By Edozie Uka
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The first Securities and Exchange Commission in the world was established in the United States in response to the stock market crash of 1929 which led to the Great Depression. The massive economic collapse, huge unemployment and the misery and hunger that followed was adduced to the unregulated high-risk & reckless activities of companies, brokers, investors and speculators who had engaged in profit-seeking on the American stock exchanges. The Commission was created to bring regulations and governance into that then unregulated space.
True to the same mission the Nigerian Securities and Exchange Commission (SEC) has released regulations to govern the activities of cryptocurrency and blockchain developers and traders, and their affiliated service providers. Issued on the 11th of May 2022, the new regulations impose weighty requirements on local and international firms offering blockchain products or services to Nigerians. Here are 10 notable points to consider from the new regulations.
- Blockchain Tokens are securities
Distributed Ledger Technology (blockchain) projects and products are considered investment assets unless the SEC determines that they are not. As prima facie securities, that brings cryptocurrencies and blockchain tokens under the SEC’s regulatory oversight. Cryptocurrency is not merely currency, ie a means of payment, but an appreciating (or depreciating or volatile) asset, ie an investment. Some exceptions exist, such as the eNaira and other fiat-money types of crypto.
- Whitepaper Disclaimer
The regulations require that the whitepaper for any unregistered crypto or blockchain product or project contain the following disclaimer: “THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE TOKENS OR DETERMINED IF THE TOKENS ARE SECURITIES AND THUS, SHALL BE REGISTERED, OR THAT THE CONTENT OF THE WHITEPAPER ARE ACCURATE AND COMPLETE. ANY FALSE OR MISLEADING REPRESENTATION IS A CRIMINAL OFFENCE AND SHOULD BE REPORTED IMMEDIATELY TO THE SECURITIES AND EXCHANGE COMMISSION”
This requirement is meant to put the public on notice that the SEC considers such a project as likely one that should fall under its regulatory jurisdiction. This is an instance of the SEC acting in its public watchdog role by inserting a safeguard for the investing public.
- Registration of Crypto Platforms
Exchanges, trading platforms, financial services in crypto, custodial wallet services providers are required to be registered with the SEC. Foreign based and owned entities already providing these services fall within the scope of these rules. They will be required to incorporate in Nigeria, and set up an office in Nigeria managed by a “Director”
- Global Corporate Standards
High standards for corporate governance are imposed on registrable platforms and service providers like crypto exchanges. Applications for registration must demonstrate availability of financial acumen, technical skills and competence, and adequate cyber security measures to protect the system and infrastructure of the blockchain project. Sworn undertakings on proof of facts, a business model, and the proposed rules of the platform will be examined by the SEC before registration of the platform. The SEC also reserves the power to deregister any platform or operator that breaches the required standards. Operators of exchanges are required to ensure safeguards to deter manipulative activities, manage excessive volatility, manage error trades, systems errors, etc.
- Managed Business Setup
The SEC will approve the composition of the proposed board of certain kind of blockchain platforms before the entity is incorporated at the Corporate Affairs Commission. For crypto exchanges and ICO issuing platforms, the CEO of the company has to be a university graduate with 5 years relevant experience. He must also have a clean criminal and business record. Generally the top management and directorship of blockchain entities will be subjected to high ethical fitness & record vetting.
The obvious intention is to weed out mushroom investment companies touting blockchain solutions as a bait to the public, however, the unintended effect might be to hand effective control of startups to outsiders in circumstances where the actual founders with the programming skills and vision of the company do not meet the SEC standard.
- Managed Business Shutdown
Crypto exchanges, custodians (wallet operators) and related platforms cannot cease operations without prior permission of the SEC. The funds and assets of customers will have to be preserved and continuously be available after their cessation of business.
- Full KYC Required
Anonymity may no longer be guaranteed to owners of blockchain assets, as operators are required to use KYC procedures that capture names, addresses and ID information, and also comply with all anti-money laundering, anti-terror financing and counter proliferation laws and regulations.
Anonymity was built by design into bitcoin architecture, and remains a major selling point for many adopters of cryptocurrency. It is yet unclear how far this KYC requirement will extend, for example, to uncovering wallets and accounts of users not resident in Nigeria though transacting & transferring to or through Nigerian operated wallets.
- High Entry Barrier
Exchanges, custodians and Issuing platforms will have to prove a paid up equity capital of NGN500m, provide a fidelity bond worth at least NGN125m, and register at a fee of NGN30m. Needless to say this high capital requirement will be beyond the reach of many tech and crypto bros with the coding skills and the acumen to build a future web3 unicorn.
Additionally, Initial Coin Offerings are limited by a funding cap at NGN10 billion per 12-month period, and individual retail buyers of coins or tokens in an ICO project cannot spend more than NGN200,000 per project per year.
- SEC to approve tokens
One of the more puzzling regulations is that the SEC must issue a no objection for each token or digital asset to be traded on a registered exchange. Although this provision appears to refer to cryptocoin tokens, the broad definition of “virtual asset” in the regulations negates this, thereby extending the application of this requirement to user-generated tokens such as NFTs.
It is hard to see how such a restriction will not hinder smooth operations of marketplaces and exchanges where tokens are traded, such as Looksrare and Opensea, where project-focused as well as user-originated content equally compete for market visibility. Many web3 projects are small scale and many digital tokens are the work of informal, self-trained artists and content creators. Does the Commission really want to appropriate the power to pre-judge the value of every digital asset that is traded? Requiring either the trading exchange or the artist to apply for an approval for each tradable token will put compliant Nigerian operators at a disadvantage compared to participants in other markets. Hopefully clarifications to this requirement will be issue in due course.
10. Crypto Tax
“The Commission will charge fees on transactions”.
CONCLUSION
While a regulation-free operating environment is high-risk and hardly desirable for the growth and long term benefit of Nigerians seeking to utilize web3 technologies to build careers and assets, overregulation is equally a slippery slope that can have several possible adverse effects. Not unlike the Central Bank of Nigeria’s grey-listing of crypto transactions in the banking system, an overreaching and overregulating SEC could force Nigerian developers into a shadow zone of semi-concealed operations. There is also the lingering inconsistency between the CBN’s crypto restriction policy and this move by the SEC to regularize and formalize crypto operations. Regulations that aim to bring crypto operations into a structured and governed market and even tax their transactions, can hardly be applauded in an environment where banks are under a stern mandate to freeze transactions and block bank accounts that are connected to crypto. The two scenarios cannot coexist, and one or the other will have to give way.
Edozie Uka is a lawyer based in Lagos.
This article is for information only and does not constitute legal advice. The author can be reached by email at consulattorneys@gmail.com
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