The Nigerian Securities and Exchange Commission (SEC) has just classified cryptocurrency investments as financial security instruments. This means that cryptocurrency firms will now be regulated by the SEC potentially limiting opportunities for fraudulent schemes to thrive as well as increasing entry barriers for startup crypto firms.
Cryptocurrencies like Bitcoin and Ether are not regarded as securities globally because of the fact that they operate on decentralized networks that are the direct opposite of traditional securities. However, that distinction is not so clear with regard to cryptocurrencies like XRP. The debate seems to center more around the status of ICO companies.
The SEC’s move is understandable if you look at it from the perspective of nervous (and novice) “investors” and the proliferation of crypto companies and startups that are announcing Initial Coin Offerings (ICO) in Nigeria. It is inevitable that some fraudulent investment schemes will try to profit off crypto, and Nigerian investors need some sort of protection. That is exactly what the SEC’s new classification seems designed to address. “… the SEC will regulate crypto-token or crypto-coin investments when the character of the investments qualifies as securities transactions.”
“The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices that ultimately make for a fair and efficient market.“— Nigerian Securities and Exchange Commission
The Securities and Exchange Commission of the United States of America uses the Howey Test to determine whether a cryptocurrency investment qualifies as a security. Bitcoin failed that test. However, with the “complex” and confusing ways some cryptocurrency operations in Nigeria run, it is not clear which ones are affected. The SEC does provide some guidance, some of which includes;
- “All Digital Assets Token Offering (DATOs), Initial Coin Offerings (ICOs), Security Token ICOs, and other Blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors, shall be subject to the regulation of the Commission.”
- “Any person, (individual or corporate) whose activities involve any aspect of Blockchain-related and virtual digital asset services, must be registered by the Commission and as such, will be subject to the regulatory guidelines.”
- Issuers or sponsors (start-ups or existing corporations) of virtual digital assets shall be guided by the Commission’s regulation.
Read the full document here:
“The position of the Commission is that virtual crypto assets are securities unless proven otherwise. Thus, the burden of proving that the crypto assets proposed to be offered are not securities and therefore not under the jurisdiction of the SEC is placed on the issuer or sponsor of the said assets.”
According to US SEC Official, William Hinman, “the primary issue in determining whether cryptocurrencies and ICOs were securities was the expectation of a return by a third party, specifically whether there was a person or group that sponsored the creation and sale of the asset, and who played a significant role in its development and maintenance. For purchasers of the asset, the key is whether they are seeking a return on the investment.” This seems to tie in nicely with what Nigeria’s SEC new classification system is seeking.
Coming on the heels of a slight disruption recently reported by crypto-traders, this news might make some crypto startups and investors nervous. On the other hand, however, it may signal wider acceptance of crypto in Nigeria and a pathway to greater liquidity for the virtual currency.
According to the statement published on the SEC website earlier today, “The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices that ultimately make for a fair and efficient market.” That should provide some assurance for nervous advocates of crypto in Nigeria and cautious optimism for investors who are adopting cryptocurrencies in the light of Nigeria’s forex crisis.
This article was published on The BB Buzz Featured Photo by Ewan Kennedy on Unsplash