Trade has been an essential aspect of human life for millennia. Through that time, humans have sought ways to make trading goods and services easier and more efficient. From the barter system, to gold and silver coins, to the fiat currency present in today’s world, the financial system has always been in a state of flux and innovation. While the idea of cryptocurrency had been around since the 80s, it wasn’t until 2009, that the idea finally found concrete realization with the invention of the world’s longest surviving cryptocurrency, bitcoin. The goal of cryptocurrency was creating a new decentralized, anonymous yet transparent financial system with no corporate middlemen as is the case with the traditional financial system. The thought of quick transaction times, anonymity and little to no fees gained popularity quite quickly with more than 23,000 coins being invented and 425 million users adopting the technology over the course of a decade and a half. Unfortunately, this noble dream quickly gave way to nefarious actors looking to capitalize on the unregulated and anonymous nature of crypto to commit fraud and launder money. It is for this reason that governments across the world began cracking down on the sector and looking for ways to effectively regulate it and kick out the bad actors without stifling its potential for growth and change. Nigeria is no exception and in this article, the regulatory stance of the government in regards to companies in the crypto space will be discussed.

Before looking at the regulations proper governing crypto companies, we’ll take a slight detour to understand the legal status of cryptocurrency in Nigeria. Is crypto legal tender or a security? The SEC answers this question. In September, 2020, it released its Statement on Digital Assets and Their Classification and Treatment which amongst others states:

"The position of the Commission is that virtual crypto assets are securities, unless proven otherwise. Thus, the burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC, is placed on the issuer or sponsor of the said assets."

In other words, all crypto assets are classified as securities in Nigeria and are regulated by the SEC unless proven otherwise by the issuer of said asset. Naturally, the obvious next question would be how would an issuer prove otherwise? If an issuer can show that his digital asset is "structured to be exclusively offered through crowdfunding portals or other exempt methods" via an initial assessment filing, his asset would not fall under the regulatory purview of the SEC. Now that it’s clear what regulatory authority covers digital assets and the extent of that coverage, it is time to discuss the regulations proper.

In May, 2022, the SEC released the Rules on Issuance, Offering Platforms and Custody of Digital Assets regulating digital assets and Virtual Assets Service Providers (VASPs). These Rules are, in the meantime, the primary regulation governing crypto companies in the country. While the Rules use the terms “digital assets” and “virtual assets” to refer to crypto assets, for the purposes of this article, both terms will be used interchangeably. In regulatory parlance, a crypto company is usually referred to as a VASP (Virtual Asset Service Provider). In Nigeria, a company is considered a VASP if it performs one or more of the following activities:

• Exchange between virtual assets and fiat currencies.
• Exchange between one or more forms of digital assets.
• Transfer of virtual assets.
• Safekeeping and/or administration of virtual assets.
• Participation in and provision of financial services related to an issuer's offer and/or sale of a virtual asset

To register as a VASP, a company is required to register on the appropriate SEC form as well as accompany the application with the relevant evidence and undertakings contained in Part E (4) of the Rules showing the solvency of the company as well as the fit and proper character of its directors. In addition, a VASP is required to have an office in Nigeria managed by a director of the company.

While the general term “VASP” covers all companies operating in the crypto space, further classifications have been given to these companies based on the specific services they offer to their users. These classifications are as follows:

• Digital Assets Offering Platforms (DAOPs)
• Digital Asset Custodians (DACs)
• Digital Assets Exchange (DAX)

Companies have further regulatory commitments to fulfil based on the classification they fall under. These will be discussed below.

Digital Assets Offering Platforms

The Rules define a DAOP as an electronic platform for offering digital assets. To better understand this definition, it is necessary to first understand what a digital asset offering is. A digital asset offering is simply when a digital asset is “offered” to the public by the issuers/sponsors in exchange for cash or other digital assets. The key ingredient of what constitutes a digital offering is that the asset is purchased directly from the issuer of the said asset. It is quite similar to what is obtainable during an Initial Public Offering (IPO) in the traditional financial market. Now that the concept of a digital asset offering is better understood, the initial definition of a DAOP begins to make a lot more sense. A DAOP is simply the place where a digital asset offering takes place. In order to register as a DAOP operator in Nigeria, companies, in addition to the general requirements for VASPs, have to submit the appropriate forms and documents contained in Part B (11 & 12) of the Rules as well as comply with the following financial obligations:

• Pay an application fee of one hundred thousand Naira
• Pay a processing fee of three hundred thousand Naira
• Pay a registration fee of thirty million Naira
• Pay a sponsored individual's fee of one hundred thousand Naira per individual (for principal officers of the company)
• Evidence of minimum paid up capital of five hundred million Naira.
• Fidelity bond covering at least 25% of the minimum paid up capital.

In approving what offerings are carried out via its platform, a registered DAOP is saddled with the following obligations:

• Carrying out due diligence on a prospective issuer taking into account the nature of the issuer’s business as well as the features of the token to be offered.
• Assessing the whitepaper furnished by the issuer ensuring it doesn’t contain any false or misleading statements or material omissions.
• Making the whitepaper accessible to investors via its platform.

Side Note:

A white paper is a document that outlines important information relating to a cryptocurrency project. It usually explains the underlying technology as well as objectives and real world use cases. See for instance, the bitcoin whitepaper.

A DAOP is also saddled with the following noteworthy obligations in its day to day activities:

• Disclose information required by the SEC.
• Take reasonable steps to secure the platform from cyber threats.
• Maintain proper records of all transactions executed on the platform.
• Carry out periodic reviews and audits on its systems.
• Ensure investors’ assets are properly safeguarded from unauthorized access.
• Ensure its fees are reasonable and transparent.

Digital Asset Custodian (DAC)

A DAC is defined by the Rules 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.” In simple terms, a DAC is simply a person who holds digital assets on behalf of another person. Wallets like Metamask and Phantom are perfect examples of DACs. In addition to the general requirements for VASPs, companies seeking to register as DACs are required to satisfy the eligibility requirements for a Custodian or Trustee under the SEC Rules. Foreign DACs can also be registered in Nigeria provided they operate legally in a jurisdiction with which the Nigerian SEC has regulatory arrangements with.

Part C (31 -37) of the Rules outlines the obligations as well as the standards required of a DAC, a few important ones are highlighted below:

• Ensure its fees are fair and reasonable.
• Disclose such information the SEC may require.
• Establish a risk management framework to identify and eliminate potential risks.
• Perform regular audit checks.
• Maintain a secure storage medium to store clients’ virtual assets.
• Keep up to date transaction records.

Digital Assets Exchange (DAX)

A DAX is an electronic platform that facilitates the trading of digital/virtual assets. Platforms like Binance, Bybit, Coinbase, etc. are examples of exchanges. To register as a DAX, a company must submit the appropriate forms and documents contained in Part E (6 - 9) of the Rules as well as fulfil the following financial requirements:

• Pay an application fee of one hundred thousand Naira
• Pay a processing fee of three hundred thousand Naira
• Pay a registration fee of thirty million Naira
• Pay a sponsored individual's fee of one hundred thousand Naira per individual (for principal officers of the company)
• Evidence of minimum paid up capital of five hundred million Naira.
• Fidelity bond covering at least 25% of the minimum paid up capital.

A DAX is also required to comply with the regulatory requirements listed in Part E of the Rules. A few noteworthy ones are highlighted below:

• Report weekly and monthly trading statistics.
• Prohibited from offering financial assistance to investors to invest on its platform.
• Establish a risk management framework.
• Carry out regular audits.
• Prohibited from facilitating the trading of any digital/virtual asset that hasn’t received a “no objection” from the SEC.
• Ensure trading information is available to investors on the platform on a real-time basis.
• Maintain proper records of transactions executed on the platform.
• Charge only fees that have been approved by the SEC.

Conclusion

In this article, the regulatory requirements of crypto companies in Nigeria have been discussed under their relevant classifications. It is important to note however, that a company is not restricted to carrying out only one operation. A company can act as a DAC, DAX and DAOP altogether, provided it appropriately registers under each classification. While the SEC’s the Rules on Issuance, Offering Platforms and Custody of Digital Assets is a good first step to effectively regulating the sector, more governmental effort is still required to ensure the effective regulation and protection of investors in this new and ever evolving digital market.