On 21 June 2024, the Securities and Exchange Commission (SEC) released a Framework on Accelerated Regulatory Incubation Programme ("ARIP") for the Onboarding of Virtual Assets Service Providers ("VASPs") and other Digital Investment Service Providers ("DISPs")(the "Framework"). The Framework introduced the Accelerated Regulatory Incubation Program (ARIP) to expedite the registration and regulation of entities engaging in virtual asset activities within the Nigerian Capital Market and sets out the requirements that VASPs and DISPs seeking to participate in the ARIP should satisfy before being eligible for such participation. This initiative aligns with global trends on the need for the regulation of virtual and digital assets and the relationship between VASPs and financial institutions.
This article provides an overview of the ARIP, its purpose and objectives, applicability, eligibility criteria, and application process for stakeholders interested in participating under the ARIP.
Purpose and Objectives
The ARIP framework is designed to streamline the onboarding process for digital asset service providers, allowing them to receive an approval-in-principle pending the full implementation of the Digital Assets Rules. It is a window for the onboarding of entities that intend to carry on virtual asset activities and whose applications have been filed with the SEC, as well as prospective applicants that engage in such activities.
In addition, the ARIP also provides a platform for participants to receive guidance from the SEC on its regulatory requirements before they become fully operational in the Nigerian capital market. It also seeks to give the SEC a better understanding of the digital asset business models thereby enhancing regulations tailored to effectively address issues of market integrity, investor protection and money laundering.
Applicability
A VASP shall refer to any entity which conducts one or more of the following activities or operations for or on behalf of another person;
- exchange between virtual assets and fiat currencies
- exchange between one or more forms of virtual assets
- transfer of virtual assets
- safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets
- participation in and provision of financial services related to an issuer's offer and/or sale of a virtual asset.
Whilst a DSP is a provider of investment service accessed and delivered through a digital channel.
The ARIP framework applies to:
- Virtual Asset Service Providers (VASPs) and token issuers operating or offering services in Nigeria.
- Platforms for offering, trading, exchange, custody, and transfer of virtual/digital assets.
- Individuals and entities involved in initial token offerings, virtual asset services, and Distributed Ledger Technology (DLT)-related activities.
- Foreign operators targeting Nigerian investors.
Eligibility
For an entity to be eligible to apply to the SEC for participation in the ARIP, it must meet the following criteria;
- Hold incorporated status and have an active office in Nigeria with the CEO/Managing Director habitually resident in Nigeria.
- Engage in investments and securities business and activities.
- Seek registration or have pending applications related to virtual assets with the SEC.
Application Process
The application process into the ARIP essentially involves the Initial Assessment Phase and the Application Phase. For clarity, the steps for the application process include:
1. Initial Assessment Phase: Participants must first submit an initial assessment form via the SEC ePortal. To access the form, the following are required:
- Fee of Fifty Thousand Naira (N50,000.00 ), only (paid online via the portal and Non-refundable)
- An end-to-end schematic diagram illustrating the proposed business process (with explanatory notes)
- Certified copies of all incorporation documents
- Copy of any previous registration, regulatory licence or authorization
2. Eligibility Notification: Upon receipt of the form, the SEC reviews and notifies the applicant of their eligibility status.
3. Application Phase: Upon review, if the SEC deems an applicant eligible to apply as a participant in the ARIP, such an applicant is invited to complete a full application.
4. Approval in Principle (AIP): Successful applicants receive an Approval in Principle (AIP), allowing them to operate within the ARIP framework under the SEC's supervision for a period determined by the SEC.
5. Rejection: The SEC may defer or reject applications to maintain market orderliness, providing justifications for denials.
Application Requirements
In the application phase, an eligible applicant is required to engage the services of a registered solicitor or adviser in Nigeria to complete the application online. The documents required include:
- Form SEC 2 and 2D
- A sworn undertaking affirming the accuracy and completeness of submitted information.
- An operational plan and business model with a unique value proposition.
- Entity rules that ensure investor protection, fairness, transparency, conflict management, and proper regulation.
- Application submission through a registered solicitor or adviser.
- Additional documentation, including corporate documents, audited accounts, tax identification, and valid identification of sponsored individuals.
- A minimum of 4 Sponsored Individuals who shall be principal officers including Managing Director and Compliance Officers.
- Evidence of registration with the Nigerian Financial Intelligence Unit (NFIU).
- Where an applicant is regulated by another sectoral regulator, a no-objection or approval letter from the relevant sectoral regulator of the entity
The SEC may request additional documents as necessary for the ARIP application.
Financial and Operational Commitments
Applicants are required to pay a non-refundable processing fee of N2,000,000.00 and provide evidence of the required shareholder funds and a Fidelity Bond covering at least 25% of these funds. The SEC retains the authority to impose additional financial requirements based on the nature and risk profile of the applicant's operations.
Penalties/Sanctions
Non-compliance with the stipulated requirements can result in:
- An initial penalty of N5,000,000 and N200,000 for each day of default.
- A penalty of N20,000,000 shall apply to all commercialised VASPs operating trading, offering and custody platforms without due authorization or registration by the Commission.
- A penalty of not less than N10,000,000 (Ten Million Naira, only) shall immediately apply to all other digital investment platforms including crypto brokers/dealers, advisers, market makers etc. operating without due authorization or registration by the Commission.
- Suspension from capital market activities.
Obligations of ARIP Participants
These obligations shall include:
- providing the SEC with weekly and monthly trading statistics;
- allowing SEC representatives to audit your business both on and off site;
- Implementing safety measures for identifying, managing, and mitigating risks, such as undisclosed risks of financial loss or other risks to customers, investors, and market players; and
- implementing a comprehensive operational plan that incorporates a framework for risk management.
Non-permissible acts for Qualified Applicants
- Conducting any other securities and/or investment business except as presented to the Commission
- Carrying out promotional activities such as any notice, circular, letter or other written or electronic medium of communication either publicly or privately
- Providing information that is incomplete, untrue or misleading;
- Growing their customer base by more than 10% from the point of entry into the ARIP.
Upon the conclusion of the ARIP period, participants who have complied with the requirements of the Framework may transition to full registration with the SEC.
Conclusively, the Framework outlines stringent criteria for continued participation in the ARIP, underscoring the importance of maintaining integrity, compliance, and operational excellence. The Commission holds the authority to terminate participation if a Participant is deemed unfit, violates restrictions, breaches the ISA or Commission regulations, deviates from its operational plan, or for any other justifiable reason. Additionally, the Commission can withdraw or suspend approval for various infractions, including failure to implement safety measures, submission of false information, legal contraventions, liquidation, data security breaches, detrimental business practices, or recurring service issues.
Nonetheless, the Framework marks a significant step towards fostering innovation in the financial sector while ensuring regulatory compliance and market integrity. By this Framework, entities in the virtual assets and digital assets space especially in the cryptocurrency industry can legally carry out business in Nigeria.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.