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As the world becomes more digitally dependent, there has been an increase in the use of digital assets such as cryptocurrency, Non-fungible tokens (NFTs), Central Bank Digital Currencies (CBDCs), and security tokens.[i] Digital assets have become an invaluable part of today’s financial market, making payments more efficient and capital flow more freely.
To regulate innovation in the digital asset space, the Securities and Exchange Commission (SEC) came up with the New Rules on Issuance, Offering Platforms and Custody of Digital Assets” (the “Rules”) published on the 21st of May, 2022. This regulation is a positive step in ensuring that digital assets are exchanged and kept secured in accordance with the law.
In this article, we shall give an overview of these rules and point out the highlights of this regulation. The rules cover the following:
Issuance of Digital Assets as Securities
PART A of the Rules regulates the issuance of digital assets as securities. PART A applies to all issuers seeking to raise capital through digital asset offerings. Digital asset is defined in the Rules as “a digital token that represents assets such as a debt or equity claim on the issuer.”
All digital assets must be registered in line with the Rules. The issuer shall follow the procedure for initial assessment filling as stated in Rule 4. Thereafter, SEC would determine if the proposed digital asset qualifies as “securities” under the ISA 2007. Upon the issuance of a determination of the SEC that the proposed digital assets to be offered are securities, they are to be registered in accordance with Rule 5, which requires the issuer to file an application for registration with the requisite information and documents.
Registration Requirements for Digital Assets Offering Platforms (DAOPs)
PART B provides rules on registration requirements for Digital Assets Offering Platforms. A Digital Assets Offering Platform (“DAOP”) is defined as an electronic platform operated by a DAOP operator for offering digital assets under the Rules.[ii] DAOPs must be registered with the SEC. An applicant seeking to register as a DAOP must comply with the requirements in Rule 11 as well as the general requirements for the registration of Virtual Assets Service Providers (“VASPs”).
The requirements include payment of the prescribed fees and applying through the appropriate SEC Form accompanied by relevant documents as provided in Rule 11. The applicant must also present evidence of the required minimum paid-up capital of N500 million and a current fidelity bond covering at least 25% of the minimum paid-up capital (Rule 11.4). Furthermore, the requirement for the registration of sponsored individuals, submission of necessary corporate documents, and other additional requirements must be strictly complied with.
Read also: An overview of types of banking licenses in Nigeria
Registration Requirements for Digital Asset Custodians (DACs)
PART C dwells on rules on registration requirements for Digital Asset Custodians. A Digital Asset Custodian (“DAC”) is defined as “a person who provides the services of providing safekeeping, storing, holding or maintaining custody of virtual assets/digital tokens for the account of another person.”[iii]
A Digital Asset Custodian must be registered. An applicant seeking to register as a DAC must comply with the general requirements for Virtual Assets Service Providers (VASPs), as well as comply with the requirements for registration as a Custodian or Trustee as stipulated under the rules.
The Commission is empowered to register a foreign DAC upon satisfaction that:
a) the applicant is authorized to operate or carry out an activity of a similar nature in the foreign jurisdiction; and
b) the applicant is from a comparable jurisdiction with whom the Commission has regulatory arrangements on enforcement, supervision, and sharing of information.
Rules on Virtual Assets Service Providers (VASPs)
PART D focuses on rules for Virtual Assets Service Providers. Virtual Assets Service Provider (VASP) means any entity that conducts any of the following activities or operations for or on behalf of another person; the exchange between virtual assets and fiat currencies; or between one or more forms of virtual assets; the transfer of virtual assets; safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.[iv]
The VASP Rules apply to all platforms that facilitate trading, exchange, and transfer of Virtual assets; any person whose activities involve any aspect of Distributed Ledger Technology (DLT)-related and virtual digital asset services; issuers or sponsors of virtual/digital assets and foreign or non-residential operators that actively target Nigerian investors. On the other hand, the VASP Rules, however, do not apply to a technology service provider who merely provides the infrastructure to a Digital Asset Exchange (DAX); an operator of a communication infrastructure that merely enables orders to be routed to an Exchange and an operator of a financial portal that aggregates content and provides links to financial service sites and information provider.
A VASP must be structured as a body corporate unless specified otherwise by the SEC. It must obtain a license from the SEC to lawfully operate in the country. The requirements to be complied with for the registration of a VASP are spelt out in Rule 4, which provides that an application for registration as a VASP be filed on the appropriate SEC Form accompanied by the requisite documents.
Rules on Digital Assets Exchange (DAX)
PART E covers rules on Digital Assets Exchange. Digital Assets Exchange (DAX) is defined as an electronic platform that facilitates the trading of a virtual or digital asset.[v] An applicant seeking to apply as a DAX operator must comply with the requirements stated under the Rules on Digital Assets Exchange (DAX Rules) as well as the general requirement for VASPs.
The requirements include payment of the prescribed fees and applying through the appropriate SEC Form accompanied by relevant documents as provided in Rule 6.2 of the DAX Rules. The applicant must also present evidence of the required minimum paid-up capital of N500 million and a current fidelity bond covering at least 25% of the minimum paid-up capital (Rule 6.3 of the DAX Rules). Furthermore, the requirement for the registration of sponsored individuals, submission of necessary corporate documents, and other additional requirements must be strictly complied with.
CONCLUSION
SEC’s New Rules on Issuance, Offering Platforms, and Custody of Digital Assets are a laudable step in the right direction. However, the CBN ban restricting the ability of financial institutions to deal with entities transacting in cryptocurrencies is a drawback to the effectiveness of the new rules. It is hoped that the Central Bank of Nigeria would remove the ban to enable the free flow of all forms of digital assets in Nigeria, which would, in turn, facilitate social and economic growth in the country.
[i] Nasdaq, Digital Assets https://www.nasdaq.com/solutions/all-about-digital-assets Accessed on the December 14th, 2022
[ii] PART A, Rule 10.0 of the New Rules on Issuance, Offering Platforms and Custody of Digital Assets 2022
[iii] PART C, Rule 29.0 of the New Rules on Issuance, Offering Platforms and Custody of Digital Assets 2022
[iv] PART D, Rule 3.0 of the Rules on Virtual Assets Service Providers
[v] Ibid
Written by Omolumo Adeife for The Trusted Advisors
Email us: info@cms.trustedadvisorslaw.com