Favour Uche, Associate

On 29 August 2024, Nigeria’s Securities and Exchange Commission (SEC) announced the granting of “Approval-in-Principle” to two digital asset exchanges, Busha Digital Limited and Quidax Technologies Limited, under its Accelerated Regulatory Incubation Program (ARIP). The approval granted to Busha and Quidax marks a significant milestone in the implementation of the ARIP, paving the way for more VASPs to join the program in the coming months.

Notably, five other VASPs (Trovotech Ltd, Wrapped CBDC Ltd, HousingExhange.NG Ltd, Dream City Capital, and Blockvault Custodian Ltd) have been admitted to test their models and technology under the SEC’s regulatory incubation program.

This is a welcome development. What are the implications and expectations? Here’s an insight into an interim and pre-licensing incubation program that has become the window to Nigeria’s regulated digital assets market.

Why the SEC introduced ARIP

The primary purpose of the ARIP, introduced by the SEC 21 June 2024, is to accelerate the onboarding of virtual asset service providers (VASPs). Specifically, these include Digital Asset Exchanges (DAXs), Digital Asset Offering Platforms (DAOPs), and Digital Asset Custodians (DACs). Digital Investment Service Providers (DISPs) are also eligible to apply.¹‘ 

Upon SEC’s assessment, each qualified applicant will obtain an approval-in-principle from the SEC. This will allow the applicants to operate within certain parameters while the broader Digital Assets Rules are being finalized. 

Implications of the Approval-in-Principle 

Upon receiving the approval-in-principle, applicants are now formal participants in the ARIP. The implications of this include the following:

• Ability to Operate in Nigeria: VASPs who receive this approval can operate in Nigeria while they work towards full compliance with SEC regulations. This provisional status is intended to encourage innovation while ensuring that VASPs adhere to necessary regulatory standards. 
• Regulatory Oversight and Reporting Requirements: The SEC will closely monitor the operations of participants to ensure that they implement robust consumer protection measures and maintain transparency in their services. The ARIP participant is also subject to onsite and off-site inspection, audits, and monitoring  from the SEC. Clearly, the SEC intends to be fully aware of the activities of ARIP participants at all times. This intimacy is intended to help with its understanding of the business operations of each participant. Participants are also required to submit a range of reports to the SEC on a strictly stipulated basis. These reports include the following: 

1. 1. Weekly and monthly trading statistics (where applicable for VASPs like DAXs and all reporting requirements);
   2. Quarterly financials as well as compliance reports to demonstrate its compliance with conditions imposed by the SEC;
   3. Key issues arising from misconduct, fraud or operational incident reports and, if any, measures taken by the participant to address such incidents;
   4. Actions or steps taken to address customer complaints, emergent risks, or other issues relevant to SEC’s assessment of applicable regulatory requirements; and
   5. Any other relevant matters.²

Information gathered from the reports above are expected to serve the purpose of aligning business operations with regulatory compliance. 

• Operational Requirements and Restrictions: According to the Regulatory Incubation Program guidelines, the participant is subject to four major restrictions for the duration of the ARIP: 

1. 1. Operational restrictions: Participants must not conduct any other securities and/or investment business except as presented to the SEC. This presentation is most likely those made during the initial assessment phase and application phase. 
   2. Promotional restrictions: Participants must not carry out any promotional activities such as notices, circulars, letters, or other written or electronic medium of communication either publicly or privately. In the Regulatory Incubation Program guidelines which bear a similar provision, promotions were specifically stated to be “financial promotions which guarantee returns”.³ However, the use of the word “any” in the ARIP Framework is an umbrella term which may cover all and every form of promotional activity, whether promotions relating to the general operations of the participant, or promotions discussing the participant’s experience in the ARIP.
   3. Information restrictions: Participants must not provide information that is incomplete, untrue or misleading.
   4. Customer acquisition restrictions: Participants must not grow their customer base by more than 10% from the point of entry into the ARIP.⁴ A growth rate of 10% is at best moderate, depending on an entity’s specific goals, industry benchmarks, and overall business strategy. Limiting the growth rate of participants may be the SEC’s attempt to allow for controlled growth while it assesses their operations and compliance during the program.

Exposure to Penalties for Non-compliance

In the event of a breach of SEC requirements, law, or previous representations, an ARIP participant becomes subject to several disciplinary measures from the SEC. These disciplinary measures may range from penalties to total termination of its approval to participate or both. 

Additionally, where a participant fails to comply with any of the stipulated requirements of the ARIP (keeping reports, records, and operational restrictions), it shall be liable to a penalty of not less than ₦5,000,000 (Five Million Naira) at the first instance and further ₦200,000 (Two Hundred Thousand Naira) for every day of default.⁵ 

Other administrative sanctions as provided for in the SEC’s Rules and Regulations may also apply depending on the severity of the violation(s).

Insights and Expectations

The SEC’s recent actions under the ARIP is a laudable development in Nigeria’s regulatory climate particularly for VASPs in the country. Here are insights for VASPs and other stakeholders shaping the future of digital assets in Nigeria:

• The SEC-listed ARIP participants are now a step closer to full registration with the SEC. A comprehensive guide on the registration and operation of DAXs was shared in April 2024.⁶
• The ARIP encourages VASPs to innovate while remaining compliant. VASPs should develop solutions that align with the SEC’s objectives of market integrity and efficiency for consumer protection and investor safety.
• Only approved entities will be authorized to provide virtual asset services in Nigeria. The only route to this approval presently is applying to be a part of the ARIP. Where a VASP fails to apply for the ARIP, it could be interpreted as an intention to not operate or not wish to operate under the SEC’s authority. The result of such act or omission may be an immediate penalty of not less than ₦20,000,000 (Twenty Million Naira).⁷ DISPs who tow a similar route are not left out as well. A penalty of not less than ₦10,000,000 (Ten Million Naira) immediately applies to all other digital investments platforms including crypto brokers/dealers, advisers, market makers etc. operating without due authorization or registration by the SEC. VASPs and DISPs who are yet to apply but operate in or have interest in the Nigerian market are therefore advised to do so.
• Active engagement with the SEC can facilitate a smoother transition to full registration. VASPs should use the ARIP as an opportunity to clarify regulatory expectations and adapt their business models accordingly.
• The SEC has indicated that it will continue to assess applications for approval-in-principle on a case-by-case basis. This suggests more approvals are coming and more VASPs will soon be able to operate under the ARIP, further expanding the market. The SEC is expected to announce the application date for the next cohort.
• By legitimizing the operations of these VASPs, the SEC is fostering a more structured market environment, which is expected to attract additional players and investment into Nigeria’s digital asset sector.
• Ultimately, the outcomes of the ARIP are expected to inform future regulatory policies, shaping the digital asset landscape in Nigeria. The SEC’s approach of testing and monitoring will be crucial in developing comprehensive regulations that balance innovation with risk management.

Final Remarks

The SEC’s approval of Busha and Quidax under the ARIP marks a significant advancement for the digital asset sector in Nigeria. This shows clearly that the SEC wishes to bridge the gaps that have existed between regulators and players in the digital asset space over the years.

Generally, if VASPs and DISPs are guided early on the regulatory demands they would face in the capital market, it would help ensure that they have a better chance to thrive, and not nosedive. Simultaneously, if the SEC has a better understanding of the business models of operators, it would enable it to understand the uniqueness of the space better, and the advantages of applying the regulatory principle of “same activity, different risks, different regulation but same regulatory outcome” as opposed to that of “same activity, same risk, same regulation/regulatory outcome”. 

Lastly, addressing critical issues that are fundamental to the integrity and safety of the digital asset market may help to further lift the stigma often associated with the space and create room for more adoption. For improved transparency in the ongoing ARIP process, the SEC may consider publishing the list of applicants, releasing a timeline on reviews, and indicating the application date for the next batch of applicants. This can also help boost participation in the program by both local and foreign entities.

As more approvals are rolled out under the ARIP in the future, the digital asset market in Nigeria will be poised for further growth and development, boosted by a more conducive regulatory climate in the country.

Image source: Cryptoeconomist