Background 

• On the 21st of June, 2024, the Securities Exchange Commission ( the SEC) issued a notice (the Notice) on the amendment of the Rules on Digital Assets Issuance, Offering Platforms, Exchange and Custody (the VASP Rule). Consequently, the SEC opened a regulatory incubation window known as the Accelerated Regulatory Incubation Program (ARIP) to accept applications from Virtual Assets Service Providers (VASPs) and other Digital Investments Service Providers (DISPs).
• The VASP Rule was originally issued by the SEC in 2022 and it applies to all platforms that facilitate the trading, exchange and transfer of virtual assets. Pursuant to the Notice, the SEC informed the members of the public that the VASP Rule was undergoing some amendments and accordingly, the SEC issued a bridge framework, i.e., the ARIP Framework (the Framework) which will apply to all VASP license applications submitted to the SEC and potential applicants pending the amendment of the VASP Rule.
• This Newsletter therefore highlights the key provisions in the ARIP Framework.

Key Highlights of the ARIP Framework 

Applicability and Eligibility

• The ARIP Framework is applicable to VASPs and providers of investment services that can be accessed and delivered through a digital channel. The Framework highlights specific providers such as token issuers, promoters, distributed ledger technology, issuers, sponsors, operators and platforms that are involved in virtual and digital assets services.[1]

• It also applies to foreign and non-residential operators that actively target Nigerian investors, including digital investment platforms. Importantly, the Framework broadens the scope of entities designated as VASPs, compared to the description in the VASP Rule.  
• The ARIP Framework further makes provision for eligible applications; specifically, applications to participate in the programme can only be submitted by entities incorporated in Nigeria, performing investments and securities business, and registration or have pending virtual asset-related applications with the SEC.[2 ]

Application Process 

• The ARIP application process involves two phases: initial assessment and application; applicants are required to complete and submit an initial assessment via the SEC ePortal, afterwards, they would receive the notification of their eligibility before proceeding to the application phase, where required documents and particulars are submitted.[3]
• It is pertinent to mention that ARIP applications receive an approval-in-principle to operate under the Investment and Securities Act, 2007, and other applicable SEC Rules and Regulations. This allows the participants to maintain continuous compliance with SEC guidelines until they can transition to a VASP license.[4]
• Notably, the timeline for participation under the ARIP Framework is at the SEC’s discretion, with no fixed period specified. This is as a result of the temporary or bridge nature of the ARIP.[5]

Key Application Requirements 

• By the provision of the ARIP Framework, applicants are required to submit documents and particulars through a registered solicitor and adviser. The involvement of registered solicitors and advisers in the application process is to reduce the risk of errors and non-compliance.[6]
• In addition to the financial requirement of a non-refundable processing fee of N2,000,000 (Two million naira)[7], applicants must register with the Nigerian Financial Intelligence Unit and obtain a “no objection” or approval letter from other relevant regulators, such as the Central Bank of Nigeria (CBN) for banks.[8]
• The ARIP Framework imposes weekly, monthly and quarterly reporting on the ARIP participants such as financial reports, trading statistics and compliance reports. The SEC retains the authority to conduct onsite and offsite inspections, audits, and monitoring.[9]

Operational Controls and Restrictions 

• The ARIP Framework includes controls, conditions, and restrictions to identify and mitigate risks, accordingly, participants must have a risk management framework as part of their operational plan to protect investors.[10] 

• This includes a detailed business description, client engagement, risk management, customer communication, query handling, and a clear exit plan to ensure proper liquidation of investor funds.[11] 

Termination/Removal 

• By the provision of the Framework, the SEC can terminate the participation of ARIP participants at any time. Applicants can be terminated if deemed unfit for participation, for breaching SEC Rules, deviating from the operational plan, or for other reasons the SEC deems appropriate.[12]

Registration of VASP License 

• The ARIP is a regulatory incubation program for VASPs and does not guarantee a VASP license. Regardless, it is designed to facilitate participants’ smooth transition into the capital market. After the ARIP period, participants are expected to transition to formal registration.[13]

• The SEC may take one of three actions based on participants’ performance and compliance. Firstly, successful participants may be granted formal registration approval, allowing them to operate in the Nigerian capital market under all applicable existing rules and regulations. This step ensures that participants who have demonstrated compliance and reliability during the ARIP period can continue their operations without disruption, thus fostering stability and growth in the market.[14]

• Secondly, the SEC may adopt new regulations, guidelines, or notices based on insights gained during the ARIP. This approach is pursuant to Section 38 (2&3) of the Investments and Securities Act (ISA), 2007, and is aimed at addressing broader regulatory reforms. This could include amendments or the creation of new regulations to govern specific business models or innovations that the current framework does not adequately cover.[15]

• Alternatively, the SEC may deny participants permission to operate under prevailing rules and regulations if they fail to meet the necessary requirements. This decision underscores the importance of stringent regulatory standards to protect market integrity and investor interests.[16] 

Penalties and Sanctions 

• Non-compliance with ARIP requirements results in significant penalties; participants may face an initial fine of N5,000,000[17], with an additional N200,000 for each day of default. Unauthorized commercial VASPs and DISPs also incur fines of at least N20,000,000[18], while other unregistered DISPs are fined at least N10,000,000.[19] 

Confidentiality 

• Participants are responsible for protecting their intellectual property and must mark all non-public information as “Confidential” when submitting it to the SEC. The SEC is committed to treating all such information with confidentiality, disclosing it only when legally required or permitted by the participant.[20]

Conclusion 

• ARIP is a testing ground for the SEC to gain insights into the market dynamics and ensure that the updated Virtual Assets Service Providers Rule is appropriately amended based on lessons learned during the incubation period. 
• For VASPs, participation in the ARIP involves several critical considerations. The program is designed not only to ensure compliance but also to prepare VASPs to obtain a full license. Engaging in the ARIP allows these entities to align their operations with regulatory expectations, and smoothly transition to getting a license. 
• The ARIP Framework offers a temporary licensing solution for the digital investments ecosystem and potentially addresses the regulatory limbo faced by the cryptocurrency industry in Nigeria.  

      [1] Section 5 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [2] Section 6 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [3] Section 7 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [4] Section 11 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [5] Section 12 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [6] Section 16 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [7] Section 20 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [8] Section 15 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

      [9] Section 21 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

     [10] Section 26 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

     [11] Section 29 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

     [12] Sections 33 – 34 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

     [13] Section 37 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

     [14] Section 37(a) of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

    [15] Section 37(b) of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

    [16] Section 37(c) of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

    [17] Section 40 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

    [18] Section 41 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

    [19] Section 42 of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers

    [20] Part XV of the Framework on Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers and other Digital Investments Service Providers