Author: Adedeji Olowe

This week, two Nigerian banks began blocking the accounts of individuals trading crypto and the accounts of cryptocurrency exchanges. It followed regulation from the Central Bank of Nigeria banning the activity of cryptocurrency exchanges in the country.

It sent crypto exchanges like BuyCoins, Luno, Quidax, etc., which have become immensely popular in Nigeria, into a frenzy; the task before them was to move their money from Nigerian banks before the freezes went into place. It was a curious move by CBN in a week where Bitcoin had hit record highs and coins like DOGE were gaining value.

Ironically, the CBN had some part to play in making crypto so popular. Whatever the intentions, the CBN’s persistence in maintaining an exchange rate for the Naira at N360 to the Dollar for years has led to confusing FX policies. There is a list of items for which importers cannot source FX, and in December, another policy on International Money Transfer Organisations (IMTO) sent Nigeria to the dark ages.

The Nigerian market and the numerous smart players in it are not strangers to the regulators’ heavy hand, and they have some experience working around it. For FX restrictions, importers simply turned to cryptocurrency to buy and pay for items.

The use of cryptos cut the CBN out of the process, and last year, Nigeria traded a little over 60,000 Bitcoins, the second-highest transaction volume globally. If there was any doubt about the veracity of those trades, exchanges like BuyCoins released their reports for 2020, showing massive trade volumes, up from a year before.

Yet, despite the rising popularity of crypto exchanges, the question of regulation remained the elephant in the room. To be fair, it is a conversation that is happening globally. A currency outside the government’s control and has shown such volatility will give regulators pause.

There are two initial questions around the regulation of crypto. The first is who should regulate cryptocurrencies? In Nigeria, the answer falls somewhere between the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN). The SEC has long been skeptical, warning investors off cryptocurrencies in 2017.

Remarkably, the Commission made a turnaround in 2019, stating that it now considers crypto as a legitimate investment class.  The CBN, for its part, has always taken a less enthusiastic view. In January 2017, it issued a circular warning to banks against any transactions in virtual currencies. In 2018, the CBN doubled down and reiterated its warning against digital currencies.

What are the real issues with crypto?

One of the most significant issues around crypto is its semi-anonymous nature. By their very creation, they are designed to operate without an overlord, sovereign, or whatnot. While this is interesting in theory, in practice, it can become a powerful tool in the hands of bad actors; this is the CBN’s argument.

Another issue that builds from the anonymity of digital assets is that it makes it a domain for bad actors to commit fraud. Through fake crypto exchanges, pump and dump scams, Ponzi schemes, and malware attacks, prospective investors can lose money trying to invest in crypto.

In countries where crypto regulations are in place, such as the United States, one workaround reduces some of the anonymity around digital assets. In December 2020, the U.S proposed new regulations requiring crypto exchanges to report anyone’s personal information with transaction values of above $10,000 daily.

This sort of Know Your Customer (KYC) requirement, which some may argue defeats some of the purposes of digital assets, may make crypto exchanges function a bit like banks, which is anathema to the proponents of digital currencies. This could have been one approach that the CBN could have taken, given that it has hinged its concerns on fraudulent transactions and the possibility of using these semi-anonymous assets to finance terrorism.

There are also proposals for crypto assets crossing borders to be reported by exchanges. In some of the regulatory conversations in the U.S, the most significant change would be more KYC requirements. Some may argue that exchanges in Nigeria, some of whom have berated regulators, should have engaged them instead. Others argue that despite the ban, there is still some sense in engaging the regulator now that public opinion is on the side of the exchanges. 

Of course, the ready answer to this would be that when ride-hailing operators in Lagos state engaged the government and relevant regulators for over a year, it yielded no results. It may not be a perfect analogy, but a healthy fear of regulation is a feature of African markets.

How are other African governments approaching regulation?

In at least six African countries, cryptocurrencies are banned. There are bans on all digital assets in Algeria and Morocco with fines that break the existing rules. On the flip side, South Africa, Senegal, and four other African countries have shown progressing thinking in regulating crypto.

In 2016, Senegal launched the eCFA, a digital currency built on blockchain that can be stored on mobile wallets, while Sierra Leone is vocal about its plan to be Africa’s first “smart country.” In South Africa, while crypto is not recognized as a legal tender, the South African Revenue Service (SARS) considers it an asset.

It means that SARS will be open to collecting taxes on crypto, as evidenced by some recent reports that the tax authority asks individuals to disclose crypto purchases in their tax filings. It is an exciting approach that signifies that there will be more regulation.

Regardless of what the regulators in Africa do, crypto has become attractive for regulation to kill it off effectively. What is more likely to happen is that companies and individuals will circumvent these regulations.

A missed opportunity for real control and revenue?

This week, BuyCoins announced that it is back to taking deposits from customers, two days after the CBN threw the exchange an unexpected blow. Early observers pointed out quickly that the CBN’s policy was unlikely to stop crypto trading; instead, it would introduce friction.

If anything, Nigerian founders and companies are familiar with working around infrastructure and policy challenges. In this specific instance, peer to peer trading, which is harder to regulate or control, will become popular.

In the end, it appears that the CBN may have shot itself in the foot, missing a significant opportunity to collect tax revenues or implement KYC measures to have some measure of control. One thing is clear. This is a pyrrhic victory for the regulator, but for the crypto exchanges, the show will go on.

I was recently working with a traditional financial service provider to launch a product online. And they insisted on applicants providing utility bills. Then the trouble started! Even though argued strenuously against this, but they also brought valid arguments. So, I had to take a step back to ask; why the hell do we need utility bills to start with?

I’m sure you’ve all experienced this at different times – your bank tells you a sexy story about applying for something, and bam, they hit you with a request for a utility bill. To make it worse, the strident officer across the desk or on the phone doesn’t even know why a utility bill was required.

Before you start cursing at them or berating their bosses, let’s ask – why does anyone need utility bills? Forget about the fact that the officers that ask for these may not know their left hands from their right nostrils; the truth is, there are legal requirements for, not for utility bills, a verifiable address of every customer within the financial services industry.

Thou shalt know your customers

There is an arcane financial rule called Know Your Customer (KYC), which is the same thing your mum does when your sister drags in that funny looking boyfriend of hers. She goes, “Who is your dad? Where’s your family from?”. After taking loans sending her to school, she ain’t gonna risk that for some supposed slimeball.

OK, that’s a little bit over the top.

The rules of financial services require that banks, insurers, brokers, etc., should know their customers well enough. I have previously written a playbook for digital KYC here, so if you like to bore yourself to death, you can read more.

A critical element of KYC is verifying that the customer lives where they say they do. And how do you go about that? Require that they produce a utility bill, issue in their name against the address where they purportedly live.

Like everything Nigerian, we have forgotten the spirit and just tack ourselves to the letter. KYC never require that utility bill must be produced; the utility bill is a means to an end. If you get on the CBN rules for KYC and the SEC rules for the same, there is a gazillion way for a customer to prove the veracity of their address.

What the hell are utility bills?

And what are utility bills to start with? These are receipts from the likes of PHCN, water corporation, etc., that show they deliver some modicum of services to you.

And that’s where all the problems start.

Using utility bills to prove the veracity of addresses in Nigeria is just plain dumb. And there are a gazillion reasons for that:

Most people don’t have utility bills because they don’t even get served any services to start with. Only a few Nigerians have services from recognized billers: Over 100m Nigerians don’t have water delivered to them; 43% of those who have electricity don’t have meters which means no proper bills, And nobody has landlines anymore. After all, NITEL has gone to be with the lord. So, what then do they use?

Many people live in places they don’t have access to the PHCN bills. At best, they know the meter number and use that to buy electricity tokens. As long as the tokens power the meters, who cares if it’s the name of a dog that’s on the utility bill?

Worse still, utility bills can’t be validated, and nobody validates them. Any idiot can just clone a bill, and that’s it. That part is what pains me; why go through the hassles of asking for a utility bill, creating a donnybrook in the process, and you can’t even confirm if that important utility bill is legit or not?

But but but, dearest fintech, before you join me on a foolish quest to bash utility bills, watch your back; you could find out the expensive way when fraud happens on your platform, and the Government asks for your KYC. Kirikiri doesn’t have Gucci uniforms!

How then can one solve the problems of address verifications to meet the requirements of verifiable addresses for customers?

KYC as a service

Over the last few years, a flurry of digital KYC companies, such as VerifyMe and YouVerify, has cropped up in Nigeria. They have pretty solved a few of the problems, but gaps and challenges exist.

First, they are not cheap to start with; the cost ranges from N750 per check and above. Scale that on thousands of customers, and your cost of customer acquisition starts to look like a nightmare. Attempts by a few brave fintechs to have customers to pay for this haven’t gone well. Customers don’t find that cost funny at all!

Secondly, these guys have also not put in the best of names to do the verification for them. I’ve personally seen these guys not able to verify clear addresses that Google, far away in the US, can find with a single click. Addresses that the likes of DHL and UPS can deliver to become impossible unless someone adds “Nearest bus stop or landmark.” Obviously, they use poorly trained officers who can’t find their own names on large billboards.

Thirdly, verifying addresses within gated estates is a challenge. They require that your customers are around or call the gates ahead. And if they can’t get them on the phone (most people don’t pick unknown numbers), then they mark the addresses as unverified, and there goes the N750 verification cost. That’s it!

Lastly, they also save previous addresses, which means even when the addresses ain’t valid anymore, they still validate it, giving those who rely on this feedback a false sense of hope.

Paper OTP as an alternative

Interestingly, while I haven’t tried this directly, I find the methods that Google for Business use for address verification ingenious. They simply post a paper OTP to you, and then if, and a big if, you receive it, you come to enter the code into your app, and we can all rest assured that someone got to your house.

While this sounds nice and interesting, the jury is out on first, the cost-effectiveness of this and the ability to scale it out.