Afcacia

The Securities and Exchange Commission (SEC) of Nigeria has announced a significant development in its efforts to regulate and foster innovation within the country’s digital asset sector. On August 29, 2024, the SEC revealed that it had granted “Approval-in-Principle” to two digital asset exchanges under its Accelerated Regulatory Incubation Program (ARIP).

Additionally, five firms have been admitted to test their business models and technologies under the SEC’s broader Regulatory Incubation (RI) Program. These moves represent a critical step in the SEC’s strategy to ensure investor protection while enabling the growth of the digital asset market.

The ARIP, introduced by the SEC, is designed to onboard firms that began operations before the release of the Rules on Virtual Asset Service Providers in May 2022. This program allows such companies to continue operating while their models are rigorously evaluated against regulatory standards. On the other hand, the RI Program provides a controlled environment for new digital asset firms to test innovative products and services in real-time, under close supervision by the SEC.

“The SEC uses this medium to reiterate that only approved digital exchanges and platforms are legally authorized to carry out the business of crypto trading in any form in Nigeria. In this regard, the ARIP and RI remain the only avenues for well-intentioned entities to legitimately introduce their digital products and services to the Nigerian Capital market,” the SEC said in a statement.

This current cohort of firms in both the ARIP and RI Programs is marked by an increased use of distributed ledger technology (DLT) to create and trade crypto assets. The SEC will conduct short-term, small-scale tests on these technologies, which will inform future policy development in this rapidly evolving sector. The primary objective is to establish robust consumer safeguards while assessing the viability of these innovative financial products in the Nigerian market.

The SEC’s grant of Approval-in-Principle is a preliminary step towards full registration, ensuring that each product or service meets the necessary standards for transparency and consumer protection. The approved entities will be closely monitored as they work towards fulfilling the SEC’s comprehensive regulatory requirements.

Obinna Iwuno, president, SiBAN (Stakeholders in Blockchain Technology Association of Nigeria), told Afcacia that the issuing of licenses by the SEC is a great step in the right direction which will cast a positive light on Nigeria and the industry at large.

“A lot of negativity has been put out there on the media and the international space and the global community about our country. First of all it was the CBN ban and restrictions of crypto transactions in 2021, then the arrests of crypto traders by law enforcement, then followed with the Binance officials saga that is still ongoing,” Iwuno said. “As a practitioner and leader in the industry, I can tell you how much this has affected us. A lot of entities and organizations that are interested in Nigeria have shunned our country  due to the lack of regulatory clarity.”

Participants in the Cohort

The two digital asset exchanges approved under the ARIP are Busha Digital Limited and Quidax Technologies Limited. Both companies have established themselves as key players in Nigeria’s burgeoning cryptocurrency market.

Busha operates a digital exchange that facilitates the buying and selling of crypto assets with fiat currency. The platform, accessible via mobile and web applications, allows users to trade, store, and invest in cryptocurrencies, making it a vital service for individuals and businesses in Nigeria and other developing economies.

Quidax runs a cryptocurrency trading platform leveraging blockchain technology to list and trade already issued crypto tokens. The platform is designed to be user-friendly, with both web and mobile access, and includes a digital wallet for storing and transacting in a variety of cryptocurrencies.

In the RI Program, four Digital Asset Offering Platforms and one Digital Asset Custodian have been admitted – Tovotech, Wrapped CBDC, Housing Exchange, Blockvault Custodian and Dream City Capital.

Trovotech Ltd facilitates the creation of digital tokens for trading tokenized real-world illiquid assets, such as housing, agriculture, and infrastructure, as securities. Wrapped CBDC Ltd plans to introduce a Nigerian-issued stablecoin, cNGN, pegged 1:1 to the Nigerian naira. This stablecoin aims to facilitate local and cross-border crypto transactions.

HousingExchange.NG Ltd enables property developers to raise capital through tokenization and provides an integrated exchange feature for liquidating investments. The real estate tokens are planned to be offered in denominations as low as ₦50,000, allowing token owners to earn rent and capital gains.

Dream City Capital offers a digital real estate investment platform, allowing investors to acquire equity ownership in pre-vetted residential and commercial properties through a Special Purpose Company (SPC) framework.

Blockvault Custodian Ltd is a digital asset custodian which provides secure storage, management, and safekeeping of assets. The platform is designed to comply with anti-money laundering (AML) and know-your-customer (KYC) regulations, including continuous transaction monitoring.

Broader Implications

The SEC has clarified that these are not the only entities that have applied to the ARIP and RI Programs. Other applications are under review, with approvals being granted on a case-by-case basis, contingent on meeting all SEC requirements.

“So those operations that they want to come and set up in Nigeria that will offer services, create jobs and generate revenue for our government has not been done. Secondly is the investments that they will bring in, they didn’t come because of the lack of regulatory clarity, also funding startups from Nigeria has also suffered from this as most of the investors are foreign, and will require you to register in other jurisdictions outside Nigeria with clear regulations to get funded,” Iwuno explained.

“So now you have Nigerians running their companies as foreign entities in foreign countries and we are not capturing that value which is meant to belong to us. So this step taken by the SEC is very important. The world should know about it that Nigeria has once again set the place and taken its rightful position as the leader in Africa.”

Nigeria accounts for over 60% of the Web3 adoption and trade volume in Africa, and leads in innovation and number of crypto startups in the sector. It is also among the top three users of digital assets and crypto globally.  “So it is very important that we are the first to regulate and issue licenses,”says Iwuno. “With this win on our plate, the government needs to also add another win fast in the heels of this win by resolving the Binance officials issue. Let the law and the rule of law prevail in the matter, and let the government ensure to act in the most obtainable global standards of practice.”

Nigeria’s tumultuous relationship with cryptocurrency and digital assets has had a profound impact on the country’s standing in the international crypto scene. Several factors have contributed to this, deterring investors and visitors from engaging with Nigeria’s digital assets sector.

Nigeria’s regulatory environment around cryptocurrencies has been inconsistent and often unpredictable. The Central Bank of Nigeria (CBN) imposed a ban on cryptocurrency transactions through banks in February 2021, leading to confusion and uncertainty within the market. This regulatory unpredictability has made it difficult for international investors to assess the risks and viability of investing in Nigeria’s digital asset space, even after recent efforts to introduce a crypto law through parliament. 

The global perception of Nigeria as a high-risk environment for financial transactions, exacerbated by issues like cybercrime and scams, has scared off potential investors. The lack of robust regulatory protections and the prevalence of fraud in the sector have raised concerns about the safety of investments.

Many Nigerian crypto entrepreneurs and investors have moved their operations to more crypto-friendly countries due to the hostile regulatory environment. This capital flight has further eroded confidence in Nigeria as a viable destination for digital asset investments.

Nigeria has a large pool of tech talent, but the hostile environment for digital assets has led to a brain drain, with skilled professionals seeking opportunities in countries with more favorable crypto regulations. This exodus of talent weakens Nigeria’s position in the global crypto market.

In light of the latest regulatory developments, the SEC has reiterated that only approved digital exchanges and platforms are legally authorized to conduct crypto trading in Nigeria. The commission strongly advises the public to refrain from engaging with unlicensed operators and encourages potential investors to verify the legitimacy of service providers through the SEC’s information portals.

The SEC’s initiatives, through the ARIP and RI Programs, are crucial steps in regulating Nigeria’s digital asset space, aiming to foster innovation while ensuring that investor protection remains paramount. As the digital asset sector continues to evolve, the SEC’s proactive approach will likely play a pivotal role in shaping the future of financial technology in Nigeria.