Nancy Ezeonugo, a legal practitioner and investment banker,
writes that there should be a framework where cryptocurrency is
guided in Nigeria to be a unit of account, store of value and
medium of exchange
Fintech and cryptocurrencies which is a digital asset/currency
designed to work as a medium of exchange that uses cryptography to
secure its transactions, to control the creation of additional
units, and to verify the transfer of assets – most notably Bitcoin
and Ether in particular present enormous and limitless
opportunities. With a growing acknowledgment and acceptance of the
technology in Nigeria – both as new and valuable technologies as
well as potentially lucrative investment vehicles, it is now
apparent that regulators such as the Central Bank of Nigeria (CBN)
have taken notice. But what is the opinion of the Nigerian
Securities and Exchange Commission (SEC)?
It would be injustice on my part if I fail to mention that the
Bitcoin is the perfect symbol of cryptocurrencies as cryptocurrency
is the insignia of block-chain technology. With a market
capitalization of $284 billion and a current price above $19,000,
Bitcoin remains the lion in the jungle of cryptocurrencies. Bitcoin
at its core is based on a concept called the block-chain. And for
many, it is this concept which is far more interesting than Bitcoin
in itself. Further, a block-chain is by its very nature a safe
record of things which is very hard to manipulate. The technology
can be used across boards like smart contract, e-voting, identity
management, healthcare amongst others.
Given the increasing demand for cryptocurrencies, it is no
surprise that market participants are responding and racing to
satisfy that demand by producing more of such currencies or
so-called tokens representing the currencies. Additional digital
currencies, or to be precise the tokens representing interests in
such currencies, are produced and disseminated by a process
colloquially known as an “Initial Coin Offering” or “ICO,” not
coincidentally a term which is similar to the better-known term
Initial Public Offering (IPO).
The agreement to formally adopt the use in Nigeria by the CBN
and the call by the Fintech Association of Nigeria confirms this
and it is expected that a regulatory framework for same will be
made available, but an exact time or date for its availability is
not certain. Cryptocurrencies have a distributed and decentralized
nature; granting transactions to be made without intermediaries and
giving the players control over their money. Does it then imply
that it cannot and should not be regulated?
Central to the availability of the regulatory framework and the
threshold question of whether the SEC whose power is derived from
the Investment and Securities Act (ISA) has jurisdiction to
regulate these activities is the question of whether the token in
question is a “security” as defined in the ISA and whether the
offer, sale and distribution of such a token (such as via an ICO)
would be deemed as an initial offering of a security. A look into
the definition of securities in Section 315 of ISA of 2007 does not
seem to capture any point on cryptocurrencies as provided
below;
“Securities” mean-
(a) Debentures, stocks or bonds issued or proposed to be issued
by a government;
(b) Debentures, stocks, shares, bonds or notes issued or
proposed to be issued by a body corporate;
(c) Any right or option in respect of any such debentures,
stocks, shares, bonds or notes; or
Commodities, futures, contracts, options and other derivatives,
and the term securities in this Act includes those securities in
the category of the securities listed in a (a) – (d) above which
may be transferred by means of electronic mode approved by the
Commission and which may be deposited, kept or stored with any
licensed depository or custodian company as provided under this
Act.
In a statement on Cryptocurrencies and Initial Coin Offering by
the U.S Securities and Exchange Commission Chairman, Jay Clayton on
the 11th of December 2017the U.S SEC has concluded that in many
instances a cryptocurrency token in fact would meet the legal
definition of a security and thus be subject to its jurisdiction.
Therefore, the offer or sale of such a security also must comply
with the federal securities laws, which appears to be independently
adopting a similar approach as to Canada’s approach, which was
released on the 24th of August 2017. Can this be the same position
for Nigeria?
The statement also mentioned that the U.S SEC’s legal analysis
relies on a traditional analysis of the definition of a security
under the “investment contract” test and whether the tokens in
question met that definition. They reaffirmed the fundamental
principle under this test that the “hallmark of a security is an
investment of money or value in a business or operation where the
investor has a reasonable expectation of profits based on the
efforts of others” and noted that anyone who solicits something of
value in exchange for an interest in a digital or other novel form
of storing value, such as a cryptocurrency, should carefully
consider whether they are creating an investment arrangement that
constitutes a security.
They further explained that not only must any offer and sale of
such a security comply with the fundamental registration and
disclosure requirements under the Securities Act of 1933, but
market participants must also consider other aspects of the federal
securities laws if they conclude that the assets in question meet
the definition of a security.
According to the U.S SEC, additional potential obligations
include the following:
If a platform facilitating transactions in such securities is
operating as an “exchange,” the platform may require registration
as an exchange or “alternative trading system” under the United
States Securities Exchange Act of 1934.
If a person facilitates the purchase and sales of the token, in
either the primary or secondary markets, the person may need to
register as a broker-dealer under the United States Securities
Exchange Act of 1934.
If the composition of assets of the entity offering and selling
the security causes it to meet the definition of an “investment
company,” even if inadvertently or temporarily, the entity may
require registration under the United States Investment Company Act
of 1940.
If a person provides advice about an investment in the security,
that person may be deemed an “investment adviser” and may need to
register as such under the United States Investment Advisers Act of
1940.
With the above reference points made by the U.S. SEC and
Canada’s approach, the Nigerian regulators may want to take into
consideration the above mentioned approach and additional potential
obligations of the regulators in Nigeria. Can the laws governing
the Capital Market operations in Nigeria provide for this
development? Will this regulatory framework open the door for this
investment to develop in a properly regulated manner?
With an unclear regulatory stance on cryptocurrencies in Nigeria
and the constant delay being exhibited by the CBN in releasing
regulations, it remains unseen how Nigeria expects to positively
utilize the cryptocurrency. The ownership or possession of Bitcoin,
Ethereum or related cryptocurrencies is therefore not illegal in
Nigeria as at the date of this publication.
The regulatory framework is needed to protect consumers and the
wider financial system. Therefore, Bitcoin and other
cryptocurrencies should not remain in a legal vacuum without the
appropriate supervision.
My Take
If the original concept as it is being said in some quarters is
that “Bitcoin is to eventually replace Fiat currency” and with
buyers and owners of Bitcoin holding it or even hoarding as against
using it as a means of payment, then that might just be the reason
why the price has skyrocketed.
When the primary motivation on a currency is to “hold” instead
of deploying it as a “means of payment or exchange”, then
equilibrium-value point would have a deflection. Over time, the
value becomes speculative instead of being driven merely by the
forces of demand and supply.
I would be open to a SEC framework where the Cryptocurrency is
guided in Nigeria to be a unit of account, a store of value and a
medium of exchange.
Nancy Ezeonugo, a legal practitioner and investment banker,
writes that there should be a framework where cryptocurrency is
guided in Nigeria to be a unit of account, store of value and
medium of exchange
Fintech and cryptocurrencies which is a digital asset/currency
designed to work as a medium of exchange that uses cryptography to
secure its transactions, to control the creation of additional
units, and to verify the transfer of assets – most notably Bitcoin
and Ether in particular present enormous and limitless
opportunities. With a growing acknowledgment and acceptance of the
technology in Nigeria – both as new and valuable technologies as
well as potentially lucrative investment vehicles, it is now
apparent that regulators such as the Central Bank of Nigeria (CBN)
have taken notice. But what is the opinion of the Nigerian
Securities and Exchange Commission (SEC)?
It would be injustice on my part if I fail to mention that the
Bitcoin is the perfect symbol of cryptocurrencies as cryptocurrency
is the insignia of block-chain technology. With a market
capitalization of $284 billion and a current price above $19,000,
Bitcoin remains the lion in the jungle of cryptocurrencies. Bitcoin
at its core is based on a concept called the block-chain. And for
many, it is this concept which is far more interesting than Bitcoin
in itself. Further, a block-chain is by its very nature a safe
record of things which is very hard to manipulate. The technology
can be used across boards like smart contract, e-voting, identity
management, healthcare amongst others.
Given the increasing demand for cryptocurrencies, it is no
surprise that market participants are responding and racing to
satisfy that demand by producing more of such currencies or
so-called tokens representing the currencies. Additional digital
currencies, or to be precise the tokens representing interests in
such currencies, are produced and disseminated by a process
colloquially known as an “Initial Coin Offering” or “ICO,” not
coincidentally a term which is similar to the better-known term
Initial Public Offering (IPO).
The agreement to formally adopt the use in Nigeria by the CBN
and the call by the Fintech Association of Nigeria confirms this
and it is expected that a regulatory framework for same will be
made available, but an exact time or date for its availability is
not certain. Cryptocurrencies have a distributed and decentralized
nature; granting transactions to be made without intermediaries and
giving the players control over their money. Does it then imply
that it cannot and should not be regulated?
Central to the availability of the regulatory framework and the
threshold question of whether the SEC whose power is derived from
the Investment and Securities Act (ISA) has jurisdiction to
regulate these activities is the question of whether the token in
question is a “security” as defined in the ISA and whether the
offer, sale and distribution of such a token (such as via an ICO)
would be deemed as an initial offering of a security. A look into
the definition of securities in Section 315 of ISA of 2007 does not
seem to capture any point on cryptocurrencies as provided
below;
“Securities” mean-
(a) Debentures, stocks or bonds issued or proposed to be issued
by a government;
(b) Debentures, stocks, shares, bonds or notes issued or
proposed to be issued by a body corporate;
(c) Any right or option in respect of any such debentures,
stocks, shares, bonds or notes; or
Commodities, futures, contracts, options and other derivatives,
and the term securities in this Act includes those securities in
the category of the securities listed in a (a) – (d) above which
may be transferred by means of electronic mode approved by the
Commission and which may be deposited, kept or stored with any
licensed depository or custodian company as provided under this
Act.
In a statement on Cryptocurrencies and Initial Coin Offering by
the U.S Securities and Exchange Commission Chairman, Jay Clayton on
the 11th of December 2017the U.S SEC has concluded that in many
instances a cryptocurrency token in fact would meet the legal
definition of a security and thus be subject to its jurisdiction.
Therefore, the offer or sale of such a security also must comply
with the federal securities laws, which appears to be independently
adopting a similar approach as to Canada’s approach, which was
released on the 24th of August 2017. Can this be the same position
for Nigeria?
The statement also mentioned that the U.S SEC’s legal analysis
relies on a traditional analysis of the definition of a security
under the “investment contract” test and whether the tokens in
question met that definition. They reaffirmed the fundamental
principle under this test that the “hallmark of a security is an
investment of money or value in a business or operation where the
investor has a reasonable expectation of profits based on the
efforts of others” and noted that anyone who solicits something of
value in exchange for an interest in a digital or other novel form
of storing value, such as a cryptocurrency, should carefully
consider whether they are creating an investment arrangement that
constitutes a security.
They further explained that not only must any offer and sale of
such a security comply with the fundamental registration and
disclosure requirements under the Securities Act of 1933, but
market participants must also consider other aspects of the federal
securities laws if they conclude that the assets in question meet
the definition of a security.
According to the U.S SEC, additional potential obligations
include the following:
If a platform facilitating transactions in such securities is
operating as an “exchange,” the platform may require registration
as an exchange or “alternative trading system” under the United
States Securities Exchange Act of 1934.
If a person facilitates the purchase and sales of the token, in
either the primary or secondary markets, the person may need to
register as a broker-dealer under the United States Securities
Exchange Act of 1934.
If the composition of assets of the entity offering and selling
the security causes it to meet the definition of an “investment
company,” even if inadvertently or temporarily, the entity may
require registration under the United States Investment Company Act
of 1940.
If a person provides advice about an investment in the security,
that person may be deemed an “investment adviser” and may need to
register as such under the United States Investment Advisers Act of
1940.
With the above reference points made by the U.S. SEC and
Canada’s approach, the Nigerian regulators may want to take into
consideration the above mentioned approach and additional potential
obligations of the regulators in Nigeria. Can the laws governing
the Capital Market operations in Nigeria provide for this
development? Will this regulatory framework open the door for this
investment to develop in a properly regulated manner?
With an unclear regulatory stance on cryptocurrencies in Nigeria
and the constant delay being exhibited by the CBN in releasing
regulations, it remains unseen how Nigeria expects to positively
utilize the cryptocurrency. The ownership or possession of Bitcoin,
Ethereum or related cryptocurrencies is therefore not illegal in
Nigeria as at the date of this publication.
The regulatory framework is needed to protect consumers and the
wider financial system. Therefore, Bitcoin and other
cryptocurrencies should not remain in a legal vacuum without the
appropriate supervision.
My Take
If the original concept as it is being said in some quarters is
that “Bitcoin is to eventually replace Fiat currency” and with
buyers and owners of Bitcoin holding it or even hoarding as against
using it as a means of payment, then that might just be the reason
why the price has skyrocketed.
When the primary motivation on a currency is to “hold” instead
of deploying it as a “means of payment or exchange”, then
equilibrium-value point would have a deflection. Over time, the
value becomes speculative instead of being driven merely by the
forces of demand and supply.
I would be open to a SEC framework where the Cryptocurrency is
guided in Nigeria to be a unit of account, a store of value and a
medium of exchange.
Read more https://nairalaw.com/wither-the-regulatory-framework-on-cryptocurrency/