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Developments In Digital Asset Offering Compliance In Nigeria – Fin Tech

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Introduction

On the 11th of May, 2022, the Securities and
Exchange Commission issued New Rules on Issuance, Offering
Platforms and Custody of Digital Assets. This has come at a time
when there are rampant platforms offering digital assets as
securities either genuine or questionable e.g., Cryptocurrencies or
Non-fungible tokens. This article seeks to provide an insight into
what digital assets are, who can offer them and compliance for
digital offering platforms.

In ordinary parlance, digital assets are referred to as content
that is stored and transmitted digitally. That could mean images,
photos, and videos, files containing text, spreadsheets, or slide
decks. However, over the years it has evolved to be items that you
can buy, sell, and store and trade online but typically cannot
physically see or touch. They can be in the form of digital
currencies, or they may be the underlying works that are traded
using block chain technology. Either way, their value, like all
assets, comes from a claim to ownership. 

Types of Digital Assets

Currently, there are two main types of digital assets, they
include Cryptocurrencies and Non-fungible tokens. However, there is
no limit to what you may be able to do with a digital asset. In the
future, we could see shares of stock, car and real estate titles,
and other physical assets eventually move to a block-chain format
of ownership. For now digital assets refers to:

1. Knowledge: You might be wondering how
knowledge is a digital asset. Let me explain, Knowledge recorded,
stored or traded in formats such as documents, books, websites,
infographics and media are digital assets as they possess something
of value and can be owned despite no physical presence e.g.,
intellectual works sold on online platforms.

2. Software: Software’s in the form
of codes and deployed services e.g., Application software, database
software, multimedia software,
sharewares. 

3. Data: As we all know data is now the
new gold, data on databases and unstructured formats are Digital
assets that can be shared in accordance to privacy policies
etc.

4. Designs: Gone are the days when designs
were structured physically, now most designs are structured
digitally, stored and traded, e.g., architectural designs and
visual designs.

5.  Patents and Trade
Secrets:
 Nowadays, details of inventions are
documented in digital forms and as such can be traded
digitally.

6.  Arts: Visual
works of artistic value are now traded digitally, popular examples
of this are photographs and digital paintings.

8.  Music and
Movies:
 Digital music, movies, documentaries and
media contents are now traded online. These serve as assets to the
owners and can be exchanged using exchange platforms.

9.  Addresses: What
comes to mind are domain names for websites?. These are also
digital assets that are bought and stored online.

10. Virtual Property: This includes
locations, items and characters in the virtual world. Example of
this is the NFT’s.

11.  Digital
Currency:
 This includes all electronic currencies
bought and traded digitally, e.g., Bitcoin, Ethereum etc.

The introduction of Digital assets is tipped to be a
trillion-dollar opportunity for companies and investors for one
reason. The high-speed digital economy necessitates new ways of
doing business and creating wealth. Whether you are talking about
cryptocurrencies, crypto commodities, utilities, security tokens or
real-world asset tokens, digital assets provide ways to digitally
redesign the global economy, and develop new business models,
creating more efficiency and unprecedented access to new
opportunities.

Rules on Issuance of Digital Assets as Securities

The Rules on Issuance of Digital Assets as Securities apply to
all issuers looking to raise capital through digital assets
offerings.

The Securities and Exchange Commission has stated that all
promoters, entities or businesses proposing to conduct initial
asset offering within Nigeria shall submit an assessment form and a
draft white paper containing current information about the offering
projects, business plan and feasibility study. The commission after
review shall within 30 days determine whether the offering is a
security and issue a communication in 5 days of its review. Where
the digital asset is determined to be a security, the issuer shall
apply to register the said securities. The regulations require
applicants to pay ₦100,000 for the filing or application fee,
₦300,000 for the processing fee, ₦30 million for the
registration fee, and ₦100,000 for sponsored
individual’s fee. These fees are to be paid in a bank account
operated by the SEC.

Requirements for the registration of digital assets
offerings

  1. A registration statement of the digital assets which shall
    include the name, amount, price, number of tokens and registration
    fees.
  2. Know Your Client procedures.
  3. Disaster recovery plans and risk management protocols.
  4. Security protocols
  5. Solicitor’s opinion confirming that the issuer has all
    permits and licenses for the issuance and transfer of
    securities.
  6. A copy of the escrow agreement with an independent
    Custodian/Trustee registered with the Commission.
  7. Corporate Governance disclosures.
  8. Evidence of payment of the applicable fees.

Note that the Commission may reject the
application of the issuer if it finds the proposed activity to be
against public policy or that it violated any Law or rules
implemented by the Commission. The issuer’s director and
senior management shall, in aggregate, own at least 50%
equity.  Also, Initial Digital Offering Projects in Nigeria
are not allowed to raise beyond 10 billion naira ($24 million) and
they must demonstrate that the gross proceeds to be raised would be
sufficient to undertake the project proposed. If the money raised
is below the minimum amount raised or aimed for the project. The
issuer shall refund all monies collected from the token holders
within (5) business days from the offer closing date.

Exemptions

  1. Securities structured to be exclusively offered through
    crowdfunding portals or intermediaries are exempted from
    registration of Digital Assets.
  2. Judicial sale of digital assets by an executor, administrator
    or receiver in insolvency or bankruptcy.
  3. A sale of a digital asset by a pledge holder or mortgagee,
    selling to liquidate a bona fide debt.
  4. An isolated transaction where a digital token is sold for the
    owners account but not in the course of a repeated or successive
    transaction.

Digital Assets Offering Platforms

These are electronic platforms operated for the purpose of
offering digital assets.

For a digital assets offering platform to operate within Nigeria
it must be registered with the Securities and Exchange
Commission.

The requirements for registration are as
follows:

  1. Evidence of payment of all prescribed fees.
  2. Form SEC 2 AND 2D evidencing officer who are the principal
    officer of the platform.
  3. Evidence of minimum Paid-up capital of ₦500,000,000
    (Five Million Naira Only) e.g., bank balances, fixed assets or
    investment in quoted securities.
  4. Current Fidelity Bond covering 25% of the minimum paid-up
    capital.
  5. A copy of draft rules of the Digital Assets Offering
    Platform.
  6. Sworn undertaking to produce to the commission copies of
    amendment of the DAOP’s rules.
  7. Information on the Company.
  8. Sworn undertaking to keep records and render returns specified
    by the Commission.
  9. Sworn undertaking to abide by the Commission’s rules and
    regulations.

Note: Digital assets offering platforms
are prohibited from providing direct or indirect financial
assistance to investors to invest in the digital tokens of an
issuer hosted on its platform. Also an issuer shall not be hosted
concurrently on multiple platforms or on an equity crowdfunding
platform. Also, Digital assets offering platforms are not allowed
to outsource any function that involves the decision making of the
Digital assets offering platforms or any interaction or direct
contact with the Digital assets offering issuer or token
holder.

Digital Assets Custodians

They are persons who provide the services of providing
safekeeping, storing, holding or maintaining custody of virtual
assets/digital tokens for the account of another person.

For a person to provide the services of a Digital assets
custodian in Nigeria, they must be registered as a Custodian or
Trustee with the Securities and Exchange Commission.

Where the applicant is a foreign Digital assets custodian, the
commission must be satisfied that they are authorized to operate an
activity of the similar nature in the foreign jurisdiction that is
comparable.

Note: A digital assets custodian shall
give priority to the client’s interest if there is a conflict
between the client’s interests and its own interests. Also,
Digital assets custodians are not allowed to outsource any function
that involves the decision making of the Digital assets offering
platforms or any interaction or any contact whatsoever with the
clients

Virtual Assets Service Providers

They are entities who conduct the operations of exchange between
virtual assets and fiat currencies, exchange between one or more
forms of virtual assets, transfer of virtual assets, safekeeping
and administration of virtual assets or instruments and
participation in and provision of financial services related to an
issuer’s offer and sale of a virtual asset for and on behalf
of another person.

Note: A Virtual assets service provider
shall have an office in Nigeria Managed by a Director of the
company.

For a Virtual assets service provider to operate within Nigeria
it must be registered with the Securities and Exchange
Commission.

The requirements for registration are as
follows:

  1. A sworn undertaking that the applicant will be able to operate
    an orderly, fair and transparent market.
  2. A sworn undertaking that the applicant will be able to carry
    out its obligations.
  3. A sworn undertaking that the information or document that is
    furnished by the applicant to the Commission is not false or
    misleading nor does it contain any material omission.
  4. Evidence that the applicant is not in the course of being wound
    up or otherwise dissolved.
  5. Evidence that no receiver manager or an equivalent person has
    been appointed within or outside Nigeria, or in respect of any
    property of the applicant.
  6. A sworn undertaking that the applicant has not, whether within
    or outside Nigeria, entered into a compromise or scheme of
    arrangement with its creditors, being a compromise or scheme of
    arrangement that is still in operation.
  7. Evidence that the applicant, applicant’s directors, chief
    executive, controller, and any person who is primarily responsible
    for its operations or financial management are fit and proper.
  8. Submit a business model which has a clear or unique value
    proposition.
  9. Submit the rules of the entity it seeks to operate.
  10. Evidence that the applicant will be able to take appropriate
    action against a person in breach.
  11. Evidence that the applicant will be able to manage risks
    associated with its business and operation.
  12. Evidence that the applicant has sufficient financial, human and
    other resources for the operation of the Exchange at all
    times.
  13. Evidence that the applicant has appropriate security
    arrangements.

Note: Where an applicant is regulated by
another sectoral regulator, the applicant must also submit to the
Commission a no objection or approval letter from the relevant
sectoral regulator when making the application. 

Digital Assets Exchange

These are electronic platforms that facilitate the trading of a
virtual asset or digital asset.

For a Digital assets exchange platform to operate within Nigeria
it must be registered with the Securities and Exchange
Commission.

The requirements for registration are as
follows:

  1. Evidence of payment of all prescribed fees.
  2. Form SEC 2 AND 2D evidencing officer who are the principal
    officer of the platform.
  3. Evidence of minimum Paid-up capital e.g., bank balances, fixed
    assets or investment in quoted securities.
  4. Current Fidelity Bond covering 25% of the minimum paid-up
    capital.
  5. Sworn undertaking to keep records and render returns specified
    by the Commission.
  6. Sworn undertaking to abide by the Commission’s rules and
    regulations.

Prior to the commencement of the operations of the Digital
assets exchange operator, the Commission shall be furnished
with:

1. Evidence of Information Technology (IT) assurance regarding
the system readiness.

2. A written declaration by its internal auditor confirming that
it has:

i. Sufficient human, financial and other resources to carry out
operations;

ii. Adequate security measures, systems capacity, business
continuity plan and procedures, risk management, data integrity and
confidentiality, record keeping and audit trail, for daily
operations and to meet emergencies; and

iii. Sufficient IT and technical support arrangements.

iv. Chief Information Security Officer to ensure amongst others,
that cyber risks are adequately mitigated.

v. Weekly and monthly trading statistics and all reporting
requirements.

vi. Quarterly and annual financial as well as compliance
reports.

vii. Its latest audited financial statements, within three
months after the close of each financial year.

Note: Digital assets exchange operators
are also prohibited from providing direct or indirect financial
assistance to investors to invest in the digital tokens of an
issuer hosted on its platform. Also an issuer shall not be hosted
concurrently on multiple platforms or on an equity crowdfunding
platform.

CONCLUSION

The attempt by the Nigerian government to find a middle ground
between an outright ban on crypto assets and their unregulated use
after the outright ban of trading crypto currencies last year is
applaudable. In 2021, the Central Bank ordered commercial lenders
to stop transactions or operations in cryptocurrencies, citing a
threat to the financial system’s stability. The SEC stated at
the time that it would seek to protect investors and make the
market more transparent. It may seem that the Central Bank and the
Securities and Exchange Commission has now recognized the essence
of the regulation of digital currency trading in Nigeria. The new
rules are expected to boost trading by giving more clarity on the
crypto sector as the country is already one of the biggest
markets for digital assets and accounts for the largest volume of
cryptocurrency transactions outside the United States, according to
Paxful.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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