Cryptocurrency transactions, as the name implies, are shrouded in secrecy. Amid fear that they can be used for money laundering and terrorist financing, participants at a seminar on cryptocurrency and money laundering, organised by the Presidential Advisory Committee Against Corruption (PACAC), have called for legal framework on virtual currency. JOSEPH JIBUEZE reports.
Should cryptocurrency be jettisoned due to its risks and potential for abuse? No, say legal and financial experts. To them, cryptocurrency is like a train that has left the station; its momentum cannot be halted.
For National Information Technology Development Agency (NITDA) Director-General Dr Isa Ibrahim, the adoption of cryptocurrency is only a matter of time, so the government must gear up for its challenges.
Ibrahim believes there are enormous financial and economic benefits in cryptocurrency, despite its potential for abuse.
“Cryptocurrency will challenge the very need for banks, stock markets and other government sanctioned intermediaries,” he said.
The anonymity that cryptocurrency offers and its decentralised nature means it could be tool for money laundering and terrorist financing.
Ibrahim said: “The innovativeness of a criminally-minded person is incredible. A desperate person seeking to ward off law enforcement agencies would see cryptocurrency as a veritable means of money transformation.”
Ibrahim was the keynote speaker at a two-day seminar organised by the Presidential Advisory Committee Against Corruption (PACAC) in Abuja.
It theme was: “Understanding the interface between Cryptocurrency and Money Laundering.”
Chaired by Senate Committee on Anti-Corruption and Financial Crimes Chairman Senator Chukwuka Utazi, it featured speakers from the Ministry of Justice, the Central Bank of Nigeria (CBN) and the Economic and Financial Crimes Commission (EFCC), as well as investigators and cyber-crime/telecoms law experts.
Ibrahim noted that Nigeria’s anti-money laundering laws “were made in respect of local and foreign legal tenders”.
According to him, “the phenomenon of cryptocurrency is not envisaged” when the laws were drafted.
To underscore its money laundering potential, Ibrahim cited an unnamed politically exposed person who converted N1.2 billion to cryptocurrency in Ibadan, the Oyo State capital.
“In essence, Nigeria has no current legal regime to prevent the use of cryptocurrency as a tool of money laundering.
“The consequences of this exposure are grave, especially considering their implications on our anti-graft war,” he said.
Understanding cryptocurrency
A cryptocurrency is a digital asset designed to work as a medium of exchange. It is a kind of alternative currency or digital currency, of which virtual currency is a subset.
The digital representation of value is neither issued by a central bank or a public authority. It is unregulated digital money, which is issued and usually controlled by its developers and accepted among the members of a specific virtual community.
According to the Financial Action Task Force (FATF), virtual currency is a digital representation of value that can be digitally traded, and which functions as a medium of exchange, a unit of account and/or a stored value, but does not have the legal tender status in any jurisdiction.
Bitcoin is considered the first decentralised cryptocurrency. Over 4,000 alternative variants of bitcoin are said to have been created since 2009.
It allows users to transact directly, peer to peer, without a middle man to manage the exchange of funds. Unlike traditional (or fiat) currencies and assets, bitcoin is portable, divisible and irreversible.
As a global currency, bitcoin can be sent to anyone, anywhere in the world without worrying about cross border remittance fees. No entity can lock users out of their funds.
How it works
The underlying technology of cryp-tocurrency is the blockchain, according to Ibrahim, who was represented by a senior legal officer at NITDA, Mr Olufemi Daniel.
He said cryptocurrency uses decentralised control as opposed to centralised digital currency and central banking systems.
The decentralised control of each cryptocurrency works through distributed ledger technology, typically a blockchain, which serves as a public financial transaction database.
A blockchain, Ibrahim explained, is a growing list of records, called blocks, which are linked using cryptography – the practice and study of techniques for secure communication that prevents third parties (adversaries) from reading private messages.
According to Ibrahim, a blockchain, like the internet, has a robust architecture and cannot be controlled by a single entity.
“Blockchains are distributed, not centralised; open, not hidden; inclusive, not exclusive; immutable, not alterable, and secure.
“Blockchain promises transaction transparency and incorruptibility. The data is embedded within the network as a whole. Alteration of any information on the blockchain can only be effected by a swift, simultaneous overriding of every computer on the entire network.
“With all its potential, blockchain can be a force for good in our world today. The biggest application of blockchain today is cryptocurrency,” he said.
A cybercrime/telecom law expert Dr Uchenna Orji said key actors in crytocurrency transactions are the exchanger (who converts real currency to virtual currency), the administrator (who maintains a central payment ledger), the user (who transacts in virtual currency) and the miner (who applies special software to solve complex algorithms to validate transactions).
According to him, a user needs to get a digital currency wallet, which is a software application or any other medium for holding, storing and transferring virtual currencies.
“Basically, a virtual currency wallet holds a user’s private keys and enables the user to spend virtual currency allocated to the virtual currency address in the blockchain,” he said.
Money laundering potential
According to Orji, a Research Associate at the African Centre for Cyber Law and Cybercrime Prevention (ACCP), Kampala, Uganda, virtual currency transactions have a very high degree of anonymity.
Parties do not have to provide verified identification information before accounts are opened or transactions are made.
Traditional due diligence protocols, which financial institutions are required to undertake (such as the Know Your Customer requirements) are not an embedded feature of virtual currency transactions.
Cryptocurrency transactions are carried out fast and are usually within seconds due to the absence of traditional funds transfer protocols, he said.
Orji said such transactions can be carried out in any country that is connected to the internet and cost far less when compared to traditional financial transactions that have attendant unauthorised bank charges.
“The Bitcoin protocol does not also require or provide for the identification and verification of participants, and neither does it generate historical records of transactions associated with the real identities of persons or entities.
“In addition, there is no anti-money laundering software for monitoring and identifying suspicious transaction patterns and neither is there any central body regulating the Bitcoin platform.
“All these elements make virtual currency platforms and transactions difficult for state actors to exercise regulatory measures and thereby increasing the potential that they can be used to carry out money laundering and terrorist financing operations,” Orji said.
Calls for regulation
The Central Bank of Nigeria (CBN) is not unaware of the challenges posed by cryptocurrencies.
CBN Governor Godwin Emefiele, quoting coinmarketcap.com, said cryptocurrency’s global market capitalisation stood at $203billion in October.
Represented by a senior CBN official Mr K. N. Amugo, Emefiele said the cryptocur-rency market in Nigeria is unregulated.
“At present, there is no legal framework for the regulation of cryptocurrencies in Nigeria. Based on legislations, the usage of cryptocurrency in Nigeria is neither permitted nor prohibited,” he said.
Pending formal regulation, Emefiele said the CBN constituted an inter-agency committee on virtual currencies, comprising regulators and law enforcement agencies. Their mandate, he said, is carry out studies on the subject.
Also, the committee is empower to build staff capacity and issu cautionary public notices. Emefiele said the CBN issued a circular to banks and other financial institutions to ensure that their customers who are virtual currency exchangers have effective anti-money laundering/combating the financing of terrorism (AML/CFT) controls that enable them comply with identification, verification and transactions monitoring requirements.
Banks were also directed to render suspicious transaction reports to the Financial Intelligence Unit (NFIU), he added.
Utazi: why legal framework is needed
Senator Utazi emphasised that virtual platforms of value exchange, such as cryptocurrency, were becoming the new order.
According to him, there is “a murky, loosely regulated framework” for the use of cryptocurrencies, which he said rely on cryptography that uses hidden codes to communicate.
“Users can make transactions directly under pseudonyms, taking away power of control from banks and governments, and it is not controlled by a central authority.
“This scenario creates a monstrosity of huge proportions for governments and regulatory authorities,” he said.
The lawmaker said cryptocurrency could be used to hide ill-acquired assets and to sponsor terrorism.
“There should be legislative and regulatory frameworks that understand the dynamics of this genre of economic activity to place society a step ahead of its rapid evolution.
“There is, therefore, a need for tighter regulation. The associated risks of virtual currencies mutate everyday and it is important that all stakeholders understand what these risks are, and what legislative, regulatory and criminal justice responses to them should be,” Senator Utazi said.
Sagay: ‘dark side’ of cryptocurrency worrisome
PACAC Chairman Prof Itse Sagay (SAN) said while cryptocurrency yields benefits to those providing the service or trading with it, it was like a “stateless phenomenon” that poses challenges.
The almost invisible and decentralised nature of virtual currencies, he emphasised, creates a potential for them to be used for money laundering and terrorist financing.
To him, the questions are how to regulate trading in virtual currencies and how to prevent them from being used as an avenue for crime.
“There is a dark side, which includes the use of cryptocurrency for criminal activities.
“Due to the upswing in the use of virtual currencies by criminal groups, legislative and regulatory frameworks need to be adapted and updated in response to these new challenges, particularly to the fight against money laundering and terrorist financing.
“Because of the encrypted nature of cryptocurrency, operators evade tax. It is necessary that there should be some regulations provided in this sector in order to prevent it from being a new avenue for criminal activities and evasion of social responsibility,” Sagay said.
Tackling money laundering
The Money Laundering (Prohibition) Act of 2011, which applies to “financial institutions and designated non-financial institutions”, can be stretched to regulate cryptocurrency transactions, Orji said.
Section 2 (1) of the Act provides that the transfer of funds or securities “by a person or body corporate, including a money service business” of a sum exceeding US$10,000 or its equivalent shall be reported to the CBN, Securities and Exchange Commission or the EFCC in writing within seven days from the date of the transaction.
Orji pointed out that Section 25 of the Act defines “money service business” to include “currency dealers, money transmitters, cheque cashers, and issuers of traveller’s cheques, money orders or stored value”.
“Thus, Section 2(1) of the Act would imply with respect to virtual currencies that a money transmitter who is engaged in the business of transmitting funds for virtual currency operations is required to report any transfer of funds to or from a foreign country, where the sum exceeds US$10,000,” he said.
Orji noted Section 6 of the Money Laundering Act provides for the reporting of suspicious transactions by financial institutions where such transactions involve “a frequency which is unjustifiable or unreasonable”.
“Under the above provisions, a virtual currency user or operator that has received or converted virtual currency funds in his or her account with a financial institution in Nigeria can be reported to the EFCC where such funds qualify as suspicious transactions under the Act.
“This is possible because of the broad classification of what constitutes a suspicious transaction under the Act,” Orji said.
He said the scope of definitions of a “financial institution” and a “non-designated financial institution” under the Money Laundering Act should be expanded to cover virtual currency operations.
This, he said, is so that the customer due diligence obligations, such as KYC, protocols and record keeping requirements can be imposed.
He called for the establishment of a legal response that will require the registration of virtual currency exchangers so that regulatory and law enforcement authorities can regulate and monitor their operations.
“It is necessary that regulatory responses are carefully studied and implemented to avoid stifling innovation.
“In particular, regulatory responses that aim to out rightly ban the use of virtual currencies should be avoided in favour of risk-based regulatory measures,” he said.
Federal Ministry of Justice Cybercrime Prosecution Unit Head Mr George Tyendezwa said international cooperation was paramount in tackling money laundering and terrorism financing through cryptocurrency.
“Cryptocurrency can be used to buy gun. Or they can be the object of a crime. We need to regulate the exchanges,” he said.
Besides, he believes that statutes need to be reviewed. “Laws need to reflect current realities in their definitions,” he said.
He called for capacity building, arguing that the anonymity of cryptocurrency “is not absolute” as investigations can be done using “blockchain forensics”.
“We must train people to ensure they are equipped to carry out the task. Online investigation requires patience, commitment and huge resources.
“Train and retrain people to give them the tools they need to operate in this space,” he said.
Senate Committee on ICT & Cybercrime Expert Group member Dr Olutoyin J. Oloniteru said legal, regulatory and policy challenges around cryptocurrency must be addressed.
“Nigeria needs to wake up or else we’ll be 1000 years behind. If the Federal Government refuses to do the needful, we’ll be in serious trouble,” he said.
Oloniteru, who founded the Digital Extra Blockchain Innovations Hub & Laboratory, believes the next generation will use cryptocurrency due to its advantages.
According to him, “cryptocurrency means ‘maths money’” because it uses cryptography, which he said “is a branch of mathematics that has to do with hiding information using encryption”.
Role of taxation
Associate Professor of Law at the Kogi State University, Dr Josephine Agbonika, said taxation could be used to tackle money laundering through crypto-currency, if there is regulation.
According to her, cryptocur-rencies are fast becoming an alternative for those seeking to diversify their investment portfolios.
“The jump in the value of Bitcoin means that an investment, say of a few thousands of dollars a few years ago, may be worth $10,000 today.
“So, like any investment – for example, stocks – you are liable to report the appreciation and pay tax on it.
“Because of the astronomical rise in the value of the Bitcoin, the tax laws are far from catching up. Ideally, every time you transfer a cryptocurrency, you might trigger a gain and must pay the tax on it,” she said.
According to her, the cryptocurrency market is huge. “In 2017, cryptocurrency had a market capitalisation of over $200 billion… A study conducted from data gathered from over 150 cryptocurrency companies and individuals, covering over 38 countries from five world regions revealed an estimated 2.9 million to 5.9 million unique active users of cryptocurrency wallets, and between 5.8 million and 11.5 million estimated ‘active’ wallets,” she said.
Agbonika said taxing cryptocur-rency transactions as a control strategy may not be as easy as it seems.
However, high-volume cryptocu-rrency transactions for which tax was not paid could lead to tax-crime investigation.
On the need for a regulatory framework, she said: “Regulation may be needed to protect consumers and the wider financial system in essence.
“Bitcoin and other cryptocur-rencies should not remain in a legal vacuum, without the appropriate supervision.
“It is important the government issues modalities for individuals and companies participating in the trading of digital currencies.
“The Money Laundering Act would also need to be amended to allow for the recognition of digital currencies.
“A benchmark for trade in digital currencies should also be set to enable security agencies flag investigation into the trading and use of digital currencies to prevent terrorism amongst other nefarious acts.
“With an unclear regulatory stance on cryptocurrencies in Nigeria and the constant delay being exhibited by the CBN in reeling regulations, it remains unseen how Nigeria expects to positively utilise the unruly product called cryptocurrency.
“The ownership or possession of bitcoin, etherum or related cryptocurrencies is, therefore, not illegal in Nigeria. But failure to move legal tender makes it imperative that it cannot be taxed.”
EFCC: beware of bogus offers
An EFCC investigator Abdul-karim Chukkol emphasised that Bitcoin is a currency designed with anonymity in mind, and is frequently used when purchasing illegal goods and services.
He warned about fake exchanges, saying many fake “crypto wallets” have sprung up in recent times in Nigeria with dubious mouth-watering money-doubling promises.
Some of them, he said, actively encourage the recruitment of new investors to maximise profit, with promises of absurd returns and unclear mode of investment.
Chukkol also warned about “pump and dump schemes”, in which “crypto groups with thousands of members manipulate the prices of coins…” and exploit the ignorant.
He added the transactions are prone to impersonation, as scammers can act as crypto exchange support staff to dupe people of their crypto funds, or create fake accounts to impersonate genuine operators.
On investigative challenges, Chukkol said: “The Darkweb and virtual currencies are designed to provide anonymity. Best chance of unmasking the criminal actors means finding a clear web connection.
“Investigators have to use the tools used by criminals as well e.g. use of virtual currency, lingo etc. Accounts need to be anonymised and not tied to investigators identity whatsoever.”
He said cultural distrust of others and difficulty in the arrest and prosecution of offenders arising in gathering of evidence and presentation of evidence in court, were other challenges.
“We need to create regulatory frameworks to meet an evolving challenge. The same innovation that power virtual currencies can also help us regulate them.
“Crypto exchanges should adopt the know your customer requirement. The use of biometrics, artificial intelligence and cryptography would let law enforcement agencies remove the pollution from the virtual currencies ecosystem.
“We need an indispensable international cooperation in the investigation and prosecution of cases relating to virtual currencies,” he said.
Owasanoye: don’t be scammed
PACAC Executive Secretary Prof Bolaji Owasanoye gave tips to avoid being defrauded: “If you don’t understand it, don’t get involved. If you receive a suspicious mail, delete it.
“If the mail has an html attachment, don’t open it. It could lead to where your data could be harvested. When return on investment looks too good to be true, delete it.
“Once the return on investment indicates you should bring someone else, turn it down. Beware of mails that come between 11pm and 5am. That is when scammers operate. Be realistic about expectations.
“Greed is a major push factor. You could be educated but if you’re greedy, you could be scammed. If you’re not greedy, you have solved 80 per cent of your problem.”
Owasanoye said the event was organised towards designing a legal regime for cryptocurrency. He said the outcome of the seminar would be shared with the National Assembly.
“The truth of the matter is that we must regulate this. You cannot say ‘don’t do it’. That will be futile. We cannot run away from technology. When you regulate, you can separate the wheat from the chaff. That’s a way forward,” he said.
Some recommendations
Strengthen international ooperation in tackling money laundering via cryptocurrency
•Expand the scope of Money Laundering Act definitions to cover cryptocurrency
•Register virtual currency exchangers to monitor their operations
•Build investigators’ capacity to operate in virtual currency space
•Create regulatory frameworks to meet evolving challenge
•Crypto exchanges should adopt know your customer requirements
•Issue modalities for cryptocurrency traders for tax purposes
