Nigeria needs a strong regulatory system to help stem the growing illicit transfer of millions of dollars by ‘criminals’, accused by experts of using cryptocurrency platforms to siphon cash out of the country.
The West African country tops the continent in bitcoin peer to peer exchanges (transactions with fellow bitcoin users). Monthly cryptocurrency transfers to and from Africa of below $10,000 rose by over 55% in a year, hitting $316 million in June, with most of the transaction recorded in Nigeria, according to the report from U.S. blockchain research firm Chainalysis.
This figure may be understated as financial market analysts say there are no official figures on the actual amount of money sent abroad annually because the current monitoring and reporting rules are ineffective, albeit not all of this activity is criminal but they say the decentralized nature of the virtual currency and level of anonymity have given criminal entities an opportunity to obfuscate their digital foot print while perpetrating illicit transactions.
Blockchain, crypto asset, and virtual currencies, are some of the frequent terminologies used to describe the innovative technology designed to transfer value across the world via the Internet. Nigeria has been the quickest in Africa to take to this virtual marketplace.
In the face of the impact of the global Covid-19 pandemic on the country’s economy – the naira had dropped by at least 28% at the time of writing – investors have sought safe havens to preserve the value of their investment as well as the fastest means for exit. But the virtual currency market has also attracted criminals, who have turned to the use of these digital assets to move funds unnoticed.
Trading in crypto is recognized in Nigeria and the Securities and Exchange Commission (SEC) certified crypto assets as securities. Nigeria now ranks 8th globally in the adoption of cryptocurrency, according to a Chainalysis report dated September, 2020. Chainalysis is a blockchain analysis company which tracks and advises businesses, banks and governments on compliance issues regarding global trade in virtual currencies.
One of the leading crypto exchanges in Africa, Binance, was recorded to have performed transactions worth N4.6Billion ($9.6million) being converted from Naira to Bitcoin and over N2Billion ($4million) from naira to Tether (cryptocurrency) on 24 November, 2020 alone.
While conceding that this may be an alternative for financial transactions, financial experts have raised questions as to who regulates Know Your Customer (KYC) requirements to ensure that no illegal transaction or fraudulently earned monies are sent out of the country undetected.
The Chainalysis report showed that Illicit activity makes up roughly 1.4% of all African cryptocurrency activity by volume, in terms of both sending and receiving. But there may also be an issue of underreporting: a graphic representation by Ciphertrace showed that Nigeria was ranked “Porous” of the three categories (Weak, Porous and Strong) in its assessment of the average virtual asset service provider (KYC) by country in 2020.
Ciphertrace is the world’s first blockchain forensics team, focused on protecting financial institutions from virtual asset laundering risks and crypto-related asset.
Although the Financial Action Task Force travel rule recommendation makes it mandatory for any Virtual Asset Service Provider (VASP) to send details of any customer transaction or transferring an amount up to or above $1,000 between themselves, sadly, not all countries are prepared for this.
Nigeria is not an exception as the authorities are yet to come up with the actual amount being lost through illicit transactions in the country which ideally should help define the extent of regulatory policies to be adopted particularly across borders.
In a memo dated 14 September 2020, the SEC said: “All Digital Assets, Token Offering, Initial Coin Offerings, Security Token ICOs and other Blockchain-based offers of digital assets within Nigeria or by Nigerian issuers or sponsors or foreign issuers targeting Nigerian investors, shall be subject to the regulation of the Commission.”
But the Central Bank of Nigeria said in a 28 February 2018 press release: “Cryptocurrencies such as Bitcoin, Ripples, Litecoin etc. and Exchanges such as NairaEx are not licensed or regulated by the CBN.”
Following the CBN circular regarding their operation, the circular by the SEC and NairaEx adherence to the FATF guidelines, NairaEx said in answer to questions posed by this reporter:
“We have registered our interest with SEC and to the best of our knowledge, no company has been registered pending the policy guidelines from the SEC. Our wallet provider BitGo has support for the Financial Action Task Force’s travel rule.”
Further investigations also revealed that the SEC is yet to draft regulatory and licensing requirements for startups.
Adedeji Owonibi, lead, Financial Forensics at A&D Forensics and Chainalysis Africa Investigative partner, commented: “There is need for government and regulators in Nigeria to form an investigative think tank with a serious mandate to research the extent of cryptocurrency criminal use, drafting members from crypto intelligence firms and all law enforcement agents in the country.”
He added that evidence from his firm suggests that the country may not be ready to deal with the matter yet owing to lack of appreciation of the enormous advantage that government silence is giving bad actors by not acting on time. Owonibi said that mixers and peel chains are all obfuscation strategies used by bad actors to hide any trace of illicit funds.
“Mitigating the same is difficult but investigating it is not sophisticated as tools are available to assist in bringing such actors to book,” Owonibi said.
This story was produced by Irene Ubani. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation in partnership with The African Centre for Media Excellence. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.
