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Technology

Overview of the Guidelines for Contactless Payments in Nigeria

Nigeria has experienced significant growth and development in its financial sector, driven in large part by the integration of technology.
Technology has revolutionized the way banks operate in Nigeria, enhancing their efficiency, expanding their reach, and transforming the customer experience. The growth of fintech companies has further entrenched the relevance of technology and its potential to redefine the Nigerian financial services ecosystem.
The financial services sector has been at the forefront of leveraging technology to address challenges, enhance services, and stimulate economic growth. With banks and fintech companies in Nigeria embracing innovative solutions such as mobile banking, online platforms, and electronic payment systems to offer convenient and accessible financial services to a wider population, it is clear that there is a recognition of the potential inherent in technology to reshape financial services.
A case in point which highlights the efforts being put into building a more innovative financial ecosystem is the introduction of contactless payments. The COVID pandemic and the resultant lockdown triggered significant changes in the payment industry. Specifically, it amplified the need for contactless payments and ushered in a wave of unprecedented innovation and product development in the payment industry globally.
Given the record traction in the Nigerian payment market, the Central Bank of Nigeria (CBN), recognizing the… Click here to download article...

 

About DealHQ

We are an Africa Focused deal advisory/boutique commercial law firm focused on supporting businesses and positioning them to operate efficiently within their market sphere. We are known for our quality service delivery which is focused on attention to detail, creativity, timely execution and client satisfaction.

Our service offering includes: corporate commercial, real estate & construction, finance, capital markets & derivatives, mergers and acquisitions, private equity, infrastructure, technovation and data privacy, agriculture & commodities, business formations & start up support amongst others.

The content of this Article is not intended to replace professional legal advice. It merely provides general information to the public on the subject matter.

You may contact our team on:

Email: info@dealhqpartners.com; clientservices@dealhqpartners.com

Telephone: +234 1 4536427 or +234 9087107575

Episode 3 Season 2- Nigeria’s Energy Transition Plan – One Year On: Cost vs Gains Analysis

Simply is a sponsored podcast of DealHQ Partners, where we engage thought leaders on trending issues around law and business in the most simplistic manner.

On this Episode 3; our Ayobami Elias leads Mr. Akin Akinfemiwa, the CEO of Geregu Power, in conversation around Nigeria’s Energy Transition Plan specifically assessing its capacity to meet Nigeria’s immediate and future energy demands, whether the plan is aligned to economic priorities of providers of capital, developers and users of energy and most importantly what just energy transition means to Africa vis-à-vis finding the capital required to implement our Net Zero ambition.

Listen here:   linktr.ee/DealHQ

 

WHAT YOU NEED TO KNOW ABOUT THE NIGERIA DATA PROTECTION ACT, 2023

INTRODUCTION

As technology and digital innovation continues to advance, the volume of data generated and exchanged by users of the internet, mobile/web applications and other digital devices has raised the security of personal data to the status of “matter of national concern” in Nigeria.

On the 14th of June 2023, the President of the Federal Republic of Nigeria, signed into Law, the Nigerian Data Protection Act (the Act) thereby establishing by statute, the Nigerian Data Protection Commission; which is entrusted with the power to make and enforce regulations for the protection and security of the personal data of Data Subjects in Nigeria.

  1. SCOPE OF THE LAW

The Act provides the legal framework for the establishment of the Nigeria Data Protection Commission, the regulation of the processing of personal data of Data Subjects, and for other related matters. The objective of the Act is to safeguard the constitutional right of Data Subjects in Nigeria as relates to the processing activities undertaken by Data Processors or Data Controllers.  A Data Controller is a person, organization, or a statutory body who determines the purposes for, and the way Personal Data is processed or is to be processed. Consequently, a Data Processor is one who processes the data in the manner prescribed by a Data Controller).

  1. WHO DOES THE ACT APPLY TO?[1]

The Act applies to and is binding on Data Controllers or Data Processors who are either:

  1. Resident or operating in Nigeria;
  2. Processing data within Nigeria; or
  3. Processing data of Data Subjects in Nigeria.
  1. EXEMPTION

Data Controllers or Processors who fall into any of the underlisted categories are exempted from the application of the Act:

  1. One or more individuals who process personal data solely for personal or household purposes;
  2. Data Controllers or Processors who deal with/process personal data which have been prescribed for exemption by the Commission.
  1. ESTABLISHMENT OF THE NIGERIA DATA PROTECTION COMMISSON

The Act establishes the Nigeria Data Protection Commission as an independent body responsible for prescribing regulations, codes, guidelines, and procedures in furtherance of its functions geared towards the enhancement of personal data protection.

The overall policy direction of the affairs of the Commission shall be controlled by a governing council which shall consist of seven people headed by a Chairman who shall be a retired judge of a superior court of record. All seven members of the governing council shall be appointed by the President on the recommendation of the Minister.[2]

  1. LAWFUL BASIS FOR PROCESSING PERSONAL DATA

Personal Data of a Data Subject can only be processed when a lawful basis for such has been established. The Act like other Data Privacy statutes (such as the GDPR) recognizes that Lawful Basis shall be deemed established in the following scenarios:

  1. Consent: Data Subject’s consent has been procured and the consent has not been withdrawn;
  2. Contract: Processing the personal data is necessary or the performance of a contract for which the Data Subject is a Party;
  3. Legal Obligation: Processing the data is necessary for compliance with a legal obligation to which the Data Controller or Processor is subject;
  4. Public Interest: Processing the personal data is necessary for public interest purposes or in exercise of official authority vested in a controller;
  5. Vital Interest: to protect a life;
  6. Legitimate Interest: Where the processing of personal data of a data subject is necessary in the legitimate interest of the processor or another third party.

Relatedly, even after Lawful Basis is established, every Data Processor is expected to adhere to these general principles:

  1. Personal Data must be processed in a fair and transparent manner;
  2. Personal Data must be collected for a specified and legitimate purpose; and must not be further processed in a manner or for a purpose incompatible with that which has been specified;
  3. Personal Data collected must be limited to that which is adequate and relevant for the purpose for which it is collected;
  4. Personal Data must be retained only for only as long as is necessary to achieve the Lawful Basis for which it was collected;
  5. Personal Data must be processed in a manner that guarantees the security of personal data against loss, unlawful processing, destruction loss or damage.
  6. Personal Data is processed for the purpose of a legitimate interest by a data controller or third party to which the data is disclosed.
  1. KEY PROVISIONS TO NOTE

Amongst other things, the following mandatory provisions are to be noted by and complied with by all Data Controllers and Processors:

a. MANDATORY APPOINTMENT OF A DPO

All Data Controllers and Processors of major importance[3] are now mandated to appoint a designated Data Protection Officers (DPO) with expert knowledge of data protection laws and practices and who may either be an employee of the organization or engaged under a valid service contract[4].

b. DATA PROTECTION IMPACT ASSESSMENT

Every Data Processor or Controller who envisages that any of its processing activity is likely to violate or result in high risk to the rights and freedom of  Data Subjects by virtue of its nature, scope, context and purpose; is mandated to conduct a data protection impact assessment. It is expected that the Commission will issue guidelines to establish the categories of processing which will now require the conduct of data protection impact assessment.[5]

c. REPORTING DATA BREACHES

Every Data Controller is required to notify the Commission within 72 hours of becoming aware of any personal data breach which is likely to result in a risk to the right and freedom of a Data Subject.[6]

d. CROSS BORDER DATA TRANSFER

Cross-Border Transfer of personal data to third parties no longer requires the supervision/consent of the Attorney General of the Federation. Notwithstanding Personal Data of Data Subjects cannot be transferred to a cross border recipient; unless the transferor has satisfied itself that the foreign third-party recipient:

  1. Has a lawful basis for processing such data;
  2. Has in place a mechanism to ensure adequate level of protection of such data to the extent and level prescribed by the Act. [7]

e. REGISTRATION OF DATA PROCESSORS AND CONTROLLERS

The Act mandates the registration of Data Controllers and Data Processors of major importance with the Commission within six months from the commencement of the Act or of becoming a Data Controller or Data Processor of major importance.  The Act also prescribes the process of registration and grants the Commission the power to prescribe the registration fee and to grant exemptions from registration at their reasonable discretion. Furthermore, Registered Processors and Controllers must notify the Commission of any change in the registration details provided.

The Commission is expected to keep a register of Data Controllers and Processors on its website and to update same regularly. When a Data Controller or Data Processor ceases to be one of major importance, it must notify the Commission who shall remove its name from the register[8].

f. GENERAL RIGHTS OF DATA SUBJECTS

The Act guarantees Data Subjects the inherent right to:

  1. Obtain from a Data Controller; confirmation as to whether its personal data is being stored or processed and where so; further information on the purpose, nature/category of data being processed, recipients of such data including international/cross border recipients, period for which data will be kept;
  2. Right to demand rectification, erasure or restriction in processing (pending resolution, objection or enforcement of a legal claim) without delay;
  3. Right to decline to give or to withdraw consent;
  4. Right to demand discontinuation of processing (except on grounds of public interest);
  5. Right to lodge a complaint with the Commission;
  6. Right not to be subject to a decision based solely on automated processing of personal data.

g. RIGHT OF AGGRIEVED DATA SUBJECTS TO FILE COMPLAINTS WITH THE COMMISSION

The Act has provided a procedure for Data Subjects whose rights have been violated or is likely to be violated by any Data Controller or Processor; to file a complaint with the Commission[9]. The Commission is mandated to investigate and where it is established that the right of a Data Subject is likely to be violated, the Commission will  issue an appropriate compliance order  against such Data Controller including:-  (1) a warning (2) a directive to comply or (3)  a cease and desist order.

Where however an actual violation is established; the Commission may issue an enforcement order issuing sanctions against such Data Processor or Controller. Such order may include (1) a directive to remedy (2) a directive to pay compensation (3) order to account for profits made from a violation (4) order to pay penalty which in the case of a Data Controller of major importance will be the higher of NGN10Million or 2% of gross revenue for the preceding financial year.  Where the offender is not a Data Controller of major importance, the penalty will be the higher of NGN2Million OR 2% of gross revenue for the preceding financial year. Where Data processor or controller is dissatisfied with the order imposed by the commission, it is at liberty to apply to court for judicial review, within thirty days of the issuance such order[10].

Where an order is defiled, the defaulting Processor or Controller commits an offence and becomes criminally liable upon conviction by a competent court [11]. The court may also order the Processor or Controller upon conviction to forfeit any economic benefit or financial proceeds in accordance with the Proceeds of Crime (Recovery and Management) Act or any other similar law.[12]

h. JOINT AND VICARIOUS LIABILITY

Directors, Managers, Partners, Secretaries or other similar officer of any convicted Data Processor or Controller shall be deemed jointly and vicariously liable with the organization for any breach or violation or offense under the Act; unless such officer can prove that the offence was committed without his/her knowledge, consent or connivance; and that he/she exercised all such diligence to prevent the commission of the offence. Data Controllers and Data Processors also remain vicariously liable for the acts or omissions of their agents, clerks, servants or employees.[13]

  1. LIMITATIONS IN RESPECT OF LEGAL PROCEEDINGS AGAINST THE COMMISSION

Whilst the Commission remains a legal entity which can sue or be sued, Actions against the Commission are required to be instituted within three months of the time in which such cause of action arose and subject to the service of a one month written notice of intention to sue having been served on the Commission. The Act further directs that no execution or attachment process can be issued against the property of the Commission in respect of an action or suit filed against it[14].

  1. TRANSITIONAL PROVISION

The Act  recognizes and has given legitimacy to  all  actions (orders, rules,  decisions, directions, licenses and authorizations) of NITDA, OR the Bureau  done prior to the coming into force of the Act as if they are acts of the Commission itself and they shall remain binding  until they are waived, cancelled or repealed by the Commission. This includes specifically, the Nigerian Data Protection Regulation (NDPR) 2019.[15] The Nigeria Data Protection Commission effectively succeeds the erstwhile Nigeria Data Protection Bureau (NDPB) and puts to an end the argument that the NDPB is not statutorily created.

IMPLICATION FOR BUSINESSES IN NIGERIA

It is clear given the priority and attention given to  the assent of the by the newly elected President of Nigeria and the Federal Executive Council; that data privacy is recognized as a critical focus area for the Federal Government. It can therefore be fairly deduced that enforcement of the Act will be top of mind for the Government and the Commission.

The Act has further mandated registration for all data processors and controllers within the next six months. Consequently, Businesses operating in Nigeria except where exempt will be required to immediately reposition their protocol of operation to ensure consistent compliance with the Act. Finally, Data Processors and Controllers must keep as top of mind the potential risk of sanctions and criminal liability where they have directly or vicariously violated the rights Data Subjects as guaranteed under the Act.

This Article is written by DealHQ’s Technovation and Data Governance Practice Team, DealHQ is a licensed Data Protection Compliance Organization (DPCO). We understand the importance of safeguarding sensitive data and complying with local and foreign data protection laws applicable to your business to protect your organization’s reputation and mitigate potential cybersecurity or data violation risks which can have significant financial, legal and systemic implications for your Business. Our service niche includes (1) Data Protection/Governance Advisory (2) Data Protection Compliance Support (3) Data Protection Audit Services and (4) Outsourcing of Data Protection Officers.

About DealHQ

We are an Africa Focused deal advisory/boutique commercial law firm focused on supporting businesses and positioning them to operate efficiently within their market sphere. We are known for our quality service delivery which is focused on attention to detail, creativity, timely execution and client satisfaction.

Our service offering includes: corporate commercial, real estate & construction, finance, capital markets & derivatives, mergers and acquisitions, private equity, infrastructure, technovation and data privacy, agriculture & commodities, business formations & start up support amongst others.

The content of this Article is not intended to replace professional legal advice. It merely provides general information to the public on the subject matter.

Do you need to know more about our Data Privacy Services? You may contact our team on:

Email: info@dealhqpartners.com; clientservices@dealhqpartners.com

Telephone: +234 1 4536427 or +234 9087107575

Click here to download article…

[1] Part I Nigerian Data Protection Act, 2023.

[2] Part II and III of the Act.

[3] A Data Controller or Processor domiciled, resident in or operating in Nigeria who processes or intends to process personal data of such number of Data Subject within Nigeria as the Commission may prescribe as being of major importance.

[4] Section 33 of the Act.

[5] Section 29 of the Act.

[6] Section 41 of the Act.

[7] Part IX of the Act.

[8] Part X of the Act.

[9] Sections 47, 48 and 49 of the Act.

[10] Section 51 of the Act.

[11] Section 50 of the Act.

[12] Section 53 of the Act

[13] Section 54 of the Act

[14] Part XII of the Act.

[15] Section 64 the Act.

NIGERIA: UNDERSTANDING THE REGULATORY FRAMEWORK FOR OPEN BANKING

The open banking ecosystem in Africa has certainly taken flight, with countries such as South Africa, Kenya, Nigeria and Ghana recording unprecedented rate of product development, innovation and adoption across the regions digital financial services market. That said, strengthening financial systems regulation, risk management and financial data governance remain critical to achieving continuous and sustainable growth in the sector. The introduction of Nigeria’s open banking regulations is bold, audacious and enviable. It is expected that its implementation will be strategic and impactful.

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Season 2 Episode 1- The Appropriation Act 2023: Key Implication for Nigerian Businesses

Simply is a sponsored podcast of DealHQ Partners, where we engage thought leaders on trending issues around law and business in the most simplistic manner.

 

On the first episode of Season 2, Our Tosin Ajose leads Mr. Opeyemi Agbaje, the Founder and CEO of RTC Advisory Services Ltd – a leading strategy and business advisory firm, in a conversation on the recently enacted 2023 Appropriation Act. The conversation bothers on the key elements of the expenditure and revenue summary, Nigeria’s ballooning public debt profile, and the potential impact of the 2022 finance bill on Nigerian businesses.

Listen here:   linktr.ee/DealHQ

 

 

Season 1 Episode 11 – Financial Technology – Bridging Africa’s Financial Exclusion Gender Gap through Social Innovation

Simply is a sponsored podcast of DealHQ Partners, where we engage thought leaders on trending issues around law and business in the most simplistic manner.

On Episode 11, our final episode in Season 1, our Orinari Horsfall is joined by Solape Akinpelu, a Certified Financial Education Instructor and Co-founder of HerVest, Nigerian based fintech company pioneering inclusive finance for African women, in a conversation on gender based financial exclusion in Africa. Specifically, the conversation discusses the effect of highlights the impact of gender based exclusion on Africa’s development and economic prosperity and the role that HerVest and other social innovators in Africa are playing in tackling issues around access to finance for African Women.

 

Listen here:   linktr.ee/DealHQ

 

 

WHAT YOU NEED TO KNOW ABOUT THE “E-NAIRA”

WHAT YOU NEED TO KNOW ABOUT THE “E-NAIRA”

In response to the global rise in the use of digital payment solutions and the cryptocurrency market, the Central Bank of Nigeria (“CBN”) has created the eNaira, in a project termed “Project Giant”, which will be launched on 1st October 2021. In furtherance of this, the CBN engaged a global fintech firm Bitt Inc, as the technical partner for the development of the digital currency. The rationale behind the eNaira is to promote and facilitate the cashless culture amongst Nigerians while keeping up with contemporary economies of the world and maintaining the value of the Nigerian currency/foreign reserve. The eNaira is expected to aid financial inclusion, improve payment efficiency, improve revenue and tax collection, and aid targeted social interventions.It is noteworthy that various central banks worldwide are currently developing and issuing their central bank digital currency (CBDC). Some of these countries include China (digital yuan), Ghana (eCedi), Tunisia (eDinar) Senegal (eCfa), Tunisia (Petra), Dubai (emCash) amongst others.

CBDCS AND CRYPTOCURRENCIES

Although a digital currency, the eNaira is different from other cryptocurrencies using blockchain technology, such as Bitcoin and Ethereum, in that it is issued and regulated by a sovereign authority. The eNaira users will not be anonymous, i.e., the users will undergo an onboarding exercise and will provide identifying information such as BVN or NIN, as the case may be. The personal account details and transaction activity of every user of the eNaira system will be monitored by the CBN.

In addition, the eNaira is fiat currency and is not subject to the volatility associated with the digital currency market; the value of the eNaira will be at par with the value of the Naira and will be subject to the appreciation and devaluation of the Naira currency.

E-NAIRA DESIGN FEATURES 

In a bid to set out the eNaira as distinct, the CBN introduced certain features in the eNaira Design, these features include:

  1. It is a legal tender;
  2. It is subject to parity of value, which is pegged to the value of Naira;
  3. It operates on a tiered structure for consumers;
  4. It operates with an account-based wallet;
  5. It possesses a transaction limit for customers, determined by their applicable tier;
  6. It maintains a tiered AML/KYC approach (NIN, BVN as unique identifiers);
  7. It is a non-Interest bearing CBDC;
  8. It ensures settlement finality; and
  9. It is value-based.

HOW WILL E-NAIRA OPERATE

As the eNaira is an electronic currency, consumers will be required to download the electronic wallet and get onboarded into the system through an invitation link received from their financial institution. Once the process has been successfully completed, users will be able to commence electronic financial transactions with the eNaira. Users can fund their eNaira wallet through their financial institution.

E-NAIRA PARTICIPANTS 

There are several stakeholders involved in the operation of the eNaira model which take on the following roles:

  1. Monetary Authority (CBN): The CBN has the sole responsibility to mint, issue, distribute, redeem, destroy the eNaira and act as digital currency manager by executing and managing digital currency transactions. It will also manage the storage of transaction data on the Hyperledger Fabric Blockchain, the blockchain ledger the eNaira will operate on.
  2. Financial Institutions: Financial Institutions facilitate the participation of end users in the eNaira technology. They serve digital currency managers by carrying out the following roles:
    1. Requesting eNaira from the CBN and issuing to users;
    2. Managing digital currency across branches;
    3. Conducting Know-Your-Customer (KYC) activities;
    4. Conducting identity and Anti- Money Laundering (AML) compliance activities.
  1. Government/ Government Agencies: The government and relevant government agencies are end-users of the eNaira technology and may use the platform for the following purposes:
    1. Processing out going payments such as salaries and interventions; and
    2. Receiving incoming payments from consumers.
  2. Businesses and Merchants: Merchants and business will use the eNaira technology to process potentially swifter and lower cost payments from consumers. The eNaira will support payment options such as POS, remote pay and other online payment capabilities.
  3. Consumer (Banked and Unbanked Consumer): Individual consumers whether having a bank account or not are allowed to engage in several transactions involving other consumers or directly with financial institutions using the eNaira. They will be able to send and receive eNaira in their eNaira wallets and also process payments.

THE E-NAIRA WALLET

In a bid to safeguard the eNaira and for convenience, a special feature is being introduced, which is the eNaira wallet, a virtual enclosure where every consumer or user of the eNaira platform can comfortably track and manage available eNaira funds. It is expected that there will be no service charge for wallet-to-wallet transactions.

It is important to note that the licensed Financial Institutions shall be responsible for providing their customers with their eNaira Wallets.

PAYMENT FEATURES

Users will be able to engage in a number of payment transactions with the eNaira, including:

  1. E-Naira wallet to eNaira wallet payments;
  2. E-naira wallet to bank account payments;
  3. Bank account to eNaira wallet payments;
  4. User E-naira wallet to Ministry, Departments and Agency (MDA) eNaira wallet payments;
  5. MDA eNaira wallet to user eNaira wallet payments;
  6. E-Naira to cash conversion;
  7. cash to eNaira conversions;
  8. FX to eNaira conversion (through the Central Bank); and
  9. FX to eNaira Wallet payment (through International Monet Transfer Operators).

ON-BOARDING A CONSUMER ON THE E-NAIRA SERVICE

As a way of popularizing the eNaira initiative within the Nigerian citizenry, the several financial institutions, particularly banks, are directed to encourage the participation of their customers in the eNaira service and send out invitation codes to verified and validated customers. This makes the process easier as customers with already generated codes have a rather seamless onboarding.

RETENTION OF E-SETTLEMENT SYSTEMS

Under the eNaira system, existing infrastructure for electronic settlement systems such as the NIBSS and other switching platforms will be retained and integrated into the implementation of the eNaira.

CONCLUSION

Although the eNaira project is novel and still budding, it is interestingly one project that appears promising especially for the Nigerian economy. There are a number of obvious challenges to its widespread acceptance such as the high rate of technology illiteracy amongst the citizenry, the unrestrained monitoring of transaction activities in the eNaira system, which almost defeats the point of digital currency as is widely accepted, and lack of access by users to the ledger records. There are however some positives. Other than ensuring potentially swifter and cheaper payments, the eNaira provides relative value stability (subject always to the inflationary nature of the Naira), will be an officially accepted legal tender, and possesses an anti-fraud management system for the protection of users.

 

HOW TO GET STARTED

Do you need to know more about the eNaira? Our Technovation team is available to support you. You may contact our team on: Email: info@dealhqpartners.com Telephone: +234 1 4536427 or +234 9087107575

Click here to download PDF

 

Season 1 Episode 2 – AFCFTA: Leveraging Technology to achieve regional competitiveness

Simply is the sponsored Podcast of DealHQ Partners, where we engage thought leaders on trending issues around law and business in the most simplistic manner.

Our Tosin Ajose joins Mrs. Nkemdilim Uwaje Begho, the CEO of Future Software Resources Limited and a Non-Executive Director in Stanbic IBTC Bank who is recognized as a  seasoned digital transformation executive and one of Forbes top 10 female tech founder in Africa in conversations around the Africa Continental Free Trade Agreement and the role of technology in achieving competitiveness in Africa’s new borderless and integrated market.

This episode examines the role of digital in fast-tracking the gains of AFCFTA, how technology and innovation will facilitate connectedness and a truly homogeneous market, big data, data share, and regional collaboration, and how Nigeria can position itself for competitive advantage in the free zone

 

Listen here:   linktr.ee/DealHQ

 

 

UNDERSTANDING NON-FUNGIBLE TOKENS(NFTs)

 

WHAT ARE NON-FUNGIBLE TOKENS?

Non-Fungible Tokens are cryptographic tokens created using blockchain technology. They represent and uniquely describe a valuable digital asset with special distinct features that allow for traceability and identification of the underlying asset which it represents (this underlying asset could be digital or a tangible real-life asset such as a vehicle, a gadget, a literal work or real estate).
The non-fungibility of these cryptographic tokens distinguishes them from other common cryptocurrencies such as bitcoin or ethereum which are created in multiples, each having the same features as all the others in circulation and each coin being of equal value. An NFT is encoded with an “indivisibility feature” i.e. the token cannot be broken into smaller elements of a whole such as you would a bitcoin (which can be broken into 100,000,000 satoshis) with each bearing a corresponding value of the fraction of a bitcoin. Each NFT is unique, exclusive and can only be transferred as a whole.

Nonfungible.com a website that tracks NFT marketplaces represents that the current NFT Market is worth over USD250 Million. For a market that was completely non-existent before 2017, it is expected that the market will balloon in geometric progression because of the boundless opportunity it opens for the trade of digital assets in a secure and efficient manner. Especially the possibility of easily converting all forms of assets into NFTs.

WHAT ARE THE KEY FEATURES OF A NON-FUNGIBLE TOKEN?

i. Uniqueness
The metadata attached to an NFT allows it to be defined by its unique features such that it can be clearly distinguished from other assets.

ii. Rarity
For NFTs it is impossible to create or reproduce the subject asset (there will always, only be a single version of the asset on the blockchain). This specifically is what influences the value of NFTs and makes them desirable to collectors.

iii. Indivisibility
An NFT cannot be split into smaller units of a whole. An NFT can only be held or transferred as a whole.

iv. Value
Only assets likely to be deemed valuable in the NFT marketplace may be converted to NFTs.

ARE ALL NFTS BACKED BY A TANGIBLE UNDERLYING ASSET?

An NFT is usually backed by an underlying asset which could be digital (such as digital art) or tangible real-life assets (such as an automobile or real estate). As previously explained the distinctive information relating to the asset is encoded into metadata on a blockchain platform. It is important for a buyer to understand the exact nature of the asset that is being acquired and to ensure that the smart contract purchased actually transfers legal and beneficial interest in the intended underlying asset and that the metadata are not a mere description of the same. It has been the case that some undiscerning buyers have acquired a mere description of an asset rather than the asset itself

WHAT NATURE OF LEGAL INTEREST DO I ACQUIRE WHEN I BUY AN NFT?

The Buyer of an NFT often expects to acquire the original, rare, and unique form of the underlying asset which the cryptotoken represents (if it is an artwork the original copy as digitally signed by the artist with a digital proof of authenticity and uniqueness in the form of metadata). The asset itself may not always be encoded into the Ethereum blockchain itself.
In simple terms, the NFT buyer acquires simply a smart contract on blockchain which contains metadata with the name of the asset, description of the asset, and a URI (Uniform Resource Identifier which provides technical details about how the asset works and in some cases link to an IPFS (InterPlanetary File System) a protocol that allows for the creation of permanent, immutable links to the blockchain where the asset is emplaced.

HOW IS THE VALUE OF AN NFT DETERMINED?

An NFT’s value is driven by demand and the value placed on it by potential buyers. There is therefore no empirical basis for determining its value, it remains very speculative. Offer prices are often driven by sentiments and its inherent features of rarity and uniqueness. A popular example is a digital collage created by the artist Beeple which after being converted to an NFT was traded for USD69Million at a public auction that started with a usd100 bid called the beginning of the Digital Collectibles craze. Or Jack Dorsey’s (Founder of Twitter) first tweet which he converted to an NFT and sold for USD2.9Million.

HOW DOES THE NFT MARKET PLACE OPERATE?

The NFT Marketplace is a virtual platform/website where NFTs can be traded, and where market participants take a sell or buy position and transact with each other via their digital wallets using cryptocurrencies as the medium of exchange. Whilst most marketplaces will trade a wide range of NFTs some operate as niche markets trading only one homogeneous category of NFTs a good example is Looking Glass Factory, a site that trades only digital holograms.

Some of the most common NFT marketplaces are:
i. Opensea, which is acclaimed as the largest NFT marketplace trading a variety of NFTs including art, virtual worlds, sports, trading cards, and other forms of collectibles. On Opensea, collectibles can be listed at a fixed price or for auction;
ii. Rarible, another popular marketplace that is community owned. It trades several categories of NFTs including art, photography, games, metaverses, music, domains, and memes amongst others;
iii. SuperRare is a marketplace for people to buy and sell unique, single-edition digital artworks. Each artwork is authentically created by an artist in the network and tokenized as a crypto-collectible digital item that you can own and trade;
iv. Atomic Market another popular platform is a shared liquidity marketplace that feeds other marketplaces. It allows its users to tokenize and create the digital asset and thereafter sell or auction the asset;                                         v. Another common platform “valuables” is a niche market solely for trading tweets.

NFT marketplaces have become mainstream in the crypto space whilst NFTs have become the most trending asset class of 2021, sparking the interest of traditional investors and several high net worth individuals.

HOW ARE NFTs CLASSIFIED?

The subject of the classification of NFTs remains quite unsettled, however as the market deepens we expect more clarity around their classification. A school of thought argues that NFTs are securities in respect of which local securities law should apply, others argue that they are simply a digital identifier of any form of asset whose legal title is transferrable. The test of whether an NFT will be classified as security will depend on:
i. The purpose for which it was created: If the NFT is being created and sold as a way for members of the public to earn investment returns with a line of recourse to the issuer it will be more likely to be considered a security. Especially if the smart contract has features of an investment contract.
ii. How it is traded: where an NFT is traded on a marketplace that operates similarly to exchanges and capital trade points shares where other securities or commodities are traded, it is likely to be classified as security especially where there exists is a secondary market feature on the trading platform.

WHAT FORMS OF INTELLECTUAL PROPERTY RIGHTS ARE ATTRIBUTABLE TO NFTs?

The storage of NFTs on a blockchain ledger provides a way for asset holders to establish proof of ownership and possession with the innate benefit of immutability and security. It is important to understand the bundle of intellectual property rights which may be applicable NFTs or transferrable to a buyer.

Patent: Where the mining of an NFT or the cryptotoken involves innovation that solves a technical problem, it may be possible to patent the innovation subject to meeting the applicable registration criteria. The patent right is likely to remain proprietary to the creator.

Copyright: In relation to copyright, the metadata related to an NFT are by themselves a creative expression over which the creator automatically acquires exclusive copyright. There is a marked distinction between ownership of the NFT and ownership of the content in the metadata. Where not expressly assigned in the ‘smart contract’ between the creator and the buyer, any incidental copyright remains with the owner. The owner of the copyright remains the only party who can reproduce, make derivative works of, perform, display or distribute copies of the content. Where an NFT relates to artistic or literary work, it is curious what nature of interest is transferred to a buyer if he is not granted the intellectual property right in the work whether in form of a full assignment or a license to use.
Trademarks: In relation to trademarks, NFT creators may protect the name or other graphic property in the work by registering the name or the visual representation.

CONCLUSION
Even though Non-Fungible Tokens are gaining popularity and momentum as a digital asset class, it is no gain saying that the market is new and evolving. Market regulations are therefore still at infancy. At best, the law and regulation applicable to the class of underlying asset will apply to all related transactions. It remains important to exercise caution and seek professional advise when dealing in NFTs especially to guarantee that a buyer of an NFT actually acquires the intended interest in the subject underlying asset.

 

HOW TO GET STARTED

Do you need to know more about NFTs? Our Technovation team is available to support you.
You may contact our team on: Email: info@dealhqpartners.com Telephone: +234 1 4536427 or +234 9087107575

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Simply is the sponsored Podcast of DealHQ Partners, where we engage thought leaders on trending issues around law and business in the most simplistic manner.

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Listen here:   linktr.ee/DealHQ