Nigeria SEC Digital Asset Framework: Points to watch

Rules on Issuance of Digital Assets as Securities

Addresses those seeking to raise capital through issuing digital assets, such as ICOs or any other kind of decentralised ledger technology. The emphasis of this section is on whether a digital asset offering constitutes a security.

  • Whitepapers can be circulated pending SEC approval but must contain a disclaimer stating they have not been formally registered.
  • Applications must contain independent legal evaluation as to whether the proposed digital asset offering constitutes securities.
  • KYC procedures, risk management and security protocols for the token.
  • Independent legal certification that the issuer has acquired necessary licenses and certificates.
  • The maximum funds raised can be 20x the issuer’s shareholders’ funds up to a cap of NGN 10bil.
  • The issuer must demonstrate the funds being raised are sufficient to fulfil the aims of the project, and if the soft cap is not met refund all investors within 5 days.
  • Retail investors can invest NGN 200k per issuance, with an annual limit of NGN 2mil.

Digital Assets Offering Platforms (DAOPs)

Addresses electronic platforms designed to offer digital assets, such as those on which ICOs are hosted and tokens subsequently launched.

  • Processing fee — NGN 300k
  • Registration fee — NGN 30m
  • Sponsored individuals fee — NGN 100k
  • Evidence of required minimum paid up capital of NGN 500m, held in either liquid or illiquid assets.
  • Active insurance (fidelity bond) of at least 25% of minimum paid up capital.
  • DAOP CEOs must be appointed for a 5 year term, with a 2 term limit. They must fulfill specific experiential and educational requirements.
  • Clearly highlight necessary risk warning statements associated with individual issuers and projects.
  • Establish requisite whistleblowing, segregation of function and compliance protocols.
  • Set up a robust, board-approved risk management framework addressing events posing a significant risk to operations.
  • Develop an internal audit function.
  • Publicly disclose conflicts of interest, including holdings it may have in issued assets or referral schemes.
  • This account must be operated by a Central Securities Depository registered by the SEC.
  • Only release funds once the targeted amount sought has been raised and there is no material change to either the issuer or the DAOP.

Digital Asset Custodians (DACs)

A person or service who maintains custody over users’ digital assets on the users’ behalf. Examples include self-custody software (hard/soft wallets) or exchange wallets.

  • Establishing and maintaining written policies containing a clear line of reporting, authorisation and segregation of functions.
  • Lines of reporting must also include anti-corruption and whistleblowing procedures that are consistent with the nature and scale of the DAC.
  • Provable safeguarding and security policies with respect to client data confidentiality.
  • DAC risk management systems must include strategies to monitor and mitigate material risks. These risks must be regularly internally audited and reported to senior management.
  • Ensure employees involved in the key generation process are prevented from having unauthorised access to client assets.
  • Allow clients access to their assets independently of the DAC.
  • These assets must be probably segregated from the DAC’s own assets, tracked by accurate and up to date records.
  • Foreign DACs must have a separate account for Nigerian custodian services.

Virtual Asset Providers (VASPs)

Rules governing all platforms facilitating trading, exchange and transfers of digital assets. These rules do not apply to technology services merely providing infrastructure or systems to a DEX.

  • Exchange between virtual assets.
  • Transfer for virtual assets.
  • Administration of virtual assets.
  • Provision of financial services related to offer/sale of virtual assets.
  • Collect self-declared risk assessment forms and make clear to users that loss resulting from trading activities is not covered by any protection fund.
  • Relevant declaration of fees, education materials and complaints mechanisms for users.
  • Provide the SEC access to the platform when required.

Digital Assets Exchange (DAX)

In addition to the requirements set out for VASPs, DAXs must satisfy further conditions for operation.

  • DAXs’ internal guidelines must incorporate the use of a secondary site to ensure that critical IT systems can resume operations in case of disruptive events.
  • DAXs must submit an application to the SEC containing the asset’s whitepaper, legal compliance information and security protocols (including number of nodes and history of hacks).
  • All trading activity, market structure, order types must be recorded and disclosed to the SEC.
  • The DAX must have systems in place to detect and deter market manipulation, manage volatility and ensure transparent execution, clearing and intra-day settlement.

Conclusion

It’s important to remember that this framework is still subject to consultation, feedback and subsequent change. It is, after all, just a framework for now.

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