Nigeria’s Securities and Exchange Commission (SEC) has mandated that crypto firms and other virtual asset service providers (VASPs) must establish a physical presence in Nigeria to operate legally.
This directive is part of the newly introduced Accelerated Regulatory Incubation Program (ARIP), aimed at onboarding firms into the regulatory framework. On June 21, 2024, the SEC issued a circular titled “Framework On Accelerated Regulatory Incubation Program (ARIP) For The Onboarding Of Virtual Assets Service Providers (VASPs).”
This circular mandates that all existing and prospective VASPs, including crypto brokers and dealers, visit the SEC ePortal to complete the application process within 30 days. This initiative underscores the SEC’s commitment to regulating and developing Nigeria’s capital market.
The ARIP aims to expedite the onboarding of entities with pending applications and new applicants seeking SEC registration. The program allows “qualified entities” to obtain provisional approval from the SEC until the Digital Assets Rules become operational.
The ARIP framework applies to VASPs and token issuers operating in Nigeria or offering services to Nigerian consumers. This includes platforms facilitating the offering, trading, exchange, custody, and transfer of virtual or digital assets.
As the rules on Digital Assets Issuance, Offering Platforms, Exchange, and Custody are being amended, VASPs must comply with the ARIP guidelines. Virtual assets refer to any digital representation of value that can be used in transactions, such as cryptocurrencies. The ARIP provides detailed guidelines for determining eligibility, application requirements, reporting mandates, and penalties.
Entities must meet several eligibility requirements to participate in ARIP.
They must be incorporated and have a physical office in Nigeria and ensure that their Chief Executive Officer or Managing Director resides in Nigeria. They must engage in investments and securities business and seek registration or have pending virtual asset-related applications with the SEC.
Entities applying for ARIP must submit a sworn affidavit confirming that neither the entity nor its owner has been convicted of fraud or dishonesty, within or outside Nigeria. Applicants must present an operational plan and a business model with a clear value proposition that contributes to capital market development. They must also demonstrate satisfactory provisions for investor protection and public interest. The processing fee is N2 million, and applicants must provide evidence of the required shareholder funds.
ARIP participants are required to submit weekly and monthly trading statistics, quarterly financial and compliance reports, report incidents of misconduct, fraud, or operational issues with remedial actions, and detail resolutions of customer complaints and emergent risks. They must comply with SEC inspections, audits, monitoring, and periodic reporting requirements.
The framework stipulates a minimum penalty of N5 million for initial non-compliance, plus N200,000 per day of default. Unauthorized VASP operations face a penalty of N20 million, while unauthorized digital investment platforms face a penalty of N10 million. Sanctions, including suspension from capital market activities, will be imposed for non-compliance.
As outlined in the ARIP guidelines, applicants need to submit an operational plan along with their application. This plan should offer an in-depth overview of the business, encompassing details about the product, service, or business model, and the involved technology or infrastructure. It must also provide current and prospective customer information.
Additionally, the plan should include a Risk Management Framework, identifying key risks and strategies to mitigate and manage them, such as insurance coverage, investor protection, and data security protocols. The plan should also elaborate on how the ARIP participant will ensure customers are aware of these risks.
Furthermore, it must detail how communications with customers will be handled before and during the ARIP period, including managing inquiries, feedback, and complaints. Lastly, an exit strategy should be included, explaining how the participant will fulfill customer obligations if registration isn’t secured.
Upon the expiration of the ARIP period, compliant participants will receive formal approval from the SEC to operate in Nigeria’s capital market. This could impact platforms like Binance, which has faced legal challenges in Nigeria and abroad, potentially rendering them ineligible for registration.
The SEC’s ongoing digitization efforts aim to set a new standard for capital raising in Nigeria and support the administration’s goal of achieving a US$1 trillion economy. Additionally, the Federal Inland Revenue Service has also made a move to tax cryptocurrency transactions.
KuCoin, a cryptocurrency exchange, recently announced it would collect a 7.5% Value-Added Tax (VAT) on transaction fees in Nigeria starting July 8, 2024. This follows charges against Binance for tax evasion although the charges have now been dropped. While taxation legitimizes the industry, concerns persist as websites and services of crypto platforms remain inaccessible to Nigerians.
