When you buy cryptocurrencies such as Bitcoin or Ether on a local exchange, you are often trusting the platform with one simple task: to keep your funds safe. But what happens if the exchange is hacked, freezes withdrawals or suddenly shuts down?
Nigeria’s Securities and Exchange Commission (SEC) wants cryptocurrency companies to have better answers. Under proposed rules released on August 20, crypto exchanges and other digital asset firms would have to separate customer funds from their own, strengthen how they safeguard cryptocurrencies, and report major losses, cyber incidents, and other material operational failures to the regulator.
The framework, which is open for public comment, brings a rule already familiar in the traditional banking sector to the digital asset industry: when something goes wrong, the regulator expects to know about it quickly. Like banks, crypto firms would have to notify their regulator of certain incidents within 24 hours with further updates where necessary; the SEC’s proposal also requires digital asset firms to submit a detailed incident report within 48 hours.
The SEC is also proposing higher financial requirements for digital asset businesses. Digital Asset Exchanges and Digital Asset Custodians (DACs) would each need minimum paid-up capital of N2 billion ($1.5 million) while Digital Asset Platform Operators (DAPOs), Digital Asset Offering Platforms (DAOPs), and Real-World Asset Tokenisation Platforms (RATOPs) would require N500 million ($371,600). Virtual Asset Service Providers would require N200 million ($149,000).
The proposal also requires a current fidelity insurance bond covering at least 25% of the applicable minimum paid-up capital.
The rules are aimed at strengthening investor protection and reducing the risk that customers lose access to their assets when a digital asset company fails. The stakes are high in a market where the collapse or failure of a platform can leave customers unable to access their money, with little clarity on when—or whether—they will be repaid.
The proposal also gives retail investors a five-business-day cooling-off period for certain digital asset offerings. During that period, investors can withdraw their subscription and receive a full refund, subject to the conditions set out in the rules. The provision applies to subscriptions to digital asset offerings; it is not a blanket five-day withdrawal right for every cryptocurrency purchase on an exchange.
Nigerians have already seen what can happen when a crypto company fails to protect customer assets. Patricia, a Nigerian crypto startup, suffered a breach in January 2022 that was reported to have cost the company about $2 million. The company later froze withdrawals, leaving customers unable to access their assets for extended periods.
The SEC’s proposed fidelity insurance requirement is intended to provide another layer of protection against losses suffered by clients or investors as a result of operational failure, technology failure, cybersecurity breaches, custody failures, fraud, negligence, misconduct, misappropriation or unauthorised transactions. The protection would not extend to losses caused by market movements, price volatility or poor investment performance.
Separating client money from company funds
Globally, crypto platforms can hold assets belonging to many customers in the same wallet or account, a structure commonly known as an omnibus account. But those assets are still legally and operationally distinct from the platform’s own property.
The 2022 wave of crypto failures in the United States showed the consequences when that separation breaks down. Firms including Celsius, Voyager, and FTX collapsed after taking on significant risks tied to lending, trading and related activities, leaving customers to navigate lengthy bankruptcy proceedings and uncertainty over the recovery of their assets.
In FTX’s case, the US regulators alleged that customer funds were diverted to Alameda Research, its trading affiliate, and used for expenses and debts. The collapse prompted renewed scrutiny of customer-asset segregation and custody arrangements.
In a post-FTX proposal, the Commodity Futures Trading Commission (CFTC) said customer and company funds should be kept separate, with daily reconciliations and records showing who owns the assets. In August 2026, the US SEC also proposed stronger custody requirements for investment advisers holding customer crypto assets.
Nigeria’s SEC is proposing similar safeguards. Virtual Asset Service Providers (VASPs) would have to keep client assets separate from their own, while Digital Asset Custodians would have to legally segregate client assets from proprietary assets and those of affiliated entities. Custodians would also have to maintain separate wallets for each client, or equivalent internal ledgering systems that accurately attribute assets to individual clients.
Custodians would also not be allowed to use client assets for proprietary trading, or lend, pledge, rehypothecate, or otherwise encumber them, unless the arrangement is disclosed, the client gives separate consent and the SEC permits it. They would also have to reconcile client assets, with discrepancies reported to the SEC within 24 hours.
VASPs must keep customer funds separate from their own when users deposit naira or withdraw money from a crypto platform. Digital asset exchanges (DAXs) cannot use customer fiat to fund their own trading, operating expenses, lending, investments, or other obligations.
“Client fiat funds received or held in connection with on-ramp or off-ramp services shall be segregated from the [virtual asset service provider] VASP’s proprietary funds and handled in accordance with the client funds, trust account, safeguarding, and settlement requirements prescribed by the Commission,” the regulator said in the draft.
Keeping client money and assets separate makes it easier to identify ownership and protect customers if a company becomes insolvent.
Culled from https://techcabal.com/
