2019 VIRTUAL FINANCE PROGRAMME organized by NDIC Academy. Held in Lagos on 11th December 2019.

1. About Chimezie Chuta
CHIMEZIE CHUTA is an Advisory Board Member at Kinesis Money, Caymans, and formally
Regional Director for Africa at Paxful Inc.
He is the Founder of Blockchain Nigeria User Group, protem Chairman Organization of
Blockchain Technology User (OBTU), Africa Lead, Technology & Innovation at Blockspace Africa
Technologies and CEO of both Techbuild Innovation Partners and Lagos Drupal Varsity.
He is also the author of a series of books including; Seizing Opportunities in Blockchain and
Digital Currency Revolution: A Handbook for Enthusiasts and The Building Blocks of
Blockchain StartUP Entrepreneurs.
He is a regular speaker at various blockchain, cryptocurrency, and technology conferences both
locally and internationally. As a Certified Technology Innovation Expert, he plays a key role in
organizing Nigeria's biggest Blockchain and Cryptocurrency events in Lagos, Abuja and Port
Harcourt for three consecutive years.
With his involvement as a community lead organizer, he is involved in a number of industry-
government projects working towards technology innovation. This includes being a member of
Fintech Roadmap Committee of The Nigeria Capital Market, set up by SEC Nigeria,
Blockchain, Virtual Financial Assets Regulations Working Group also set up by SEC Nigeria,
and NITDA National Blockchain Strategy Team.
He is a Member of Government Blockchain Association (GBA), member Blockchain Group, Africa
Progress Group (APG), ISSAN, Fintech Association of Nigeria etc.
He is regularly featured as a tech commentator and innovation subject matter expert on CNBC
Africa, Channels TV and BBC UK, to mention a few.
@mezie16

2. Regulation of Digital Currencies
The Nigeria Experience
2019 VIRTUAL
FINANCE
PROGRAMME

3. Outline
• Bitcoin, Cryptocurrencies, and Tokens: What are they to Regulators?
• Benefits of Digital Currency Regulations
• Consequences of an unregulated Digital Assets Ecosystem.
• Who and What should be Regulated
• Four prongs of the Howey test.
• Crypto Assets Regulation in Nigeria: SEC Nigeria Approach
• Cryptocurrency Regulations in Different Jurisdictions
• Standard Regulatory approach for Cryptocurrencies.

4. Introduction
Digital Currencies, Virtual Financial Assets, Cryptocurrencies etc., will likely
have a profound effect on the future of the Internet, financial technology,
and governance systems in general.
The mere fact that anyone with a computer and an Internet connection can
develop and share her own currency, her own vision of the future, can be
scary.
The openness of this system makes it vibrant but it also can make it
hazardous. Some new uses of the technology will be nothing more than
scams garnished with the sort of techno-babble that inspires, confuses, and
beleaguers the caution of naive investors who want to believe in the
projects.

5. 1. Bitcoin, Cryptocurrencies, and Tokens: What are they to Regulators?
Because Cryptocurrencies and tokens,
broadly, are truly innovative.
They present an arrangement of
technological components that is so novel
and varied as to defy categorization as any
traditional asset, commodity, security, or
currency.

6. How Regulation is viewed by participants
Regulation is often seen as a murky word within the cryptocurrency
community, especially when one considers the visionary principles
outlined in the Satoshi Nakamoto’s hallmark Bitcoin whitepaper.
The ideological objective was to create a financial system that relied
on no third party, nor dictated by outside actors such as
governments or central banks.
As a result, Bitcoin enthusiasts demanded a platform that was free
from outside interference.

7. 2. Benefits of Digital Currency Regulations
Stabilize Values
To help stabilize its value, cryptocurrency needs to be regulated.
Eliminate Fears
To eliminate or at least reduce fears about it.
Ease Tax Issues
If someone keeps cryptocurrency as an investment, capital gains and losses must be reported.
If and when they are reported, it can be taxed.
Investor Confidence
Regulation will ensure that investors and user are afforded with the same safeguards as expected in the
real world.
Standardization and ethics
There is need to create standards that encourage ethical practices that ultimately make for a fair and
efficient market.

8. 3. Consequences of an unregulated Digital Assets Ecosystem.
•Without clear regulations, cryptocurrency innovation will be stifled.
•Most entrepreneurs will continue to sit on the sidelines for fear of innocently
running foul of the law.
•Institutional Investors will hang back because of uncertainty regarding valuations
and market stability.
•And the prosperity of Nigeria suffers, as other countries lure innovators away by
creating rules that make their jurisdictions more hospitable to this growing asset
class.
•Fraudulent purveyors of cryptocurrencies and digital assets will drive out those
with genuine/ good intentions.

9. 4. Who and What should be Regulated
Any person, (individual or corporate) whose activities involve any aspect of blockchain-
related and digital asset services should be registered by regulation and as such, will
be subject to the regulatory guidelines.
Such services include, but are not limited to reception, transmission and execution of
orders on behalf of other persons, dealers on own account, portfolio management,
investment advice, custodian or nominee services.
Issuers or sponsors (start-ups or existing corporations) of digital assets shall be guided
by the regulation.
Foreign or non-residential issuers or sponsors will be required to establish and register
a branch office within Nigeria.

10. 5. Four prongs of the Howey test.
•Distribution
•Common Enterprise: Horizontal and Vertical Commonality
•Expectation of Profits
•Efforts of a Third Party
The Howey test provides a lucid rubric for judging the relative risks
of token sales, and determining which sales warrant, from a public
policy perspective, some form of oversight or regulation.

11. Four prongs of the Howey test.
•Distribution
Variability in the manner that the token is distributed should, from a public policy
perspective, be the first factor contemplated in analysis of whether sales of a token are
or are not securities.
If the primary mode of distributing new tokens is through a sale of those tokens,
particularly sales initiated and made directly between users and the developers of the
network, then this prong is likely satisfied.
A token that is offered in a pre-sale and developed and/or distributed to supporters only
after that pre-sale is complete, appears more like an investment of money than mere
sales and re-sales of tokens already mined or distributed on a network that has already
been developed. Similarly, sales of pre-mined tokens by developers, particularly if
accompanied by promises of future rewards or a future minimum price floor, also
appear to fit well within the understanding of this prong.

12. Four prongs of the Howey test.
•Common Enterprise: Horizontal and Vertical Commonality
Horizontal commonality can be defined as the pooling of investor funds such that the fates
of all investors rise or fall together, often—though not always—through a pro-rata sharing
of profits.
Vertical commonality requires that the fortunes of the investor are interwoven with and
dependent upon the efforts and success of those seeking the investment or of third
parties.
As a general rule, cryptocurrency networks exhibiting strong vertical commonality
between average users and a small class of creators may warrant careful scrutiny from a
public policy perspective.
Key factors to note include;
•Scarcity
•Decentralization
•Profit-Development Linkage

13. Four prongs of the Howey test.
•Expectation of Profits
In many ways this prong may be the easiest for any token sale to satisfy.
These technologies are very new and much of their value is speculative.
Accordingly, an expectation of profits is a prime motivator for many who buy or come to
hold cryptocurrency.
There are two relevant variables worthy of consideration;
•Distribution
•Functionality

14. 5. Four prongs of the Howey test.
•Efforts of a Third Party
Whether the profits of the individual user mirror those of the promoters or issuers— whether
the actions of a particular third party are substantially the cause of increased profits and,
more precisely, whether buyers rely on those efforts.
In discussing token projects, it is not uncommon to hear over- zealous advocates suggest that
the technology is “trustless” or that it is guaranteed by “math” alone.
These are unfortunate oversimplifications. A user of a token does rely on the honest efforts of
others on the network.
The innovation behind Bitcoin is not the removal of trust, but rather the minimization of trust
through decentralization.

15. 6. Crypto Assets Regulation in Nigeria: SEC Nigeria Approach
“The Burden of Proof”
The Commission presumes that Digital Assets are securities until proven otherwise.
The burden of proving that the digital assets do not constitute securities, is placed on
the issuer or sponsor.
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, shall be
subject to the regulation of the Commission.
Existing digital assets offerings prior to the implementation of the Regulatory Guidelines will have three
(3) months to either submit the initial assessment filing or documents for registration proper, as the
case may be.

16. Crypto Assets Regulation in Nigeria: SEC Nigeria Approach
Blockchain-based securities present heightened risks related to loss and theft
when compared to traditional securities, necessitating appropriate regulation
for the platforms that facilitate trading or dealing in digital assets.
Regulation will take into account the functions that may be performed by
each platform and apply both to platforms that operate in Nigeria and those
that have Nigerian participants.
Therefore, any platform providing or holding itself out as providing blockchain
and digital assets services in or from within Nigeria, must be licensed by the
Commission.

17. 17
o Tokens issued as part of an ICO fall
into one of the following categories:
• Tokenised Shares – function as
ordinary shares
• Tokenised Equity Interest – Carry
rights to equity style payouts
• Tokenised Debt Securities – Function
as plain bonds
• Tokenised Funds – Units in a fund are
represented by a token on a
blockchain
o The existing regulatory framework
applies to Crypto assets that qualify
as transferable securities or other
types of MiFiD financial instrument
o Crypto assets that are securities
and/or derivatives or derivatives that
are based on crypto assets would be
subject to regulation and the platform
on which they are traded will also be
subject to regulatory requirements.
o Where investor’s contractual right to
the crypto assets constitute a security
or derivative, securities legislation
apply to crypto assets that are
commodities.
o No recognized or authorized platforms
in Canada.
o Under the US Securities Act of
1933/Securities Exchange Act of 1934,
“Security” includes “investment
contract”
o An Investment Contract is a security if it
is:
• An investment of money, in a
common enterprise, with
expectation of profit, through
efforts of others (SEC v N. J Howey
& Co)
o Platforms that operate as an “exchange”
and offer trading of digital assets that are
securities, must register with the US SEC
or be exempt from registration.
o Token issuers must comply with
securities laws, if tokens are being
marketed, issued or sold to U.S persons
7. Crypto Assets Regulation From Different Jurisdictions

18. 18
o The Regulatory Framework for Digital
Asset Tokens Offering (DATO), in the
Philippines is designed to protect
investors.
o The Rules consists of 3-Tiers in
investment and asset in digital tokens
• ≤ $5 million
• Between $6million - $10 million
• More than $10million
o There is also a Licensed Offshore Virtual
Currency Exchange (OVCE).
o Final ICO Regulation yet to be released.
o Trailblazing regulatory framework
for ICOs, developed in 2018.
o Virtual Financial Assets Act of
Malta Cap 590, 2018. (VFAA)
o Malta Digital Innovation Authority
Act 2018 (MDIA)
o Innovative Technological
Arrangement and Services Act
(ITAS)
Crypto Assets Regulation From Different Jurisdictions

19. 8. Standard Regulatory approach for Cryptocurrencies.
1. Avoid promising innovations that are ill-fitted to the Howey test, presenting less risk to users:
a. Highly decentralized cryptocurrencies (e.g. Bitcoin, Litecoin) because of a lack of vertical
commonality or a discernible third party or promoter upon whose efforts investors rely.
b. Sidechained Cryptocurrencies/Blockchains because there is no expectation of profits on the part of
participants who hold tokens with a value pegged to their existing bitcoin/parent-chain holdings.
c. Cryptocurrencies where initial distribution is made through open competitive mining or proof-of-
burn because there is no investment of money, i.e. no risk capital is provided to an issuer or promoter.
d. App-Coins or Distributed Computing Platforms (e.g. Ethereum) because participants seek access to
these tokens for their use-value rather than an expectation of profits.

20. 8. Standard Regulatory approach for Cryptocurrencies.
2. Take action necessary to protect investors against cryptocurrencies well-fitted to the Howey test,
presenting greater risks to users:
a. Closed-source or low-transparency cryptocurrencies because without visibility into the operation
of the technology there is no reason to believe that profits come from anything other than a
promoter’s hype.
b. Open but heavily marketed pre-sales or sales of pre-mined cryptocurrencies with a small and non-
diverse mining and developer community when the facts indicate that profits come primarily from
the efforts of this discrete and profit-motivated group.
c. Cryptocurrencies with permissioned ledgers or a highly centralized community of transaction
validators.

21. Conclusion/ Questions
https://Slides.com/chuta
http://chuta.com
https://www.linkedin.com/in/chimeziechuta/
Twitter: @mezie16