Introduction

On the 11^th 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.