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Solving the crypto regulatory conundrum

Cryptocurrency (also known as crypto), a digital currency, has created a headache for regulators. Widely embraced by youths, its potential for money laundering and terrorist financing has led to a ban. But is crypto all bad? What are the pros and cons and regulatory prospects? Legal, financial and anti-corruption experts examined these and more at a virtual conference organised by the Presidential Advisory Committee Against Corruption (PACAC). 

The older generation may struggle to comprehend the concept of an artificial means of exchange that cryptocurrency is.

The idea of a virtual currency, or virtual money, which is issued and controlled by its developers and used among the members of a specific virtual community, may appear far-fetched.

But, cryptocurrency has come to stay. Nigerians have embraced it.

Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralised system using cryptography, rather than by a centralised authority.

Decentralised cryptocurrencies, such as bitcoin (a type of digital currency), provide an outlet for wealth that is beyond restriction and confiscation.

Cryptocurrencies work using a technology called blockchain – a decentralised technology spread across many computers that manages and records transactions.

Simply put, a cryptocurrency is a type of currency that uses digital (invisible) files as money.

Usually, the files are created using the same methods as cryptography (the science of hiding information).

Part of the appeal of this technology are its security and anonymity. But these are the sources of worry for regulators and anti-corruption agencies.

Last October, a UsefulTulips report stated that $32.3 million worth of bitcoin was traded in Nigeria.

According to Paxful, a leading peer-to-peer bitcoin marketplace, Nigeria has the world’s second-largest Bitcoin trading volume.

It says Nigerians have traded 60,215 Bitcoins in the last five years, or more than $566 million.

While its potential is huge, there are associated dangers. These were highlighted by speakers at a virtual conference organised by the Presidential Advisory Committee Against Corruption (PACAC).

The event, with the theme: Global trends in cryptocurrency: opportunities and risks, featured legal, financial and anti-corruption experts drawn from the Senate, Ministry of Finance, Ministry of Justice, Central Bank of Nigeria (CBN), the anti-corruption agencies, regulatory agencies and the private sector.


Sagay: We have enough problems

PACAC Chairman Prof Itse Sagay (SAN) believes Nigeria already has enough problems to contemplate sanctioning the official use of cryptocurrency.

He said: “From its name crypto, it is not available to those who are not directly concerned with it. We have a currency that exists only notionally, that is, in the mind or on the internet.

“Cryptocurrencies are merely notional, perpetually invisible. They are creatures of the computers and the mind, which can be used as objects of crime, including money laundering.

“Why are we tolerating the operation of that type of system in our country? We have enough problems already with our highly regulated currency, the naira.

“Why tolerate an unregulated, secret, abstract digital-only currency so susceptive to criminal and illegal usage? Don’t we have enough problems already?”

Sagay called for a multi-pronged approach to ensuring that an appropriate legal and regulatory framework is designed and adopted to mitigate the associated risks.

Sagay got the backing of the National Assembly in that regard.

Chairman, Senate Committee on Anti-Corruption and Financial Crimes, Suleiman Kwari, said the National Assembly “would drive any needed legislation that will help regulate the use of cryptocurrency”.

Represented by his aide Mr Ashley Emenike, the Senator said: “The National Assembly is well aware of the dangers and potentials in the use of cryptocurrency.

“The areas of money laundering/disposal of the proceeds of crime, the financing of terrorism and the application of blockchain, cryptocurrency and distributed ledger technologies where all these transactions can take place without a trace, are of concern to the committee.

“The Financial Action Taskforce has mandated its members to implement a programme where sharing of cryptocurrency business-related transactions and other financial intelligence units will be made possible in our region.

“Knowing that up to $4billion was transacted in Europe alone, the Euro report says that 40 per cent of illicit/corrupt transactions in the EU were carried out using cryptocurrency.

“We welcomed the CBN directive that naira and kobo are the symbols of our sovereignty and the issuance of the directive that all banks and other financial institutions do not use, trade or transact in digital or virtual currencies.”

Kwari said there was a need “to urgently develop a national framework for robust regulation of the use of cryptocurrency”.

He said there was also the need to look at “the possible legislation to grant the anti-corruption agencies oversight on its spreading applications.

“We’re urging law enforcement agencies and the CBN to work in partnership in the formulation of a joint operation strategy that would mitigate any adverse effect of the criminal deployment of these digital technologies that can harm our national interests.

“No time will be wasted in putting legislative frameworks in place to enable the regulation and application of these cryptocurrencies,” Kwari said.


‘A double-edged sword’

Head of Cybercrime at the Economic and Financial Crimes Commission (EFCC), Lagos, Mr Dein White, said law enforcers globally are faced with the “geometric nature” of crime evolution driven by information technology.

“We find ourselves as law enforcement agents always playing the catch-up game. Virtually every facet of a crime seeks to have as its main objective a pecuniary gain through the laundering of the proceeds. Cryptocurrency has presented a unique opportunity for this to happen,” he said.

White likened the cryptocurrency to a kitchen knife, which can be deployed for useful and sinister purposes.

“The purpose for which cryptocurrency is used is what characterises it as good or bad. We cannot talk about potentials without risks within those potentials. So, it presents itself as a double-edged sword,” he said.

Highlighting the potential, he also pointed to its merits such as speed, anonymity, and low transaction cost.

The cybercrime expert explained that cryptocurrency transactions are peer-to-peer. In effect, no transaction charges go to intermediaries (banks).

He said: “Someone recently exited the cryptocurrency market with $1.3billion worth of cryptocurrency in 47 seconds. The processing charge only cost $80.

“Place that side by side with regular bank transactions. It will cost a lot more for that transaction to happen.

“The regulatory bottlenecks that will be faced from the originating point of that transaction to the end will not make it impossible to conclude it in such a record time. This also provides convenience for the person using it.”

But the potential for secrecy means stolen funds can easily be hidden.

White said: “At the same time, cryptocurrency poses a risk where the intention is to launder proceeds of crime. Cryptocurrency has opportunities that create risk in themselves.”

According to him, the mandatory regulatory requirements that ought to address money laundering, terrorist financing, tax evasion and different forms of fraud are largely not applicable to cryptocurrency.

On the risks of the obscure nature of crypto, White continued: “One of the major components is anonymity.

“Within the classes of tokens, there is the privacy coin, one of which is the monero (a privacy-focused cryptocurrency released in 2014).

“When a transaction has gone through, and it becomes part of an investigation, during audit and review, if you try to trace the trail of a transaction, which of course has different levels of anonymity within the value chain, you will see the public addresses of where it is coming from and where it is going to.

“But for privacy coins, it makes it almost bulletproof. You can hardly get even the least detail when queried.

“This anonymity is a threat because people seeking to launder or move large proceeds of fraud would not mind cutting their losses based on the current coin value of this particular coin, knowing that it provides a high level of privacy.”

The EFCC investigator said cryptocurrency also makes it easier to hide funds.

“There are coins you can purchase and the value will remain constant for as long as you let them be.

“Someone trying to hide funds can leave them there in a suspended animation state for as long as he wants till he decides to either trade or exchanges it for any other purposes.

“There is no recall option where money is wrongly transferred. In cryptocurrency, once a transaction has been consummated, it cannot be recalled. Such transactions are irrevocable at the point of transaction,” he said.


Fraud in the cryptocurrency realm

White said the Ponzi schemes can also occur in the world of cryptocurrency.

One of such scams, he said, is the pump and dump.

Scammers hype fake investment with huge returns. Victims invest, driving the price up. The scammers quickly sell their shares at a huge profit, causing the price to plummet (to fall very suddenly), leaving victims with worthless stock.

“They bring up new coins, they do social engineering to inflate the values of commodities and where people invest in them, when it gets to an all-time high, the owners pull out completely, leaving everyone in complete chaos,” he said.

White’s point that cryptocurrency markets remain a scammers paradise accords with current findings.

Academics at the University of Technology Sydney and the Stockholm School of Economics in Riga found 355 incidents of price manipulation across several cryptocurrency exchanges over a period of just seven months.

About $350m (£267m) of suspicious trading activity was linked to “pump and dump” scams that reaped an estimated profit of $6million for organisers.

The paper, published last August, concluded that the level of price manipulation in cryptocurrency is “unprecedented in modern markets.”

Another dangerous potential, according to White, is the ability to completely hide the nature of ill-gotten proceeds.

“There is a serious conversation on the need to balance the legitimacy and opportunities that cryptocurrency and blockchain hold and the regulation of their activities,” he said.


Way forward

Though the CBN has officially stopped banks from facilitating crypto trading, White believes more needs to be done.

He said: “The CBN has tried within its purview to stop financial institutions from dealing with ‘exchangers’ of cryptocurrency. It’s a laudable move.

“But as we saw during the #EndSARS protests, most people traded person-to-person in a Halala-style transaction format.

“They nominate where cryptocurrency would be converted to physical currency without going through any exchange other than just transferring the value between the cryptocurrency wallets and deciding where physical cash equivalent or service commodity of equal value will be delivered.

“There is a need to work around the framework of this regulation to beam more light on the person to person transactions within our jurisdiction.

“It is not an easy task because there are servers all over the world that play a critical role within the value chain of the consummation of transactions.

“It will take a lot but there might be some light at the end of the tunnel following what the UK and Canada are doing now.

“If we can look at some of these existing laws and policies that are slowly coming into the light, and try to tailor them to what we have here, as time goes on, we’ll be able to come up with something to reduce the excesses that cryptocurrency and blockchain present.”


‘Regulation needs innovation’

Mr Soji Apampa, the co-founder of the Convention on Business Integrity, which promotes ethical business practices, transparency and fair competition, noted that Nigerian youths now prefer to deal in cryptocurrency “and with good reasons”.

Quoting statista.com, he said Nigeria is the third-largest bitcoin trader by volume after the USA and Russia.

“Whether we regulate or not, agree with it or not, Nigeria is a top player. Nigeria is the eighth largest market by crypto adoption in the world after Ukraine, Russia, Venezuela, China, Kenya, the USA and South Africa.

“I agree with my brother from the EFCC that typically, regulation lacks innovation globally. Oftentimes, things spin faster than regulatory agencies can keep track of.”

Apampa underscored some of the factors that push youths towards cryptocurrency, such as disaffection with a banking system that creates few opportunities for them.

So, they would rather go for something that offers them returns.

“The inefficiency in the economy is also a factor. I think we need to look at those fundamentals because those are really what drive the adoption rate of cryptocurrency in the country,” Apampa added.

He emphasised that even if crypto is officially banned, it will only be driven underground.

Apampa added: “And it will become even harder to regulate and it will become even more attractive to the dark side of the web.

“So, we have to balance all of this to ensure we have some intermediate wins that help us to keep pace with the industry before we’re left behind.

“Most trades are notional and abstract. Even the notion of sovereignty is changing in the world today.

“I agree with the analogy of the knife, that it is at best neutral, and that it depends on whose hands it is.

“Therefore, it is imperative that we catch up on the regulatory side and in the understanding of the technology.

“I predict that governance systems, in the near future, will be underlaid with blockchain technology to hold public officers to account, which is one of the good potentials of blockchain technology, one of which application is cryptocurrency.

“The sooner we understand how to utilise it, the better for us because it is a global trend, and it was designed from the beginning to be out of the reach of the government.”

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