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Digital Assets –
an emerging
trend in capital
markets.

July 2022

PwC
Digital Assets – an emerging trend in capital markets

Introduction

Inventions and innovations of the digital age, which began in the 1970s, has resulted in a
paradigm shift in economies, culture, work style, education, health, investing, and
everything seems to have become “smarter”. From photos, music, and videos stored on
smartphones, to documents, emails, illustrations, animations, social media accounts,
books, and logos stored in the cloud, and more, today, we live in a digital world.

Similarly, financial technology is driving innovation in financial markets globally and

bringing with it the emergence of a digital asset market. With many individuals interacting
with digital assets on a daily basis, from investing in crypto as a digital asset to digitisation
of existing investment assets, the digital assets market is becoming integrated in the
existing fabric of traditional financial markets.
The market structure of the digital asset space initially built around retail, high-net-worth,
and crypto-native investors has expanded with traditional institutional investors including
digital assets into their existing portfolio of traditional investments, and some monetary
authorities adopting digital currencies as a legal tender or introducing a digital version of
their countries’ currency. In the US, the combined market capitalisation of digital assets
grew from about $14 billion as at November 2016 to about $3 trillion as at November
2021, a compound annual growth rate (CAGR) of 193%.

These developments have presented opportunities for the entrance of new service
providers, exposure to a new investor base and emergence of new asset classes in
financial markets. For instance, the Ontario Securities Commission in February 2021
approved exchange-traded products for spot bitcoin ETFs and the US Securities and
Exchange Commission in October 2021 approved ETFs on bitcoin futures.

The increased adoption of the digital asset market has elicited concerns as to its
implications for consumer and investor protection, including issues about data privacy and
security; financial stability and systemic risk; money laundering/crime; national risk; the
ability to exercise human rights; and financial inclusion. These developments have
heightened the need for the existence of global and domestic laws and regulation guiding
the activities of participants in the digital assets market.

As a member of the global community, Nigeria is not left out of ongoing events in the
digital assets market space. In February 2021, the Central Bank of Nigeria (CBN) through
a press release prohibited banks from using, holding, trading or transacting
cryptocurrencies. In October 2021, the Central Bank of Nigeria introduced the e-naira, a
digital version of the naira in order to create an inclusive economy, foster innovation and
enhance efficiency with naira transactions. As of December 2021, there had been over
666,000 e-naira speed wallets created, 700,000 e-naira speed wallet app downloads
across 160 countries and over 35,000 transactions.
In May 2022, the Securities and Exchange Commission (SEC) - the apex regulator of
Nigeria’s capital market, issued Rules on the Issuance, Offering Platforms and Custody of
Digital Assets. The Rules regulate the following: i)Issuance of digital assets ii)
Registration requirements for Digital Assets Offering Platforms ―DAOPs― iii)
Registration requirements for Digital Asset Custodians ― DACs― iv) Guidelines for
Virtual Assets Service Providers ―VASPs― v) Guidelines for Digital Assets Exchange
―DAX.

July 2022

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Digital Assets – an emerging trend in capital markets

What are digital assets?

A digital asset is simply content that is stored digitally in any Tokens help to transform sensitive information, with a unique
format and their associated value. They are electronic files symbol that preserves the critical data without compromising its
of data that can be owned and transferred by individuals security, into digital units or simpler forms, that can be managed
and used as a currency to make transactions or as a way of without a central intermediary, through blockchain technology.
storing intangible content such as computerised artwork, Economic value is generated when units of those underlying
videos or contracts documents. A digital asset functions in assets represented by the digital asset in the form of tokens,
a way that makes it distinguishable and identifiable through exchange hands in a transfer. Thus, a digital asset can be seen to
a type of decentralized database of electronic ledger called have three key characteristics; digital storage, ownership rights and
a Blockchain. They can be in the form of digital currencies probable future benefits due to those rights, and value.
such as cryptocurrencies e.g. bitcoin or CBDC, or they
maybe the underlying assets that are traded using block Accordingly, the Securities and Exchange Commission’s (SEC)
chain technology such as non-fungible tokens (NFTs). New Rules on Issuance, Offering Platforms and Custody of Digital
Assets, defines digital assets as “a digital token that represents
One of the key features of digital assets is that they assets such as a debt or equity claim on the issuer” while virtual
encourage fractional ownership. This means that digital assets are defined as “a digital representation of value that can be
assets could be created from equity, real estate, transferred, digitally traded and can be used for payment or
commodities or any underlying asset, which has the investment purposes”.
potential to generate future benefits and has ownership
rights attached, often through tokenisation, a process which
involves the creation of tokens.

Digital assets issuance in other jurisdictions

The emergence of digital assets has brought about disruptions in the global financial markets and traditional financial
services to the extent that various jurisdictions have recognised digital assets as a key component of the future growth of
the changing financial landscape. Various governments have engaged with digital assets market stakeholders through a
range of approaches as the global scrutiny for its budding market has increased. Data from Statista shows that the use of
cryptocurrencies as an investment tool or means of payment is on the increase in various countries.

Fig 1: Share of respondents who indicated they either owned or used cryptocurrencies in 25 countries and territories worldwide from
2019 to 2021

Country 2019 2020 2021

Nigeria 28% 32% 42%
Thailand 23% 18% 31%
Philippines 15% 20% 28%
Vietnam 22% 21% 27%
Turkey 20% 16% 25%
Argentina 16% 14% 21%
South Africa 16% 18% 21%
Switzerland 10% 11% 16%
Kenya 10% 11% 16%
Malaysia 6% 12% 16%
Brazil 16% 11% 16%
Netherlands 9% 10% 15%
Colombia 18% 15% 15%
Czechia 10% 9% 15%
India 7% 9% 15%
Portugal 9% 8% 14%
Spain 10% 9% 14%
Chile 11% 12% 14%
Pakistan 6% 6% 14%
Ireland 8% 10% 13%
United Arab Emirates 20% 10% 13%
United States 6% 6% 13%
Peru 15% 16% 13%
Hong Kong 11% 11% 13%
Greece 11% 11% 13%
Source: Statista July 2022

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Digital Assets – an emerging trend in capital markets

The growth and adoption of digital assets and developments around the regulatory framework has been a key topic of interest
globally. A look at initiatives in a number of jurisdictions is shown below:

Malaysia

• In 2019, The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 was
introduced to recognise digital assets as securities. Digital assets are categorised into two types; digital currencies and digital
tokens.

• The Securities Commission Malaysia (SC) further issued the revised Guidelines on Recognised Markets to incorporate a new
chapter setting out the requirements for electronic platforms that facilitate the trading of digital assets.

• Subsequently in 2020, the SC issued Guidelines on Digital Assets setting out requirements relating to fund raising activity
through digital token offering, operationalisation of initial exchange offering (IEO) platform and provision of digital asset custody.

• As at April 2022, there were four Recognised Market Operators (RMOs) registered by the Securities Commission (SC) to
establish and operate digital exchanges in Malaysia.

• As at September 2021, the volume of digital assets traded has surpassed a billion, with over 300,000 new accounts created
since the introduction in 2019.

Mauritius

▪ In September 2018, the Financial Services Commission (FSC) Mauritius, recognised digital assets as an asset class for
investment by expert and sophisticated investors, expert funds, specialised and professional collective investment schemes.

▪ The FSC introduced in 2019, a licensing framework specifically for digital assets custodian services. Persons intending to offer
custody services for digital assets are required to obtain a Custodian Services (Digital Asset) license issued by the FSC.

▪ The FSC, in 2020, issued Guidance Notes on Security Token Trading Systems under the Financial Services Act 2007, to
provide for the implementation of a common set of standards for the licensing of Security Token Trading Systems in Mauritius.

▪ In February 2022, the FSC, issued a communique stating that the Virtual Asset and Initial Token Offering Services Act 2021,
had come into effect. It sets out a framework to regulate the business activities of virtual assets service providers (VSAPs) and
initial token offerings (ITOs). It requires any person carrying out the following business activities to apply for a license or
registration with the FSC:
o a virtual asset service provider or an issuer of initial token offerings in accordance with the Act; or
o a custodian (digital assets) in accordance with the Financial Services Act,

Thailand

▪ Digital asset regulations were introduced by the Emergency Decree on Digital Assets Business B.E. 2561 (2018), that regulates
the issue and trade of digital assets and the Amendment to the Revenue Code (no. 19) B.E. 2561 (2018), that seeks to tax
profits from digital Assets.

▪ The Decree requires digital asset businesses to obtain a license from the Minister of Finance and approval from the Thai
Securities and Exchange Commission (Thai SEC)

▪ To offer newly issued digital tokens/existing digital tokens, to the public, the issuer must:
o Be a juristic person in the categories of a limited company or a public limited company only;
o Obtain an approval from the SEC Office;
o File a registration statement for the offering of digital tokens and the draft prospectus to the SEC Office. July 2022

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 Digital Assets – an emerging trend in capital markets

Extracts from the Rules issued by the SEC Nigeria.

The SEC rules on Issuance, Offering Platforms and Custody of Digital Assets is in 5 parts covering: (i)Issuance of digital assets; (ii)
Registration Requirements for Digital Assets Offering Platforms ―DAOPs; ( iii) Registration Requirements for Digital Asset Custodians
― DACs; (iv) Guidelines for Virtual Assets Service Providers ―VASPs and (v) Guidelines for Digital Assets Exchange ―DAX.

PART A – Rules on PART B – Rules on PART C – Rules on PART D- Rules on PART E- Rules on
Issuance of Digital Registration Registration Virtual Assets Digital Assets
Assets as Securities Requirements for Requirements for Service Providers Exchange (DAX)
Digital Assets Offering Digital Asset (VASPs)
Platforms (DAOPs) Custodians
(DACs)

Definitions A digital asset is a DAOP: an electronic DACs: a person who VASPs: Any entity DAX: An electronic
digital token that platform operated by provides the services who conducts exchange that
represents assets a DAOP operator for of services such as facilitates the trading
such as a debt or offering digital assets. providing exchange between of digital assets.
equity claim on the safekeeping, storing, virtual assets and
issuer. holding or fiat currencies;
maintaining custody exchange between
of virtual one or more forms
assets/digital of virtual assets;
tokens for the transfer of virtual
account of someone assets; among other
else. services specified in
the Rules issued by
the SEC, for or on
behalf of another
person.

Applicability All issuers seeking to Applicant seeking to Applicant seeking to 1. All platforms that Applicant seeking to
raise capital through register as a DAOP. register as a DAC. facilitate trading, register as a DAX
digital asset exchange and Operator.
Offerings. transfer of Virtual
assets;
2. Any person,
(individual or
corporate) whose
activities involve
any aspect of
Distributed Ledger
Technology (DLT)-
related and virtual
digital asset
services;
3. Issuers or
sponsors of
virtual/digital assets,
including foreign or
non-residential;
4. Foreign or non-
residential operators
that actively target
Nigerian investors
directly or indirectly.
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 Digital Assets – an emerging trend in capital markets

Fees Not provided ● Filing/Application Not provided Not provided ● Same as

Fee – N100,000. applicable to
● Processing Fee – DAOPs.
N300,000.
● Registration fee –
N30,000,000.
● Sponsored
Individuals Fee –
N100,000.

Minimum Not provided ● Evidence of Not provided Not provided Same as applicable
paid-up Required to DAOPs.
capital and Minimum Paid up
fidelity bond Capital –
N500,000,000
Current Fidelity
Bond covering at
least 25% of the
minimum paid-up
capital.

Registration • Submission of ● Payment of In addition to the ● Application Same as applicable

requirements assessment form prescribed fees. general requirements filed on the to DAOPs.
(in addition to and draft white ● Submission of for VASPs, the appropriate
evidence of paper for initial forms. following apply: SEC form
payment of assessment; ● Minimum paid-up ● Satisfy eligibility ● Sworn
applicable • Compliance with capital and fidelity requirements for undertaking
fees) the Commission’s bond; registration as a that the
minimum ● Sponsored Custodian or applicant will
disclosure individuals and Trustee, be able to
requirements for directors; ● For a custodian operate an
public offers; ● Corporate or registered orderly, fair
• Registration documents etc. trustee to and
statement of the provide DAC transparent
digital assets, services, such market in
• KYC procedures, CMO shall apply relation to the
disaster recovery to the SEC for securities,
plans and risk approval; ● Evidence of
management ● Foreign DACs solvency, fit
protocol among may be and proper
other registered upon evidence for
requirements. meeting the key officers
requirements as and other
set by the SEC requirements.
among other
requirements.

Exemptions i) Securities Not provided Not provided Not provided Exemptions from
structured to be requirements may be
exclusively offered granted if the
through crowdfunding Commission is
portals or satisfied that such
intermediaries; variation is not
ii) A judicial sale or contrary to the
sale by an executor, intended purpose of
administrator or the relevant
receiver in insolvency requirements in the
or bankruptcy; issuance rules; and
iii) Where the sale is that there are
by a pledged holder mitigating factors
or mortgagee, selling which justify the said
to liquidate a exemption or
bonafide debt among variation. July 2022
other exemptions.
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Digital Assets – an emerging trend in capital markets

Potential benefits of digital assets to the domestic economy

There are lots of untapped opportunities within the domestic economy that digital assets could unlock and which would be
beneficial to the entire value chain. New forms of value could be created through innovation in the digital assets market
leading to a massive change in the financial landscape of the domestic economy. Some of the potential benefits include:

01 Asset tokenisation: The fractionalisation of high valued conventional/illiquid assets such as equity securities,
real estate, commodities, loans etc., would offer retail investors greater access to a wider pool of investments
which they could not normally afford to buy, as they can now purchase smaller denominations in digital token
form. This has the potential to drive greater liquidity across the capital markets.

02 Portfolio diversification: Digital assets could provide diversification benefits when added to a portfolio of
traditional assets, as digital assets have historically had low correlations with traditional assets.

03 Convenience of payment services: The Central Bank Digital Currencies (CBDCs), such as the eNaira, have
the ability to achieve faster payments through instant settlements. This would strengthen the competition for
smooth retail and cross-border payment services and help governments to accelerate digital transformation of
their economies.

04 High security and transparency: The transactions of digital assets are recorded on transparent public
ledgers that create an information flow for all transactions done. Therefore, tracking transactions and
establishing audit trails is relatively easy with digital asset transactions.

05 Advancing financial equity and inclusion: The evolutionary technology behind digital assets makes it quite
appealing to drive and possibly achieve greater financial inclusion in the economy. Digital assets can
potentially expand the reach of financial institutions and close gaps by providing opportunities to reduce fees
and eliminate middlemen, as well as attract foreign investors.

06 Reduced cost and complexity: The complexity of existing processes can be reduced with digital assets and
the automation of controls and checks lead to process improvements that reduce cost.

07 Efficiency: Asset digitisation and blockchain technology improves existing transaction processes through
reduced cost, increased transparency and asset liquidity, thereby enabling greater operational efficiency.

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Digital Assets – an emerging trend in capital markets

Conclusion

Advances in technology, low returns, in real terms, on traditional assets such as equities, fixed income instruments, real
estate among others, as well as the need for greater financial inclusion has brought about increased focus on digital assets
globally. Digital assets are making new investment categories possible and even accessible to retail investors. The
mainstreaming of the digital asset market is an inevitable trend with the potential to transform financial markets significantly
but also with attendant risk. Due to their digital nature, investors in digital assets are directly exposed to fraud, theft and
cyber attacks. Similarly, the digital asset market is also prone to higher than usual risk of market manipulation, market
abuse, and insider dealing by market participants due to their nascent stage. Hence, it is becoming increasingly exigent to
balance the need to explore the benefits from usage of digital assets as well as protecting investors and the financial system
at large. In some jurisdictions, such as Thailand, the use of digital assets has been restricted from some types of
transactions so as to counteract inherent risks such as money laundering, price volatility and fraudulent activities.

The inherent risky nature of digital assets underscores the need for proper investor education on the workings of the digital
asset space as well as an appropriate and robust regulatory framework to safeguard the integrity of the financial system and
ensure the participation of only reputable players in the market. To this end, the Rules by the SEC are a step in the right
direction towards facilitating the digital asset market in Nigeria.

The Rules by the SEC provide a clear regulatory framework for the growth of the digital asset market in Nigeria with the
potential to drive financial inclusion, improve transparency, reduce transaction cost and increase the level of participation in
the Nigerian capital market, while also ensuring adequate investor protection and proper regulatory oversight. However,
thorough oversight would need to be done to mitigate the inherent risks.

Contacts

Omobolanle Adekoya Elizabeth Ekpo

July 2022

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Acknowledgement

We would like to thank Elizabeth Ekpo, Nosakhare Agbonlahor and Tunmise

Omole for their important contributions to this publication.

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