Ethiopia -- Securities Classification Regulatory Overview

Ethiopia's approach to cryptocurrency is generally restrictive, with a primary focus on preventing its use as a currency or payment instrument due to concerns over monetary sovereignty, illicit financial flows, and consumer protection. While the Capital Markets Authority (CMA) is relatively new, its mandate under the Capital Markets Proclamation provides the framework for classifying certain tokens as securities.

It's crucial to understand that Ethiopia does not have specific, detailed legislation or regulatory guidance exclusively for classifying cryptocurrency tokens as securities. Instead, any such classification would rely on the interpretation of existing general securities laws, primarily the Capital Markets Proclamation No. 1248/2021, applied by the newly established Capital Markets Authority (CMA). The National Bank of Ethiopia (NBE) has also issued strong warnings and prohibitions regarding cryptocurrencies.

1. Overall Context: General Prohibition by NBE

Before discussing securities classification, it's important to note the National Bank of Ethiopia's (NBE) overarching stance:

• The NBE has explicitly stated that cryptocurrencies are not legal tender in Ethiopia.
• It has issued warnings to the public against using cryptocurrencies for transactions or remittances, citing risks such as money laundering, financing of terrorism, and consumer fraud.
• This means that even if a crypto asset is not classified as a security, its use as a currency or payment method is still prohibited.

Relevant Guidance from NBE:

• National Bank of Ethiopia, Public Notice on Cryptocurrency Use (2022): This notice explicitly warns against the use of cryptocurrencies and other unauthorized digital assets for transactions. (Finding a direct public URL for specific NBE notices can be challenging as they are often press releases or direct communications, but the policy is widely reported).
  • General NBE Website: https://www.nbe.gov.et/ - Look for press releases or circulars.

2. The Legal Test Used (Howey Test Equivalent)

Ethiopia's Capital Markets Proclamation No. 1248/2021 defines "security" broadly. While it does not explicitly mention "cryptocurrency" or "digital assets," the CMA would likely apply a test similar in principle to the U.S. Howey Test or other common law equivalents, by examining whether a crypto token fits the existing definition of a "security."

The Proclamation defines "security" to include:

• Shares in a company or other body corporate
• Debentures, bonds or other instruments creating or acknowledging indebtedness
• Warrants or other instruments entitling the holder to subscribe for securities
• Units in a collective investment scheme
• Any other instrument declared by the Authority (CMA) to be a security.

To determine if a token is a security, the CMA would likely assess these characteristics:

1. Investment of Money/Assets: Is there an expenditure of money or other valuable assets by an investor? (Generally true for crypto purchases).
2. Common Enterprise: Is there a pooling of funds or a shared venture where investors' fortunes are linked to the success of the enterprise? (Often true for tokens linked to specific projects or platforms).
3. Expectation of Profit: Is there an expectation of profit derived from the investment? (Most speculative crypto purchases fall under this).
4. Reliance on the Efforts of Others: Are the profits derived solely or primarily from the managerial or entrepreneurial efforts of others (e.g., the token issuer, development team, or a central entity)? (This is the critical element for many ICOs and project tokens).

If a crypto token satisfies these criteria, it would likely be deemed a "security" under the Capital Markets Proclamation. The catch-all "any other instrument declared by the Authority (CMA) to be a security" provides the CMA with significant discretionary power.

Relevant Legislation:

• Capital Markets Proclamation No. 1248/2021 (Ethiopian Negarit Gazeta): This is the foundational law.
  • Reference (English version): While a direct public URL for the English version of the Negarit Gazeta can be hard to find, the proclamation details are available through legal databases and government publications.

3. Which Tokens Are Considered Securities

Based on the "Howey-like" interpretation, the following types of crypto tokens would most likely be classified as securities by the CMA:

• Investment Tokens / Security Tokens: Tokens explicitly designed to represent ownership, a share in profits, voting rights in an enterprise, or a claim on underlying assets (e.g., real estate, commodities, company equity).
• Initial Coin Offerings (ICOs) and Security Token Offerings (STOs): Most tokens issued through ICOs that raise capital for a project with the expectation of future profit for investors, driven by the efforts of the issuer or development team. STOs are by definition designed to be securities.
• Certain Utility Tokens: While "utility tokens" are often claimed not to be securities, if their primary purpose at the time of issuance or purchase is speculative investment rather than immediate consumption of a service, and their value is tied to the managerial efforts of others, they could be classified as securities.
• Certain Governance Tokens: If governance tokens provide not just voting rights but also an expectation of profit or a claim on the underlying protocol/DAOs' success due to the efforts of core teams.
• Stablecoins (potentially): While intended to maintain a stable value, if a stablecoin arrangement promises a return or involves a pooled investment that generates profit, it might be scrutinized. However, their primary concern is typically monetary stability, falling under NBE purview.

Tokens Less Likely to Be Classified as Securities (but still prohibited as currency):

• Pure Utility Tokens: Tokens that genuinely provide immediate access to a product or service with no significant speculative element and whose value is not tied to the issuer's profit. (These are rare in practice without some speculative component).
• True Decentralized Currencies (e.g., Bitcoin, Ethereum): If they were allowed for payment, they wouldn't typically be classified as securities. However, as noted, their use as currency is prohibited by the NBE.

4. Registration/Exemption Requirements for Token Issuers

If a crypto token is classified as a security, any issuer would be subject to the full regulatory requirements of the Capital Markets Proclamation:

• Issuer Registration: The entity issuing the token (if based in Ethiopia or targeting Ethiopian investors) would likely need to be licensed by the CMA as a market participant (e.g., issuer, investment bank).
• Token Registration: The security (token) itself would need to be registered with the CMA. This would entail:
  • Prospectus Requirements: Issuing a comprehensive prospectus containing detailed information about the project, the token, risks, financial statements, management team, etc.
  • Disclosure Obligations: Ongoing disclosure requirements similar to those for traditional publicly traded securities.
• Exemption Requirements: The Proclamation provides for certain exemptions, mirroring traditional securities law, which might apply:
  • Private Placements: Offerings to a limited number of sophisticated or institutional investors.
  • Small Offerings: Offerings below a certain monetary threshold.
  • Offerings to Qualified Investors: Specific categories of investors deemed capable of assessing risks.
  • These exemptions would require specific conditions to be met and likely notification to or approval from the CMA.

5. Secondary Trading Rules

If a crypto token is classified as a security:

• Licensed Exchanges: Secondary trading would only be permitted on a licensed securities exchange regulated by the CMA. The CMA is in the process of licensing such exchanges.
• Market Intermediaries: Trading would require the involvement of licensed brokers, dealers, and other market intermediaries.
• Trading Rules: All established rules for traditional securities trading, including rules for market integrity, price discovery, investor protection, anti-money laundering (AML), and know-your-customer (KYC) would apply.
• Prohibition on Unlicensed Trading: Peer-to-peer (P2P) trading or trading on unregulated foreign crypto exchanges for tokens classified as securities would be illegal for Ethiopian residents.

6. Enforcement Examples

Specific enforcement examples directly related to the classification of crypto tokens as securities by the Ethiopian CMA are not yet publicly available. This is primarily because:

1. The CMA is very new: It was established following the 2021 proclamation and is still in its nascent stages of developing regulations and operationalizing its powers.
2. Overarching NBE Prohibition: The dominant regulatory action has been the NBE's blanket prohibition on using any cryptocurrency for payments or as a store of value. This general ban effectively deters most crypto activities, including potential securities offerings.

However, enforcement has occurred related to the NBE's general prohibition:

• Confiscation and Arrests: There have been reports of Ethiopian authorities seizing crypto assets and arresting individuals involved in unauthorized foreign exchange transactions or using cryptocurrencies for payments, often linked to illegal remittances or avoiding currency controls. These actions are typically conducted by the National Bank of Ethiopia, the Ethiopian Federal Police, and customs authorities under existing foreign exchange control and financial crimes laws.
• Public Warnings: The NBE regularly issues public warnings against engaging in cryptocurrency activities.

Therefore, while specific CMA actions on crypto-as-securities are pending, the overall regulatory environment means any issuer or trader of crypto assets (whether security or not) faces significant legal risk.

Conclusion

Ethiopia's regulatory landscape for cryptocurrency is characterized by a strong prohibitive stance from the National Bank of Ethiopia regarding its use as currency. The Capital Markets Authority, though new, has the legal framework under Proclamation 1248/2021 to classify certain crypto tokens as securities if they fit the broad definition of an "investment contract" or other security types. Issuers of such tokens would be subject to stringent registration, disclosure, and trading rules similar to traditional securities. Currently, the lack of explicit crypto-specific securities guidance and the NBE's overarching ban mean that any engagement with crypto assets carries substantial legal and financial risks in Ethiopia.

Official URLs (Direct links might be challenging for specific gazetted proclamations without a paid subscription, but these are the relevant bodies):

• National Bank of Ethiopia: https://www.nbe.gov.et/
• Ethiopian Capital Markets Authority (CMA): As the CMA is newly established, its dedicated website and direct public guidance might still be under development or primarily in Amharic. Information would typically be found through the Ministry of Finance or official government news outlets. The Proclamation 1248/2021 itself is the key document.