On the 9th of June 2023, the Securities and Exchange Commission (hereinafter referred to as “the Commission” or “SEC”) released a “Circular on the Activities of Binance Nigeria Limited” (Binance). In the said circular, the Commission stated that Binance is not registered with it therefore its operations in Nigeria are illegal. It further directed Binance to stop operations in Nigeria. The Commission equally urged “Nigerians to be wary of investing in crypto-assets, and crypto-asset related financial products and services if the service provider/its platform is not registered or regulated by the Commission.”
With that background, I intend to answer the following questions in this write-up.
What are the functions of the Commission?
What are Exchanges?
What are Securities under Nigerian laws?
Are Crypto-assets securities in the contemplation of the law?
The role of the Commission is spelled out in the Investment and Securities Act, (ISA) 2007, the principal law which governs investment activities in Nigeria. The Commission is the apex regulatory body for the Nigerian Capital Market. Among other functions, the Commission is responsible for:
- regulating investments and securities business in Nigeria;
- registering and regulating securities exchanges, capital trade points, futures, options and derivatives exchanges, commodity exchanges, and any other recognized investment exchange;
- Act in the public interest having regard to the protection of investors and the maintenance of fair and orderly markets and to this end establish a nationwide trust scheme to compensate investors whose losses are not covered under the investor’s protection funds administered by securities exchanges and capital trade points;
- perform such other functions and exercise such other powers not inconsistent with this Act as are necessary or expedient for giving full effect to the provisions of this Act.
(See Section 13 of ISA, 2007)
ISA provides a guide on what exchanges are. The Act defines Exchanges as a place that constitutes, maintains, or provides a marketplace for bringing together, purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by an exchange and is registered by the Commission. (See Sections 315, ISA 2007).
Simply put, an exchange is a marketplace for securities sellers and buyers. As expected, and is obtainable globally, no securities exchange as defined in Section 315 is allowed to operate in Nigeria without it registering with the Commission. What then are securities according to ISA?
The meaning of securities is not ambiguous, it is clearly defined in the Act, it means
- debentures, stocks, bonds, or notes issued or proposed to be issued by a government or corporate body. Right or option in respect of the debentures, stocks, shares, bonds, or notes. It also refers to commodities futures, contracts, options, and other derivatives. ISA also contemplates the electronic transfer of the above-listed.
I make bold to state that apart from the above, no more. At this point, it will be safe to see the definition of securities under the US Securities Act, of 1933. This is for comparison only. More so, I believe the case filed by US SEC against Binance and Coinbase could have woken our SEC from their slumber. The term security has very broad meaning in the US, securities include:
“Note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, etc.”
One of the terms under which several schemes have been brought under as securities is “investment contract”. In other words, an investment contract is a security in the US. The test of what qualifies as an investment contract was set in the case of SEC v. W.J. Howey & Co. popularly known as the Howey Test. According to the US Supreme Court in Howey’s case, an investment contract is:
- An investment of money.
- In a common enterprise
- With the expectation of profit
- To be derived from the efforts of others
It is under the authority of the Howey test that the US SEC recently filed a case against Coinbase and Binance (two of the biggest cryptocurrency exchanges in the world) for engaging in securities exchanges without registering with the US SEC.
The law as it currently is does not see Cryptocurrencies or Crypto-assets as securities. That being the case, it can be said that crypto exchanges are not legally bound to register with the Commission.
But then, the law does not leave the SEC helpless, one of its functions is “acting in the public interest having regard to the protection of investors and the maintenance of a fair and orderly market…” I think the SEC can, under the umbrella of the protection of investors, take action against schemes that expose the public to excessive risks.
The express mention of one thing excludes others. To cure this, legislators sometimes give an open definition of terms which allows the Courts to fill it in. Under the current law, Crypto-assets can not be regarded as securities that need to be registered with the Commission. This is because the definition of securities is closed under ISA. Therefore, it is not illegal to offer crypto-assets to the public without registering with the SEC.
In conclusion, I call for the quick passage of the Investment and Securities Bill which is before the National Assembly as the proposed bill has a far wider definition and will cure the current gaps.
My name is Prosper Ambaka, Esq. Feel Free to connect. Please share your thoughts on this article, I am open to learning from you.