the rules, a DAOP can provide its own custodial services, as long as it complies with applicable regulations. There are no specific requirements on how an exchange must maintain user assets.

The only time the use of a registered custodian is a requirement is before token sales in the case of an ICO.

The rules also don’t provide much clarity on how and where assets can be stored. For context, crypto regulations in Japan require custodial providers to keep at least 95% of client assets in an offline environment (cold wallets). The Nigerian regulator only requires custodians to segregate client assets from their own assets.

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Nigeria Issues Rules On Crypto Assets In A Move That Could Boost Adoption

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