NEW RULES ON DIGITAL ASSETS

Even though the new guidelines appear favourable, there must be adequate safeguards against criminality

Using peer-to-peer networks, Kucoin in April 2022 reported that 33.4 million Nigerians traded or owned crypto assets despite restrictions on cryptocurrency transactions by the Central Bank of Nigeria (CBN). In the same month, Paxful, another crypto trading platform, rated Nigeria as the largest crypto-trading country in Africa with a volume exceeding $760 million in 2021. According to Paxful, in the same year, Nigeria recorded over 16,000 trades across the country each day. Many reasons account for the increasing resort to trading in digital assets in the country, one of which is to hedge against the precipitous loss of value of the local currency.  

Apparently due to the increasing volume of trading, and as part of its efforts to regulate digital/virtual assets such as Bitcoins and non-fungible tokens (NFTs), the Securities and Exchange Commission (SEC) recently issued guidelines on their issuance and custody in the country. The document classifies digital assets such as Bitcoin and other crypto assets as securities that are regulated by the commission.  

The new rules appear to be a consummation of SEC declaration two years ago to take a three-pronged approach to regulating innovation in the crypto sector, including safety, market deepening and providing solutions to problems. The new guidelines which define digital asset as “a digital token that represents assets such as a debt or equity claim on the issuer,” are in five parts. But taken together, they effectively legalise digital assets such as cryptocurrencies and NFTs in Nigeria, which were hitherto prohibited by the CBN. But there are questions as to whether these guidelines for trading in crypto assets can stand effectively without the concurrence of the apex bank.  

At its last Monetary Policy Committee (MPC) meeting, the CBN had been expected to take a position on the new SEC regulations on digital assets, but that was not to be. Meanwhile, in February 2021, following the October 2020 ‘EndSARS’ protests, the CBN had issued a reminder to banks and other financial institutions to prohibit dealings and payments in cryptocurrencies. That action led to calls on the SEC to clarify whether there was a contradiction in the policies of the two regulators. Consequently, SEC said it would partner with the CBN to analyse and better understand the identified risks of cryptos to ensure that appropriate regulations are put in place if transactions in crypto assets were allowed in future. It was on that basis that SEC suspended the approval of cryptocurrencies and related products after the CBN ordered banks to terminate accounts connected to digital assets.  

In the light of the foregoing, there are salient posers arising from the issuance of the new guidelines. In coming up with the new guidelines, did the SEC follow through its assurance to partner with the CBN to analyse and better understand the identified risks of cryptocurrency to ensure that appropriate regulations are put in place? Since the CBN directive to financial institutions to terminate accounts connected to digital assets subsists, how are the new SEC guidelines expected to operate? Are there adequate safeguards against associated risks in digital assets trading?   

Part of the fears against digital assets is the potential to provide incentives for criminal elements, including terrorism sponsorship. Coming at a time the International Monetary Fund (IMF) has called for the development of a new public infrastructure to connect various payment systems, including digital currencies, the timing of SEC’s new guidelines appears auspicious, but there must be fool-proof measures and adequate safeguards to checkmate possible infringements against investors as well as criminality.We hope that SEC has worked with the CBN to put those measures in place before the new rules were released to the public.