Abstract:
The emergence of Block chain technology which has introduced the distributed ledger technology has made digital transactions seamless, ensuring that there is a high level of credibility, transparency, accountability and probity in digital investment and marketing. Through the block chain technology, assets can be broken down into blocks or crumbs to affordable rates for the investors and a chain mechanism is introduced to tie all purchased assets from different investors giving each investor the opportunity to supervise his investment on a digital platform. This technology has brought a new leaf of life to the transaction industry by introducing more portable investment methods of which tokenization is one. Through tokenization, real assets are represented on a distributed ledger technology (DLT) as tokens which creates interest upon purchase by an investor. This practice has democratized investments, making it possible to spread across to a wide range of investors at affordable rates and units.
This article through analytical lenses will be reviewing the existing legal prescriptions on tokenization and the Regulatory challenges posed to the tokenization practices in Nigeria. This article after a deep seated review will make certain recommendations aimed at strengthening efficiency in digital marketing and investment.
Introduction:
The world is fast changing and this change is occasioned by the high influx of technology (A blessed product of human intellect). Despite the fact that technology poses some ethical threats, its role in easing our life’s course cannot be underestimated. Tokenization, a method made possible by technological advancement, has brought about portability in investments to the extent that an investor does not require a full load of paperworks and myriads of signatory appendages on paper before his investment is formalized. Investment deals are formalized on digital platforms with a high level of transparency due to the technological introduction of block chain.
Through tokenization, physical assets while they exist in their physical form can be transformed to digital tokens represented on the block chain technology through DLT. Since the block chain technology is known for its unique feature of dismembering of assets into blocks and forming a chain of connection linking all the assets so that all the information on the investment available to the issuer will become available to the investors at the same time, it becomes difficult to tamper with investment from any of the two ends hence, the transparency benefits.
This feature of block chain has enabled tokenization method to convert tangible and intangible assets into digital tokens represented on the distributed ledger technology where upon purchase, investors acquire interest in those assets.
This serves as a method of fundraising as entrepreneurs who don’t have the needed capitals to carry on with an investment idea can decide to tokenize the idea and through that raises much needed capital for the investment. For illustrative purpose, let’s say an entrepreneur wants to invest in gold worth 20 millions in Nigerian Naira but doesn’t have enough capital, he can decide to enter into a contract with the gold mine for the gold and then tokenize the gold on a digital platform where investors can purchase as many tokens of gold as possible.
He can decide to fragment the gold into 2 million tokens valuing ten thousand Naira per token. An investor can purchase as many tokens as possible and through that practice, capital for the investment is raised. Tokenization can be classified into two broad categories.
We have the Fungible Assets Tokenization and the Non Fungible Assets Tokenization (NFTs). Fungible asset Tokenization are interchangeable and divisible in nature. Under this, all tokens have the same value universally and can be interchanged with a similar asset. For example, you can purchase 1 BTC as a Nigerian with an equivalent amount in Nigerian Naira which an American can purchase in USD because 1BTC values the same globally.
These tokens are also divisible in nature. This means that it can be fragmented into different units or places just like in cryptocurrency. A Non Fungible Assets Tokenization (NFTs) is non- interchangeable and unique.
For example, a real estate when tokenized is an NFT because a unit of it apportioned to investor A differs from the unit apportioned to investor B. You cannot interchange Investor A’s interest with investor B’s interest because they’re uniquely apportioned.
This article however begs to critically analyze the legal framework and regulatory challenges facing this practice of tokenization in Nigeria and suggest a way forward.
Background to the Study:
The practice of tokenization which has simplified investment, making it more efficient, durable and portable has found its way into Nigeria as Nigeria although a developing country is technologically imbibing. The big question is whether this innovative move can survive the pool of legal prescriptions and regulatory compliance in Nigeria.
The two financial Regulatory institutions in Nigeria, viz; the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) have given recognition to the global practice of tokenization. While CBN on their end has digitized the Nigerian Naira through the introduction of the E-Naira making it possible for investors to pay for tokenized assets with the digitized legal tender, SEC has issued a Statement on digital assets giving recognition to digital tokens.
This is a major advancement. SEC, on September, 2020 made a declaration that all tokens are deemed to be a security until the otherwise is proven. The implication of this statement is that tokens are digital security capable of being regulated by the extant Security and exchange laws in Nigeria until the issuer proves that it is not.
At the United States of America, only investment tokens are regarded as security and this is determined by the 1946 Howey test developed by the US Supreme Court which proposes that any asset commitment made by a group in an individual capacity with the aim of making profit from the administrative and management efforts of a third party qualifies as a security.
So, this means that if a token is purchased for investment purposes with expectations of a return on investment (ROI), it is a security. Bringing it to the Nigerian standard, if an issue is capable of proving to the Security and exchange commission that a token is not issued for the purchase of investments with expectations of profit, the Security and exchange laws in Nigeria is likely not to apply to that token since it is not a security. It could be a utility token used to pay for services, a stablecoin used for storing value or even a governance token.
Legal Framework and Regulatory challenges:
The Central Bank of Nigeria in 2021 issued a prohibitive statement on the use of cryptocurrency. What this means is that cryptocurrency which firms part of conventional tokens is not a legal tender and any transaction effected with it doesn’t pass the threshold of a legal transaction.
This is a measure made in solidifying Naira and ensuring financial stability in Nigeria. While this prohibitive statement from CBN can cause some hindrance to the swift operation of tokenization in Nigeria, its impact is basically on other tokens that are not security tokens because the Security and exchange commission through a statement released on September 2020 has recognized tokens as Securities which means that Nigerians can make tokenized investments in assets.
However, this must be done with due attention paid to the Regulatory guidelines stipulated by the commission which demands that the issuer to submit an assessment form and a white paper detailing the technology behind the issue. In addition, SEC on June, 2024 launched the Accelerated Regulatory Investment Program (ARIP) which serves as a sandbox where virtual and digital assets and services issued and rendered respectively by startups are tested to determine their credibility before putting them out for Investment.
It is a program introduced to help startups or issuers obtain an approval in principle which enables them to put out their tokens and other digital assets to the public for investment while they strive to reach full compliance with the Regulatory guidelines stipulated by SEC in the New Rules on Issuance, Offering Platforms and Custody of Digital Assets as issued in 2022.
With the program, digital assets issuers are not expected to reach a full compliance with the existing regulations; as far as they have complied to an extent and in the commission’s opinion, their tokenized assets are credible for the public’s investment, they can put it out inviting people to purchase yet aiming for full compliance.
However the tokenization practices may operate, it comes with some challenges combating it. There’s a problem of ownership and transfer of digital assets. An individual believes that he has the ownership of an asset which he hasn’t even seen in physical form and which was not formally transferred to him by the issuer.
It becomes a problem to determine when ownership passes and whether there can be a right of ownership on such asset. We also have the problem of taxing digital assets. Although the Finance Act, 2022 has made provisions that digital assets can be taxed as Capital Gains Tax, however, there’s no identified methods of how to asses and report transactions to enable tax evaluation. Another key challenge is the Regulatory inconsistencies.
While SEC finds digital assets like tokens valid and legal upon complying with stipulated laws, CBN declared its use as illegal and some Bank accounts are even frozen due to its involvement with transactions associated with digital assets like cryptocurrency. Another key challenge is with transfer of digital assets in estate planning. Estate administration is regulated by the Wills Act and the Administration of Estate laws. There’s no key provisions in them having digital assets like tokens in consideration. This is a major concern. Also, Nigeria lacks basic consumer protection laws regulating digital assets like tokens. This leaves the innocent investors at risk and at the mercy of the issuers. The available regulations are streamlined and doesn’t address digital assets in general.
Conclusion:
The world we live in is fast developing and countries of the world should pace up to be able to meet this new world. Tokenization of Assets and digital assets being a product of technological development should be given due attention and laws and regulations should be made to regulate its operations. The Nigerian government should establish a body aside from the Security and exchange commission specifically regulating digital assets because if SEC regulates the security tokens otherwise called the investment tokens, who will be responsible for the other types of tokens? Should they be left unregulated? Also,the Nigerian government will do better if it, through its Regulatory agencies gives a full recognition to digital assets even as they strive to secure the Country’s legal tender.
Digital assets like cryptocurrency can be legalized. The tax system on digital assets should also be defined and a mechanism established for filing of reports and recording transactions done digitally to help in tax evaluation. Our laws should also strive to capture digital assets as part of transferable estates and the mechanism for the transfer should be holistically defined. With these in place, Nigeria’s financial sector will gain heavily from this saving grace of technology. It’ll give us the Nigerian citizens access to a global digital currency.
References:
- SEC v WJ Howey Co 328 US 293 (1946)
- Ayoyinka Olajide-Awosedo, ‘Navigating the Legal Grey Areas of Digital Assets in Nigeria’ <https://globallawexperts.com/navigating-the-legal-grey-areas-of-digital-assets-in-nigeria/> accessed 26th April,2025
- Central Bank of Nigeria, ‘Letter to All Deposit Money Banks, Non-Bank Financial Institutions and Other Financial Institutions – Reminder of the CBN’s Position on Cryptocurrencies’ (5 February 2021) BSD/DIR/PUB/LAB/014/001.
- New Rules on Issuance, Offering Platforms and Custody of Digital Assets, 2022
- Peter N. Okafor, The Tokenisation of Assets: Jurisdictional Experiences and the Lessons for Nigeria’s Financial System
- Swastik Sharma, Shilpi Saksena, Tokenization of Early-Stage Equity: Benefits and Regulatory Trends
About the Author:
Obiagwu, Sixtus Chidera, is a dedicated final-year law student and LIFINITE at Chukwuemeka Odumegwu Ojukwu University in Anambra State, Nigeria. As a passionate legal writer, he has a passion for exploring emerging legal issues and sharing his insights through writing.