With the recent pronouncement by the Securities and Exchange Commission (SEC), Nigeria has joined the league of countries taking measures to protect investors in virtual currencies through regulation. While the regulation is yet to take effect, the statement from SEC shows a shift in government stance on cryptocurrencies. SAMSON AKINTARO reports
Until last week, the Nigerian government had remained unequivocal about its stance on virtual currencies with words of caution to Nigerian investors. In 2018, the Central Bank of Nigeria (CBN) had for the umpteenth time issued another warning stating that virtual currencies were not legal tender in the country. The apex bank had said that cryptocurrencies such as Bitcoin, Ripples, Monero, Litecoin, Dogecoin and Onecoin, and exchanges such as NairaEx, were not licensed or regulated by it. But in spite of the warnings, many Nigerians continue to invest in the various currencies. As of 2018, investments by Nigerians in the cryptocurrency market was said to be in excess of $5 million. The Nigerian market was also judged to be the seventh largest in the world in terms of peer-to-peer transactions by Local Bitcoins in the year. This reality may have forced the Securities and Exchange Commission (SEC) to come up with a regulation proposal. In a document titled “Statement on Digital Assets and their Classification and Treatment,” which was released last week, SEC had made clear its readiness to regulate cryptocurrencies and its promoters in the country.
While declaring cryptocurrencies as securities, SEC said in line with Section 13 of the Investment and Securities Act, 2007, it had the powers to regulate investments and securities business in Nigeria. Hence, it said it would now begin to regulate crypto-token or crypto-coin investments “when the character of the investments qualifies as securities transactions.” SEC further stated that “all Digital Assets Token Offering (DATOs), Initial Coin Offerings (ICOs), Security Token ICOs and other blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors, shall be subject to the regulation of the commission.” “Existing digital assets offerings prior to the implementation of the Regulatory Guidelines will have three (3) months to either submit the initial assessment filing or documents for registration proper, as the case may be” the commission added. While noting that digital assets offerings provide alternative investment opportunities for the investing public and must operate in a manner that is consistent with investor protection, SEC said the general objective of regulation is not to hinder technology or stifle innovation but to create standards that encourage ethical practices that ultimately make for a fair and efficient market. “Section 13 of the Investment and Securities Act, 2007 conferred powers on the commission as the apex regulator of the Nigerian capital market to regulate investments and securities business in Nigeria.
“In line with these powers, SEC has adopted a three-pronged objective to regulate innovation, hinged on safety, market deepening, and providing solution to problems. This will guide its strategy, its regulations and its interaction with innovators seeking legitimacy and relevance,” it said. Giving details of the regulation, SEC stated: “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.” “Issuers or sponsors are expected to satisfy the burden of proving that the virtual assets do not constitute securities by making an initial assessment filing. However, where the finding of the Commission is that the virtual assets are indeed securities (not structured to be exclusively offered through crowdfunding portals or other exempt methods), then the issuer or sponsor must register the digital assets,” it added.
Regulation of persons
SEC in the new regulatory document stated that “any person, (individual or corporate) whose activities involve any aspect of Blockchainrelated and virtual digital asset services, must be registered by the Commission and as such, will be subject to the regulatory guidelines. “Such services include, but are not limited to reception, transmission and execution of orders on behalf of other persons, dealers on own account, portfolio management, investment advice, custodian or nominee services. “Issuers or sponsors (start-ups or existing corporations) of virtual digital assets shall be guided by the Commission’s regulation. The Commission may require Foreign or non-residential issuers or sponsors to establish a branch office within Nigeria. “However foreign issuers or sponsors will be recognized by the commission where a reciprocal agreement exists between Nigeria and the country of the foreign issuer or sponsor. “A recognition status will also be accorded, where the country of the foreign issuer or sponsor is a member of the International Organisation of Securities Commissions (IOSCO),” the Commission stated.
Cryptocurrency global stance
While some countries see the advent of blockchain technology and cryptocurrencies as a threat, others see a potential in the technology behind it and are developing a cryptocurrency- friendly regulatory regime as a means to attract investment in technology companies that excel in this sector. Countries such as Spain, Belarus, the Cayman Islands, and Luxemburg fall into this category. Other countries such as Marshall Islands, Venezuela, the Eastern Caribbean Central Bank (ECCB) member states, and Lithuania, have gone further by developing their own system of cryptocurrencies.
Losses to cryptocurrencies
Nigeria is said to be losing billions of naira yearly due to the initial government’s apathy towards digital currency. According to industry experts, some foreign investors in the country had been repatriating funds from the country through cryptocurrencies, thus bypassing the normal repatriation process and denying the country of taxes According to the President of Stakeholders in Blockchain Technology Association of Nigeria (SIBAN) Mr. Paul Ezeafulukwe, government needs to sit down with the experts to get an understanding of how the blockchain technology can help the economy. “I expect that by now, the government should have pushed the private sector to form a stable coin, which the country can use in place of dollars. “We can only have dollar as our reserve, but we can use stable coins to give to our traders who go to China,America and Europe to trade. And over time, we can back it up by oil or we can even back it up by gold we can back it up by so many currencies, all those are possibilities on the blockchain technology,” he said.
Amidst several warnings in the past, Ezeafulukwe noted that the number of Nigerians trading in cryptocurrencies was rising by the day. “We have a good number of bankers who are into cryptocurrency, but majorly it’s among unemployed youths who have seen an opportunity and they are taking hold of this opportunity to engage themselves into productivity. And it also gives us a lot of concern because we’ve noticed that people from other countries are exploiting the fact that some of our people don’t understand the dynamics of good projects in the blockchain space.”
Before now, stakeholders in the cryptocurrency had longed for the government’s regulation, even though they claim there has been a self-regulation mechanism among the traders in Nigeria. According to Ezeafulukwe, “the truth of the technology is that there are a lot of limitations to regulation but there are core things that can be regulated. One is KYC-Know your customer, Ezeafulukwe, who is the President of the umbrella body of cryptocurrencies traders in Nigeria, said: “We can’t operate independently, there has to be some regulations, the one that can be regulated. So, it has to be a mix of selfregulation, and government regulations. We also need to understand that you can have Bitcoin and the government will not know about it. So, that’s where self-regulation comes in. Now, where government can regulate, they need to come in, but before you regulate any industry, you have to grow it.”
Blockchain for governance
Beyond the digital currencies, industry experts said Nigeria has a lot to gain by deploying blockchain technology for governance. According to the Chief Executive Officer of Kure Holdings, Mr Tega Abikure, the adoption of blockchain technology could help the country put an end to tax and election frauds. “It is completely transparent and cannot be changed; it can be used to create a decentralised system of payment where the taxpayer had unhindered access to the collector which is the government. It enhances revenue collection and removes the challenges of remittances, everything becomes easy when it is brought to the blockchain infrastructure,” he said. According to him, the technology addresses complexities in governance and administrative systems, as it is essentially a decentralised transaction ledger in which digital information can be distributed and viewed but not copied or altered.
The move by SEC is, no doubt, long overdue. And now that the government is set to regulate the multi-million dollar market, it must do so in a manner will not stifle innovation. The regulation should ensure Nigeria’s economy benefits from the huge opportunities in the virtual currencies space.