Olusola Mesele – Law Allianz

FRAMEWORK FOR THE REGULATION OF THE NIGERIAN CRYPTO ASSETS MARKET

Posted on April 27, 2020April 27, 2020 by Olusola Mesele

1. INTRODUCTION

It is undeniable that there is a Nigerian Crypto Assets Market (“Crypto Assets Market”), which is part of the Global Crypto Assets Market which is estimated to be worth about 350 Billion Dollars.

As the Securities and Exchange Commission (“SEC”) considers setting up a regulated Crypto Assets Market, it is essential that the framework for regulating this market be set out in extensive detail and carefully considered against the international order for regulation of these assets. This may be somewhat challenging since there is no universal global approach for regulating the Crypto Assets Market, nevertheless there are classifications, infrastructure, rules, procedures and practices common to most jurisdictions which will guide SEC in formulating an indigenous regulatory regime.

This paper shall analyze the structures, systems, processes, participants and licensing regime that need to be put in place to effectively regulate the Crypto Assets Market.

2. REGULATORY APPROACH TO CRYPTO ASSETS MARKET

While the regulation of the Nigerian Capital Market by SEC does provide basic pointers for the regulation of the Crypto Assets Market, there are numerous features of the Crypto Assets Market that do not match the Capital Market and so the framework for regulation of the latter may not be applicable to the former. Therefore, SEC must take a position as to its regulatory approach to the Crypto Assets Market. In our view it may approach this issue in any of the following ways:

(i) Regulation Through Existing Laws and Regulations: The key consideration for SEC if it wants to apply this approach is whether the Investments and Securities Act 2007 (“ISA”) and the Regulations made pursuant thereto are effective to regulate the stakeholders, activities, functions and systems that comprise the Crypto Assets Market.

(ii) Regulation Through Amended Laws and Regulations: Again SEC may decide to amend the ISA and the Regulations with a view to extending their scope to cover the regulation of the hitherto unregulated Crypto Assets Market. For example, Estonia amended its Money Laundering Act and Terrorism Financing Prevention Act, respectively, to bring Crypto Wallets and Exchanges under its regulatory regime.

(iii) Regulation through New Laws and Regulations: SEC may on the other hand, seek the enactment of bespoke legislation that will target specifically, all aspects of the Crypto Assets Market, thereby providing for a comprehensive regime of regulation able to address the peculiarities of the market. For example, Malta took this approach when it enacted the Virtual Financial Assets Act.

In our view SEC should as a matter of urgency enact new regulations for the Crypto Assets Market under its existing powers in Sections 13 and 313 of the ISA.

3. CLASSIFICATION OF CRYPTO ASSETS

This is fundamental to the regulation of the Crypto Assets Market as whatever regulations SEC enacts must define the type of crypto assets that will fall within its regulatory ambit. Global best practices tend to classify crypto assets into 3 functional models, i.e. assets that are investment tools (Security Tokens), assets that operate as a medium of exchange (Payment Tokens) and assets that give a right to participate in digital resources (Utility Tokens). In terms of SEC’s statutory jurisdiction, it would appear that by virtue of Sections 13 (a) and 315 of the ISA that Security Tokens could fall within the definition of Collective Investment Schemes and Securities (i.e. under subsection (d)). With regards to Payment Tokens and Utility Tokens, it is our view that where these are not hybrid in nature, i.e. there is no aspect of them that can be deemed to be an investment tool or a security, then they should not fall under the regulatory jurisdiction of SEC.

4. REGULATION OF ACTIVITIES AND PARTICIPANTS IN THE CRYPTO ASSETS MARKET

The Crypto Assets Market comprises a number of activities and participants which SEC will need to properly capture within the regulatory framework it shall adopt and issue appropriate licenses to. In broad terms these activities can be divided into On-Chain Activities, i.e. activities which occur on the Block chain platform and Off-Chain Activities, i.e. activities which occur off the Block chain platform. By extension the participants can also be divided along the same lines. Examples of On-Chain Activities/Participants are as follows:

(i) Mining of Crypto Tokens: This refers to the continuous process of creating new tokens through special nodes or computers called record producers through a transparent and pre-specified procedure on the protocol that runs the block chain. The individuals performing the function of mining are called miners. It is our opinion that SEC cannot seek to license miners as their operations are pure technical/technological and solely within the global block chain infrastructure. In our view they are well outside SEC’s territorial and jurisdictional competence and have no relationship with any of the entities which SEC will regulate in the Crypto Asset Market.

(ii) Distribution of Crypto Tokens: On-Chain distribution of tokens also occurs through mining (i.e. the tokens are distributed as rewards to the miners upon the discovery of the proof of work contained in the block); airdrop or fork.

(iii) Decentralized Digital Exchange Services: This refers to Exchanges operating on the block chain which facilitate peer to peer trade of Crypto Assets without taking custody of the said assets. They have a significant disadvantage of slowness and inapplicability for inter block chain trade, but have the advantage of safety and price integrity. In our view Decentralized Exchanges should be licensed and regulated by SEC because the platform they provide for trading in securities is within SEC’s territory and they deal directly with entities within SEC’s purview. Also these Exchanges can provide AML/CFT reporting and compliance functions to SEC.

(iv) Hot Crypto-Wallet Services: This refers to the service of storing public and private keys of Crypto Assets online. These type of wallets could be connected to the block chain as a fully validating node while others run as third party applications. In our view, Hot Wallet Services should also be licensed and regulated by SEC since they are principal participants within the Crypto Asset Market, operating almost like banks and as part of the payment infrastructure for crypto assets.

(v) Block chain Payment Platforms: These are gateways that facilitate the use of Crypto tokens for payment for goods and services. These in our view should not be licensed by SEC as they fall under digital payment systems utilized for Payment Tokens and may not have any features that support Investment Tokens.

Off-Chain Activities on the other hand include the following:

(i) Pre-mining Sale of Crypto Tokens: This refers to the private offering of pre-mined tokens usually on block chains that have not become operational. Under this arrangement these tokens are usually non-transferable or locked up for a certain period. Where these tokens are issued as Investment Tokens or for investment purposes, SEC should regulate their issuance and issuers.

(ii) Initial Coin Offering: This refers to the offer of new tokens in exchange for fiat currency or existing Crypto tokens, with a return on investment upon the secondary appreciation of the token. Where these tokens are issued as Investment Tokens or for investment purposes, SEC should regulate their issuance and issuers.

(iii) Cold Crypto-Wallet Services: This refers to the service of storing public and private keys of Crypto Assets on hardware devices like USBs or mobile phones which can be connected to computer or other device to enable permission for block chain transactions. In our view they are outside SEC’s jurisdictional competence as what they provide is a technical/technological function for users of the crypto assets and as such should not be licensed.

(iv) Centralized Digital Exchange Services: Centralized Digital Exchanges are platforms for trading in Crypto Assets not on the block chain, where the Exchange takes custody of the said assets and trade on behalf of the holder. They have the advantage of speed and being able to trade assets across different block chains but are prone to security attacks and market manipulations. In our view, these Centralized Exchanges should be licensed and regulated for the same reasons as the Decentralized Exchanges.

(v) Crypto Assets Market Services: There are a number of services provided off chain that are critical the effective function of the market and identical to those offered in the Capital Market. These services include asset management, collective investment schemes, investment advisory, brokerage services, security audit, ratings services, compliance services, legal services and data services. Some other services like block chain analytics, however, are peculiar to the Crypto Assets Market and based entirely on block chain related activity. In our view persons offering services to the Crypto Assets Market should be licensed and regulated to ensure the highest standards of professionalism, skill and experience in these services are what is available in the Crypto Assets Market.

5. COMPARATIVE REGULATION OF CRYPTO ASSET MARKETS

Below are the regulatory approaches adopted by some countries for the regulation of their respective Crypto Assets Market:

(i) France

France is in the process of enacting the Business Growth and Transformation Action Plan Law. In that law, tokens are defined as intangible assets representing rights in digital form which may be issued, registered, transferred or retained on a Distributed Electronic Register which identifies the owner of the assets. The law also defines Digital Assets as a digital representation of value not issued by a central bank or public authority, not necessarily linked to legal tender and not possessing status of currency but is accepted as a means of exchange and can be transferred, stored or exchanged, electronically. Essentially these definitions fall within the classification of Investment Tokens and Payment Tokens, respectively.

In terms of regulated activities, persons providing payment platforms for crypto token payment to third party vendors require a license to operate. Also Initial Coin Offerings (ICOs) for Security Tokens are regulated under the Financial Instrument Law. There is also an optional regime under the soon to be enacted Business Growth and Transformation Action Plan Law to ensure compliance with Anti-Money Laundering requirements by different entities, which include Custodial Wallet Service Providers; Trading platforms that exchange crypto tokens for fiat currency; Trading platforms that exchange crypto tokens for different crypto tokens; Digital Assets Portfolio Management Providers and Digital Assets Subscription Providers.

(ii) Israel

Israel enacted its Financial Services Law in 2016, including virtual currencies in its definition of financial assets. Furthermore, in 2017, Israel’s tax authorities defined virtual currencies as a means of virtual payments and as financial assets used for the purpose of bartering.

Under the Financial Services Law, there is a mandatory licensing regime for providers of financial assets. The criteria for obtaining the mandatory licenses differ between individual and corporate applicants and the license granted could be basic or expanded. Entities already regulated by other financial laws (like banks) and individuals serving solely as brokers are exempt from the license regime.

In 2018, the Israel Securities Authority (ISA) published an interim report on ICOs which essentially adopted the standard classification of this activity, i.e. into Currency Tokens, Investment/Security Tokens and Utility Tokens and stated that it would only regulate Investment/Security Token Offerings (but would apply a substantive test to determine if investment/security component was contained in other offerings).

In terms of AML/KYC compliance, the Ministry of Finance published draft amendments to the Financial Services Law which required Crypto Asset Service providers to publish IP addresses of its clients and public addresses of Crypto Asset Wallets and to maintain full documentation of crypto asset activity for at least 5 years.

(iii) Malta

Malta, in classifying crypto tokens, Malta has enacted bespoke legislation (i.e. the Virtual Financial Assets Act) providing for different aspects of crypto token infrastructure like Crypto Exchanges, Initial Coin Offerings, Crypto-Wallet Advisers, Virtual Finance Asset Agents and so on. The legislation classified Distributed Ledger Technology Assets into Financial Instruments, Electronic Money, Utility Tokens i.e. digital tokens for acquisition of goods and services on the block chain and Virtual Financial Asset i.e. digital tokens used as medium of exchange, unit of account or store of value (but which do not fall into any of the other categories).

The Virtual Finance Assets Act introduced a 3 stage test called the “Financial Instrument Test” to determine the classification of DLT Assets prior to an Initial Virtual Finance Offer (Initial Coin Offer), or the admission of a Virtual Finance Asset into trading or the conduct of Virtual Finance Asset related services. The test first determines whether the DLT Asset is a Virtual Token (i.e. a Virtual Asset used for limited trading purposes within a closed DLT system and not on a DLT Exchange) as these type of assets are not regulated by the VFAA. Secondly the test determines whether the asset, though not a Virtual Token is however subject to existing regime of Financial Services Legislation as it will have to comply such existing legislation. Lastly if the asset is not a Virtual Token and is not required to comply with existing Financial Services Legislation, then it will be deemed to be a Virtual Finance Asset regulated by the provisions of the VFAA.

The VFAA therefore regulates ICOs and secondary trading of Virtual Financial Assets; the provision of professional and investment services in relation to Virtual Financial Assets and Virtual Financial Asset Agents. The VFAA also imposes the AML/KYC obligations on the above regulated entities.

6. CONCLUSION

The imminent regulation of the Crypto Assets Market is something that must be done by SEC as the primary regulator for securities and investments in Nigeria as market regulation that ensure market soundness/integrity and the protection of the real investing public.

The opportunities to structure the market and formalize its operations can only come with regulation which is focused on investment/securities activity, comprehensive enough to regulate all players in the value chain and dynamic enough to respond to the peculiarities of the market and the undergirding block chain technology.

OVERVIEW OF COMPARATIVE STANDARDS FOR PROTECTION OF TRADEMARKS

Posted on October 10, 2019April 21, 2020 by Olusola Mesele

1. Introduction

Any international discussion of trademarks protection regime today must stem from the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). TRIPS is administered under the platform of the World Trade Organisation (WTO) and is a detailed and comprehensive agreement establishing minimum standards for protection and enforcement of Intellectual Property. Nigeria is a member of the WTO., but there are still substantial differences and some similarities between the Trademarks Act and TRIPS; some of which this paper shall highlight.

2. Definition of Trademarks

Article 15 of TRIPS defines a trademark as any sign or combination of signs, capable of distinguishing the goods and services of one undertaking from those of other undertakings. Section 67(1) of the Trademarks Act cap T13 Laws of the Federation of Nigeria 2004 on the other hand, defines a trademark as a mark used or proposed to be used in relation to goods for the purpose of indicating, or so as to indicate, a connection in the course of trade between the goods and some person having the right either as proprietor or as registered user to use the mark, whether with or without any indication of the identity of that person. In 2007, the then Minister of Commerce and Industry, acting under his powers in the Act, extended the classification of marks in the fourth schedule to the Trademark Act from classes 35 to 45, providing for varying services to be registered as trademarks.

3. Regime for Registration of Trademarks

The Trademarks Act provides for registration in Parts A and B of the Trademarks Register. For registration in Part A, a trademark must have the quality of distinctiveness, i.e. contain at least the name of the applicant (represented in a special manner), or signature of the applicant, or an invented word (s), or a word (s) having no direct reference to the character, quality or geographical name of the goods or any other distinctive mark. While registration under Part B of the Register may only be obtained in the case where the mark is capable of distinguishing goods with which the proprietor is connected in the course of trade from goods in which no such connection exists. Marks that are names of single chemical element or compound, deceptive and/or scandalous cannot be registered under the Trademarks Act. While TRIPS makes no provision for separate registers or regimes, it obliges criteria of distinguishability and leaves other criterion to the discretion of its members.

4. Third Party Rights in Registered Trademarks

In Article 16 of TRIPS, it is provided that a proprietor of a registered trademark shall have the exclusive right to prevent third party usage of an identical or similar mark in the course of trade in goods and services identical to his, where such use is likely to cause confusion. Under Nigerian law the right is similar, but the difference is that the proprietor has a right to exclusive use of the mark subject to vested rights of earlier users. See Sections 5, 6, 7 and 8 of the Trademarks Act.

5. Protection of Well-known or Famous Marks

Under the said Article 16 of TRIPS, ‘well known’ or ‘famous’ marks are protectable, without or without registration. The Trademarks Act, however, does not provide for protection of well-known or famous marks and as such, even though Nigeria is obliged to enforce TRIPS provisions and Paris Convention for the Protection of Industrial Property (which also provides for protection of well-known marks), it may be difficult to enforce as these treaties have not yet been domesticated under Nigerian law and so it would appear that the only option for protecting such marks is by the common law action for passing off. See the case of Exxon v. Exxon Nominees [1989] Federal High Court Reports 1. In Section 7 of the Trade Marks Act, however, such well known/famous marks can be protected against their registered counterparts as the Trade Marks Act recognizes the rights of owner or user of unregistered trademarks, which are identical with or nearly resembling a registered trademark. This is provided that the unregistered owner or user can show that he or his predecessor in title has continuously used that trademark from a date previous to the use or registration by the registered user.

6. Protection of Geographical Indications

Geographical indications identify goods as originating from a particular territory or region in a country, and indicative of quality, reputation or other characteristics attributable to that territory or region. These indications are protected under TRIPS and members could either refuse granting registration or even nullify same where there is a false or misleading indication. While the Trademarks Act does not specifically provide for Geographical Indications, they can be subsumed under Section 43 (1) of the Trademarks Act. the regime of certification marks, i.e. marks that certified as to origin, quality or other characteristic.

7. Conclusion

The TRIPS Agreement is broad based and applicable to several countries around the world. It represents the uniform standards, predictability and consensus in the use and protection of intellectual property rights as key factors for trade among nations and the entities operating within their respective territories.

While Nigeria has substantially complied the provisions of TRIPS, she is still in default of several key provisions, the most important of which are the provisions for the protection of well-known or famous marks. It is hoped that upon the enactment or amendment of the existing legislation these issue shall be resolved.

THE NIGERIAN CREATIVE INDUSTRY AND INTELLECTUAL PROPERTY RIGHTS IN A DIGITAL ENVIRONMENT

Posted on October 9, 2019April 27, 2020 by Olusola Mesele

1. BASIC FACTS AND FIGURES

One thing is crystal clear: there is an abundance of talent in Nigeria and from Nigeria. For example, the Nigerian Film Industry is estimated to account for almost 1.4% of our Gross Domestic Product (GDP) i.e. over USD 7 Billion, providing employment for over 1 million people and releases over 2500 films a year, according to an International Monetary Fund (IMF) Report released in 2016.

All across the different sectors, there are substantial revenues generated from the industry, a fact which was placed in sharp focus in 2013 when the Federal Government of Nigeria rebased our GDP by including components like music, film, telecommunications, online sales and information technology, which ultimately led to an increase of GDP from an estimated USD 285.5 Billion to an estimated USD 510 Billion.

The Nigerian Creative Industry comprises several players across diverse sectors like film, theatre, music, dance, literature, fashion, television, radio, arts, sports, information technology, media, advertising and gaming. The common tie that binds the entire industry is Intellectual Property (IP), as it is the primary product of all activities across the different sectors. The standard industry model for creating commercial value used to be good content, effective exhibition platforms/distribution channels and adequate IP Protection. Clearly this is no more the case as technology, with its fluid and constantly evolving ecosystems, has revolutionized everything about the industry, especially the way the public engages it.

We are therefore confronted by a double edged sword, i.e. the challenges created by new technology in the creative industry and the opportunities that these technologies have introduced for us to grow the industry and create something truly remarkable in Nigeria.

This paper shall traverse these and many other issues with a view to discover what portends for the industry in a digital environment.

2. INTELLECTUAL PROPERTY PROTECTION UNDER NIGERIAN LAW

Intellectual Property refers to creations of the mind over which the creator has certain exclusive proprietary rights. Intellectual Property is protected in the first instance by a body of laws which cover different categories of Intellectual Property. In Nigeria, these laws are national, i.e. laws enacted by the National Assembly of Nigeria like the Copyright Act cap C28, LFN, 2004 and international, i.e. treaties entered into which adopt certain standards and protocols applicable to its member states like the Berne Convention for the Protection of Literary and Artistic Rights 1886.

In terms of the areas they cover, these laws can be classified as follows:

(i) Industrial Property Laws: These laws protect trademarks, industrial designs and patents.

(ii) Copyright Laws: These laws protect the copying and use of artistic works, sound recordings, films, music, broadcasts, literature, computer programming and so on.

(iii) Other Laws: These Laws protect other areas of intellectual property like trade secrets, domain names, trade dress, utility models, image rights and so on.

The players in the Nigerian Creative Industry obtain the highest level of intellectual property protection through the Copyright Right Act as this is the law sets out the general regime for protection of creative activity, i.e. definitions, components, requirements for protection, types of infringement and mode of enforcement for infringement. The Act also sets out the powers and functions of the Nigerian Copyright Commission, which is the main industry regulator. For example, in 2007, the Nigerian Copyright Commission (NCC) pursuant to these powers made a Regulation called the Regulatory Framework for Registering and Monitoring Optical Discs Replicating Plants which mandated that all optical discs have a Source Identification Code to track optical discs to the plants where they are produced. The industry players also require protection through other laws like the Trademarks Act, cap T13, LFN, 2004; the Patent and Designs Act cap P2, LFN, 2004; the Cybercrimes (Prohibition, Prevention, etc) Act 2015; the National Information Technology Development Agency Act (2007) and the General Registration Policy of the Nigerian Internet Registration Association.

Copyright under Nigerian law is achieved by the expression of original works of art, literature, music, cinema, sound and broadcast, in a fixed medium through which it can be communicated directly or indirectly. Copyright in Nigeria is not by registration but other criteria which the author must meet, i.e. qualification as a citizen, person domiciled in Nigeria or body incorporated in Nigeria; or qualification as a government, state authority or approved international body; or qualification as a citizen, person domiciled or body corporate incorporated in a country which is joint signatory with Nigeria in an international treaty.

3. DIGITAL DISPLAY/DISTRIBUTION OF CREATIVE WORKS

The internet has opened up the digital space and created faster, more accessible, more interactive and more intuitive ways of communicating. This in turn has transformed the way intellectual property is created and deployed to end users. Creative activity in the digital space is through activities like uploading, downloading, streaming, live streaming and file sharing on platforms like Facebook; Whatsapp; Instagram; Twitter; Google play; Yahoo music; Youtube; Tidal; iTunes; Spotify; Soundcloud; online download platforms; file sharing platforms; vlogs and blogs.

These disruptive technologies have completely transformed previous models for the creative industry, i.e. the standard model was for established brands to purchase the bundle of intellectual property rights from their creators, use their well dispersed distribution networks and sophisticated marketing systems to drive the commercial success of the works and in exchange the creators would receive a fixed percentage of the profits known as royalties. In contrast creators now keep the bulk of commercial benefit from their intellectual property as the internet provides them with the widest possible distribution network possible; they can market their works directly to the end users in far more sophisticated ways through social media; the digital platforms that display and distribute their works most times do not own the bundle of rights but simply operate as a hosting platform and share fees collected from end users and at the same time the user engagement/experience with the work has been greatly enhanced.

The challenge with these new platforms is not with their potential to ensure creators receive appropriate commercial value for their works but with how these platforms can be effectively positioned in the Nigerian market to deliver on their potential. This is because there is a total absence of regulation in the digital space and this means that more than previous industry models, piracy can devastate the digital space if not addressed by the NCC.

4. CONCLUSION

There is no doubt that the future of the creative industry and exploitation of intellectual property is now. There are ample opportunities to reposition the Nigerian arm of the industry as the foremost hub in Africa and among the preeminent nations globally. What is most necessary is infrastructure that better applies to the digital age and for this there is a need for very significant investment in the sector. That investment for now will have to flow from governmental, institutional and multilateral sources, but this will only happen when the industry organizes itself and shows its readiness to move into the digital age.

In particular, the industry must seek stronger protection or enforcement under the provisions of existing or new laws, participate in and strengthen the activities of their trade associations for consensus building, carry out public enlightenment and advocacy, adopt comparative best practices from their regional and international colleagues and leverage on new technologies.