• Friday, March 29, 2024
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To protect consumers NDIC heckles cryptocurrencies again

Cryptocurrencys

A few weeks ago, the Nigeria Deposit Insurance Corporation took another direct aim against investing money in virtual currencies that rely on Blockchain technology.

At Enugu International Trade Fair which took place in the coal-city state, Nicholas Ibrahim NDIC controller at Enugu and who was representing the managing director of NDIC, Umaru Ibrahim made no pretence of his direction when he stated:

“I wish to draw attention to emergence of the various Ponzi schemes, popularity called Mavrodi Mundial Movement (MMM) and other forms of digital and Blockchain currencies.

“These ponzi schemes also came in form of virtual currencies such as Bitcoin, Ripples, Monero, Litecoin, Dogecoin and Onecoin for medium of exchange and web based transactions which are neither authorised by the CBN nor insured by the NDIC.”

The NDIC went ahead to reiterate that it has a committee saddled with the responsibility of studying the digital currencies for the purpose of consumer protection, financial education and the overall interest of the nation’s economic development.

A virtual currency also known as cryptocurrency refers to a digital currency or asset designed to function as a medium of exchange like normal currencies such as the naira or US dollar. A cryptocurrency uses cryptography to secure transactions and to control the creation of additional units of the currency. Due to cryptography, it is difficult to counterfeit cryptocurrency unlike physical currencies which is probably why Ponzi schemes might find it strategic.

The NDIC therefore, is in that respect correct in establishing a relationship between cryptocurrencies and ponzi schemes. A Ponzi scheme refers to a form of fraud in which belief in the success of a non-existent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

The scheme thrives the most when it is free from regulation which is mostly the reason Ponzi schemes are mostly internet based. The members have to pay money to an invisible receiver and in return must remain invisible to those who pay them their returns. Cryptocurrencies like bitcoin are notorious for being untraceable and unregulated. In fact, those characteristics have been a major ground for contention for many governments and central banks. Presently China, the US and most recently Russia and India are countries making serious efforts to place regulatory policies on bitcoin and hence legitimize its use. The Russian authorities hope to recognize bitcoin and other cryptocurrencies in 2018 as they seek to enforce rules against illegal transfers.

Does a mere relationship make cryptocurrencies and Ponzi schemes exactly alike? As already stated, crytocurrencies are digital currencies and just like physical currencies can facilitate electronic transactions between parties. Bitcoin for example can be used to buy things electronically and it is produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.

Another important fact to note is they are valuable units of transaction like ordinary currencies. Bitcoin value for example was up over $1 billion, an 8% increase in the first week of April 2017 hitting levels not seen since mid-March after Japan legalized the cryptocurrency as a payment system. It was trading at $1,222.69 as at the time of publication of this article.

The market capitalisation of bitcoin also rose from $18.34 billion on April 5, to $19.9 billion on Wednesday according to data from Coindesk.

A cryptocurrency therefore is not a form of fraud but can be used to facilitate an act of fraud just like mainstream currencies. Fraudsters may prefer a cryptocurrency solely because it guarantees that transactions will not be traced and no regulator anywhere can stop it. Other scams that may use bitcoin include phishing, cheating scams, fake website scams.

According to Tope Aladenusi, partner at Deloitte Nigeria virtual currencies are means of exchanging value and therefore not the same thing as a Ponzi scheme.

It should also be noted that the NDIC’s statement that digital currencies came in form of Ponzi schemes may not be true seeing that it was only in 2009 that Bitcoin became the first decentralized cryptocurrency. A Ponzi scheme like MMM on the other hand has been in existence since 1989 when it was established by Sergei Mavrodi, his brother Vyacheslav Mavrodi, and a woman Olga Melnikova. MMM operation in Nigeria began with naira and later switched to bitcoin. That way they probably perceived that they could have their way, because nobody will be able to track or stop them.

The NDIC said its intention for warning the public to stay away from cyrptocurrencies was to protect, but could it be reacting out of fear of its limited knowledge on the technology? Importantly, would people oblige knowing they would be obeying a regulator that is just as ignorant as they are?

Most Nigerians who got their fingers burnt by MMM were equally warned to stay away from MMM yet they refused largely because they really did not have enough information on how it had worked in the past.

“You will not blame the regulators because in their capacity, the NDIC and the CBN are supposed to have some monetary policies to protect the country. Bitcoin has been predicted as a major disruptor in the sense that with Bitcoin you may not even need Central Bank. If it gains ground like it is being predicted whereby you can send money from one person to the other without an intermediary then in a short time even the Central Bank cannot track the currency in circulation. When it cannot track the currency in circulation it cannot control the currency of circulation. That is one of the fundamental responsibilities of the apex bank to the country. So it is just natural for them to want to caution the people. I know that the CBN has formed a committee and that committee has the mandate to come up with a framework for the country but pending that time I think it is just natural for them to issue the caution,” Aladenusi said.