With the price of Bitcoin in Nigeria currently $500 (over 70 per cent) higher than the rest of the world, there are growing concerns that illicit funds are now being laundered through other avenues besides the financial system, writes Adedayo Adejobi
Emergence of Bitcoin
The need to eliminate any middle person or a third party in payments for goods and services purchased on the internet has been of great concern to the promoters of the virtual world.
In 2009, Satoshi Nakamoto overcame the challenge by creating the first digital currency known as the Bitcoin.
Through the Bitcoin, there is a direct payment from the buyer to the seller on the internet without passing through any financial institution.
The technology behind the Bitcoin is known as the Blockchain. Using an open sourced peer-to-peer electronic cash registry, digital transactions are made without the interference of any bank.
There are no `transaction fees and no need to reveal your identity. Merchants all over the world are beginning to accept them as a means of payment . With Bitcoin you can buy webhosting services, pizza or even manicures. Bitcoins can also be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation. Small businesses may like them because there are no credit card fees. Some people just buy bitcoins as an investment, hoping that the prices would go up.
Criminals, money launderers and those with illicit funds are also attracted to bitcoin because it enables them to move their proceeds of crime beyond the reach of the law enforcement agencies. That is one of the biggest worries about the increasing popularity of the virtual currency.
The value of a bitcoin has fluctuated wildly since 2009 but now hovers between $780 and US$1,251.18. To spend it, users buy bitcoin and transact using a third-party app rather than a central authority validating transactions, all transfers are recorded on a public ledger.
People can send bitcoins to each other using mobile apps or their computers. It’s similar to sending cash digitally. People compete to “mine” bitcoins using computers to solve complex math puzzles. This is how bitcoins are created. Currently, a winner is rewarded with 25 bitcoins roughly every 10 minutes. Bitcoins are stored in a “digital wallet,” which exists either in the cloud or on a user’s computer. The wallet is a virtual bank account that allows users to send or receive bitcoins, pay for goods or save their money. Unlike bank accounts, bitcoin wallets are not insured by the National Deposit Insurance Corporation.
A Case against Nigeria’s Decentralised Digital Currency
With its rise daily, bitcoin prices vary significantly from country to country. Specific regions are subject to paying premium prices, with China being a great example. But Nigeria is warming up to bitcoin as well, as prices soaring to unseen levels. Just recently, the price per bitcoin touched US$1,251.18 across Nigerian bitcoin exchanges. Considering how the average global price was US$725 at that time, such a large cap is rather unusual.
Lending a voice on the intricacies of digital currency and why the warning should be taken seriously, the Managing Director, Compliance Consulting Limited, Mr Oladele Adeoye, noted that, “Nigeria has policies in place to stop money leaving the country. The exchange rate of N315/$ that Google shows is not reality, nobody gets that rate. They have a black market system in which dollars are auctioned off every day, the rates here are often as high as N500/$, which translates to $780 per bitcoin in Nigeria. But recently, it looks like they are at $1,200 per bitcoin, but this is just not the case, because nobody can get dollars at N315/$.’’
Although Nigerian exchanges are recording such high prices, that does not mean the rest of the world will follow its lead.
Bitx is one of Nigeria’s most prominent Bitcoin exchanges to date. The platform attracts traders, consumers, and investors from all over the country. Interestingly enough, Bitx cannot provide ample liquidity to accommodate large trades right now. Due to this low liquidity, the price per individual Bitcoin spiked to over US$1,250 penultimate Thursday.
While it is not unusual to see people pay a premium compared to the normal price, a US$500 discrepancy is very uncommon. Nigeria is not the only country paying very high prices for bitcoin right now, though. India sees a similar trend, ever since the government made most of the cash supply useless. However, their premium prices are a lot lower, sitting at “just” 10-20 per cent over the global average.
Different factors influence the sudden demand for bitcoin. As the naira loses its value against the US dollar, it affects the purchasing power. Consumers and investors who see no more value in their own currency are more eager to spend it. Additionally, they want to hedge against a future volatile downturn by investing in alternative financial assets. And with this in view, bitcoin is becoming an attractive choice. Although its users are scared because the wallet in cloud, and on countless cases, servers have been hacked.
Companies have fled with clients’ bitcoins.
Most deafening is the knowledge that wallet on computer can be accidentally deleted, as viruses could destroy them. Though each bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed – only their wallet IDs. While that keeps bitcoin users’ transactions private, it also lets them buy or sell anything without easily tracing it back to them. That’s why it has become the currency of choice for people online buying drugs or other illicit activities.
Another factor to take into account is how Nigeria is home to a lot of Internet users. Recent statistics indicate the country is the ninth-highest ranking region in the world. This does not automatically mean there is an uptake in digital payments, although the growing demand for bitcoin proves otherwise.
In the words of a financial expert, Managing Director, DataPro Limited, Abimbola Adeseyoju, ‘‘The problem of the economy is not entirely fiscal or monetary. The major factor is money laundering. One preventive measure is the 100 per cent implementation of the cashless policy. Any country with predominantly cash transactions cannot achieve sustainable growth and development.
Until we combat money laundering to the minimum all the distortions associated with our economic policies will continue. The government and the Central Bank of Nigeria must find a way of resuscitating this cashless policy. The more we reduce cash transactions the tighter it becomes for money launderers to evade the financial trail. The president must be made to re-launch the cashless policy as a preventive measure for combating money laundering.”
“No payment or receipt of funds by any government agency should be by cash. All payments and receipts must pass through the financial system. Section one of the Money Laundering Prohibition Act (MLPA) 2011 (As Amended) should be strictly enforced and awareness created. Every adult Nigerian must be encouraged to open a bank account. Nigeria must first transit from a cash-based to cash-less economy to sustain the fight against corruption,” Adeseyoju added.
Future of Bitcoin
Billed as the future of democratised, digital money, the currency is now at the centre of a conflict over how to develop technologies behind the system. No one knows what will become of the unregulated bitcoin, especially as the Federal Government is concerned about taxation and their lack of control over the currency.
Fans of bitcoin say the system, which tends to be a pet project of encryption wonks, could eventually rival banks and the financial Institutions.
Waxing both financial and philosophical arguments, unlike centralised units in banks and financial Institutions, bitcoin doesn’t have a central clearinghouse to process all transactions. Instead, each purchase and transfer is verified by one of thousands of computers on a volunteer network and bundled into a digital block.
If blocks become increasingly larger, miners will need more computing power to produce blocks, which means they’ll need more money for more computers. Eventually, only professional mining operations will be able to produce blocks of transactions.
The Nigerian authorities and the law enforcement agencies must wake up to the reality of the digital currency and come up with definite steps to prevent criminal, money launderer, terrorists financiers and all those with illicit funds from having a field day.
The recent disclosure by NDIC Managing Director, Alhaji Umaru Ibrahim, that the corporation and the Central Bank of Nigeria (CBN) have set up a committee to look into the possibility of legalising the use of bitcoin for transactions, is no doubt a misconception. The right word to use is standardise not legalise.
Virtual or digital currency of which the bitcoin is the most popular, is a technological innovation for payment purposes on the internet; it is already a fait accompli. What the NDIC and CBN need to be concerned about is how to standardise and provide guidelines on the usage of the technology in Nigeria.
Saying NDIC and CBN would legalise bitcoin is a misuse of words. Can one say the National Communications Commission (NCC) would legalise the use of the internet or even mobile communication in Nigeria?
Before the NCC came into existence, there was the internet and mobile communication. What the NCC did was to set up the terms of reference and conditions for whoever wanted to partake in the use of the technology innovation. This was to prevent abuse and misuse. The same scenario should apply for CBN, NDIC, law enforcement agencies regarding bitcoin or any other virtual or digital currency framework.
Technology is a double edged sword. The bitcoin is therefore vulnerable to money laundering because of the anonymity that comes with it.
In the opinion of Adeoye, bitcoin is attractive to criminals and those with illicit funds because it is more difficult to follow the money. “If the perception of anonymity diminishes, we believe the criminal use will diminish with it. It would be easier to fight crime with appropriate anti-money laundering and know-your-customer controls,” he said.
Along those lines, there are concerns that those making money from sex trafficking and pornography involving children have started to adopt bitcoin, thus making missing and exploited children more vulnerable.
For Nigeria’s secret service’s criminal investigative division and anti-graft agencies, the technologically complex bitcoin system makes it hard for the regular agents to stay on targets’ tails. They therefore need more tech-savvy investigators.
Giving a voice on the need to address the growing adoption of the digital currency in Nigeria , Adeseyoju, noted that, ‘’Money laundering as a derivative crime has the power to derail the development and growth of any economy. And this is one of the factors that have held Nigeria down since independence.”
According to him, “Until we address the situation whereby the proceeds of illegal activities such as corruption, bribery, insider dealing, fraud, extortion, racketeering and other economic crimes are prevented from being converted into economic activities all our efforts at running a market-driven economy will fail.
“The first casualty in a society where impunity, money laundering and other predicate crimes run supreme is the much touted market forces. The operation of market forces pre-supposes that there is adequate punishment for those who flout the rules. You therefore need to understand why the Economic and Financial Crimes Commission (EFCC) and the Department of State Security (DSS) must be encouraged to rid every aspect of our economy of impunity before we can begin to feel the effect of the policies of the present administration.”
“No society has been able to eliminate crime and illegal activities. And one is not thinking that EFCC and DSS will be able to eliminate these nefarious activities. But without adequate preventive controls nothing will work. The economic team must infuse preventive, detective, corrective and directive controls in getting the economy back on track. We must have policies, processes, procedures and programmes that will debar people from taking undue advantage of the system, by side tracking laid down rules and regulations. For market forces to work we must also put in place detective controls that will spot those who will not play by the rules. It is quite foolhardy to think everybody will obey the rules. Unless those caught flouting the rules are adequately punished, the motivation to obey rules will not be there.
The economic team must also be ready to accept the fact that no policy is perfect, corrective controls must be part of the plan, whereby through adequate monitoring, gaps and deficiency are quickly spotted and addressed.
The plan must have directive controls. Any violation of the economic plan must be adequately punished no matter whose ox is gored,’’ Adeseyoju posited.