10 of the most controversial clauses in the SEC digital asset regulation

The Securities and Exchange Commission (SEC) in Nigeria released its first form of regulation surrounding digital assets last week. The new rules for Digital Assets is part of the Nigerian SEC’s effort to regulate the digital/virtual space which includes the likes of cryptocurrencies like Bitcoin and NFTs. This is a document titled, “New Rules on Issuance, Offering Platforms and Custody of Digital Assets.”

The document covers regulation on five major items ranging from issuance of digital assets to rules that govern digital asset exchanges in the country. This is a follow-through on the promise of the SEC Director-General, Lamido Yuguda, in September 2021 that there will be some form of clarity for the digital asset players.

Although a lot of industry players welcomed the move by the SEC as a step in the right direction, however, many have expressed their unapologetic displeasure surrounding how the country intends to regulate the asset class. Below are some of the most controversial clauses in the new regulation;

  1. The first controversial clause that stands out, is clause 6, which speaks on moratorium on equity interest. The clause states, “The issuer’s directors and senior management shall, in aggregate, own at least 50% equity holding in the issuer on the date of the issuance of the digital assets.” This clause is against the best standards of crypto projects as majority of crypto projects today try to bring some significant level of governance and decisions back to the community and this, allowing the owners to own 50% of equity takes decision making away from the people which is against what crypto is all about.
  2. The next controversial clause that stands out is clause 7, which speaks on the maximum amount of funds that can be raised. It states that the maximum limits are, “Twenty times the Issuer’s shareholders’ funds i.e., the maximum quantum of funds permitted to be raised within any continuous 12- month period, subject to a ceiling of N10 billion or any other ceiling as the Commission may determine from time to time.” The issue here is the ceiling of N10 billion is equivalent to approximately $24 million, using CBN’s official rate. Cryptocurrency projects are usually capital intensive and require a lot of funding and high skilled labour to scale their business, not to mention marketing and other relevant and non-relevant costs. This limit, in turn, puts a limit on the overall progress a project can raise.
  3. Another controversial clause comes from clause 8, which speaks on investment limits to the general public. The clause states, “A person may invest in an initial digital asset offering subject to the following limits; For qualified institutional and high net worth investors, no restriction on investment amount; and for retail investors, a maximum of N200,000 per issuer with a total investment limit not exceeding N2 million within a 12-month period.” This clause is very problematic because the general idea behind cryptocurrencies is the ability to give the little guy a shot at playing in the same game as the big guys. Cryptocurrencies have, and always been first about the ability to transfer value cross border and also giving everyone an equal opportunity to finance and all its benefits. Putting a restriction on the participation of retail players goes against these beliefs and then brings a class system into a world that knows no class or segregation.
  4. The next controversial clause comes in part B of the document. The reason for the bone of contention with clause 10 is first, the vague definition of Digital Assets Offering Platform (DAOP). The SEC defines them as, “an electronic platform operated by a DAOP operator for offering digital assets.” By this definition, it does not outline the major industry players in the market and the definition also puts them all under one set of rules which cannot work because these industries operate entirely differently. For instance, the laws that govern Decentralized Finance (DeFi) cannot be the same laws that will govern Play-to-Earn (P2E) platforms.
  5. Clause 11.2 speaks on the fees to be paid to operate a DAOP in Nigeria. It reads, “An applicant shall ensure that the application submitted is accompanied with the prescribed fees: Filing/Application Fee – N100,000 (One Hundred Thousand Naira only); Processing Fee – N300,000 (Three Hundred Thousand Naira only); Registration fee – N30,000,000 (Thirty Million Naira only); Sponsored Individuals Fee – N100,000 (One Hundred Thousand Naira only).” The total payment involved involves a whopping N30.5 million (approximately $73,300) in fees. Nigeria was once the poverty capital of the world and the country has high unemployment and poverty rate. These huge fees stifle innovation in the space and that is not all.
  6. Clause 11.4 speaks on Minimum paid-up capital and fidelity bond. It reads that DAOP must show, “Evidence of Required Minimum Paid up Capital – N500,000,000 (Five hundred Million Naira only) (i.e. Bank balances, Fixed asset or Investment in quoted Securities); Current Fidelity Bond covering at least 25% of the minimum paid-up capital as stipulated by the Commission’s Rules and Regulations; Notwithstanding the provision of (a) above, the Commission may at any time impose additional financial requirements on the DAOP commensurate with the nature, operations and risks posed by the DAOP.” This basically means that DAOPs must show N500 million (approximately $1.2 million) in their accounts and have a bond covering at least 25% of the amount. 25% is N125 million (approximately $300,000). These types of requirements stifle innovation and drive them out of the country.
  7. Clause 14 speaks on the Appointment of a Chief Executive Officer and Principal Officers for DAOP. Two of the requirement states that the individuals must, “hold at least a university degree or its equivalent; and have at least five (5) years cognate experience.” The first clause on having a university degree is an irrelevant and unnecessary requirement because we have seen great people like Bill Gates who are CEOs and do not have university degrees. On the second requirement, the majority of the successful crypto projects we see today are from individuals who are at the early stages of their careers. They have little to no experience and have still managed to build successful businesses.
  8. Another controversial subject is the vague definition of Virtual Assets Service Providers (VASPs). It reads, “means any entity who conducts one or more of the following activities or operations for or on behalf of another person: exchange between virtual assets and fiat currencies; exchange between one or more forms of virtual assets; transfer of virtual assets; safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.” As with DAOPs, the definition is very vague and also does not consider key industries in the space.
  9. The fees and minimum capital requirements for DAOP are the same as Central Exchanges (CEX). Asides from the fact that the SEC chose not to use the general term that describes centralized exchanges, CEX, they decided to go with another definition, Digital Assets Exchange (DAX). The issue here is that it shows the SEC is tone-deaf to the already established terms currently used in the space. Being that DAOPs and these ‘DAX’ have the same fee and minimum capital requirement, it again stifles innovation and pushes it out of the country.
  10. Clause 29 speaks on transaction fees for DAXs and it explains that the SEC will determine the fees. This is, however, impossible and clearly shows that the SEC still has a lot of learning to do when it comes to virtual assets. When it comes to sending money via blockchain, it is determined by the level of network congestion. This means that the fees cannot be determined by one single body.

On a general note, majority of the documentation to be submitted is quite unnecessary and cumbersome according to Samuel Oyenike, a cryptocurrency trader and enthusiast. He further states, “The SEC must immediately review these laws and speak to stakeholders in the space for more guidance. If not, if these laws stand, a lot of the innovation which drives our fintech space will be moved abroad and that will, in turn, ruin our economy.”

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