Abstract
Cryptocurrency has emerged as a disruptive force in the global financial landscape, offering innovative solutions and opportunities for financial inclusion. In Nigeria, a nation characterized by a burgeoning youth population and increasing digital penetration, the adoption of cryptocurrencies has witnessed exponential growth. However, alongside its transformative potential, concerns about its association with financial crime have gained prominence. This paper aims to dissect the intricate relationship between cryptocurrency and financial crime in Nigeria, exploring the challenges, regulatory responses, and future prospects.
Introduction
Cryptocurrency, a digital or virtual form of currency, has garnered significant attention worldwide for its potential to revolutionize financial systems. In Nigeria, the adoption of cryptocurrencies has surged in recent years, fuelled by factors such as a large youth population, increasing internet penetration, and a volatile local currency. However, concerns about the nexus between cryptocurrencies and financial crime have also risen. This paper seeks to delve into this complex relationship, examining the challenges posed by cryptocurrencies, the regulatory landscape in Nigeria, and the prospects for the future.
Cryptocurrency Adoption in Nigeria
Nigeria has emerged as a leading hub for cryptocurrency adoption in Africa. The country’s youthful demographic, coupled with a growing tech-savvy population, has contributed to the widespread acceptance of cryptocurrencies. Platforms like Paxful, Binance, and Luno have experienced exponential growth, providing avenues for Nigerians to engage in buying, selling, and trading cryptocurrencies, primarily Bitcoin and Ethereum. Crypto ownership among Nigerians was 46% in 2023, 90% of Nigerians are planning future cryptocurrency investments, the highest globally. Nigeria ranked second globally for crypto adoption in 2023 and ranked first globally for P2P cryptocurrency transactions in 2023, while Bitcoin adoption rate stands at 76% among Nigerian crypto investors.[1] Crypto adoption in Nigeria increased by 15% between 2020 and 2023.[2] Revenue in the Cryptocurrencies market is projected to reach $32.6m in 2024 and revenue is expected to show an annual growth rate of 12.66% resulting in a projected total amount of $52.5m by 2028.[3] This adoption trend underscores the potential of cryptocurrencies to address financial inclusion challenges in Nigeria, enabling individuals to access financial services with greater ease and convenience.
Challenges and Risks
Despite the opportunities presented by cryptocurrencies, they also pose significant challenges, particularly concerning financial crime. The pseudonymous nature of transactions conducted on blockchain networks offers a degree of anonymity, making them attractive to criminals for illicit activities such as money laundering, fraud, and ransomware attacks. Moreover, the decentralized and borderless nature of cryptocurrencies complicates regulatory oversight and law enforcement efforts, exacerbating the risk landscape. As a result, cryptocurrencies have been implicated in various financial crimes in Nigeria, including fraudulent investment schemes and ransomware attacks targeting businesses and individuals.
Financial Crime Concerns
The association between cryptocurrencies and financial crime in Nigeria has raised considerable alarm among regulators and law enforcement agencies. In 2023, the Nigerian Securities and Exchange Commission (SEC) issued a cautionary statement warning citizens about the risks associated with investing in cryptocurrencies, citing concerns about fraud and market manipulation.[4] Additionally, reports have surfaced linking cryptocurrencies to fraudulent activities, with criminals exploiting the anonymity and decentralization of blockchain networks to perpetrate scams and illicit transactions. Additionally, shortly after its creation, Bitcoin attracted regulatory scrutiny due to its widespread use among vendors and customers on the Dark Web. This hidden corner of the internet was notorious for illegal transactions involving items such as weapons, stolen data, illegal services and illicit drugs. Notably, the Silk Road marketplace exclusively accepted Bitcoin to maintain anonymity for its users. The negative reputation of Bitcoin eventually led to the FBI shutting down Silk Road. Even US Senator Charles Schumer explicitly labelled Bitcoin as a “surrogate currency” facilitating criminal activities.[5] These incidents underscore the urgent need for robust regulatory measures to mitigate the risks associated with cryptocurrency use in Nigeria.
Cryptocurrency and Money Laundering
Cryptocurrencies’ pseudonymous nature makes them attractive for money laundering. This is because, cryptocurrencies offer varying degrees of anonymity, allowing individuals to transact without revealing their real-world identities. This anonymity, coupled with the global accessibility and borderless nature of cryptocurrencies, makes it challenging for law enforcement agencies to monitor and regulate transactions effectively. Moreover, the complexity of cryptocurrency transactions, including techniques like mixing services and decentralized exchanges, further obscures the trail of illicit funds. Additionally, cryptocurrencies can be easily converted into other forms of currency, facilitating the laundering process by enabling the movement of funds across different jurisdictions. While cryptocurrencies themselves are not inherently illicit, these characteristics have made them attractive to money launderers seeking to conceal the origins of their funds, prompting regulatory efforts to combat money laundering within the crypto space.
Between 2009 and 2018, approximately US$2.5 billion was laundered through Bitcoin and Recent reports indicate that the Nigerian government is seeking $10 billion in penalties from Binance. The reason behind this demand is Binance’s alleged facilitation of approximately $26 billion in untraceable funds within the country.[6]
Cryptocurrency and Terrorism
The relationship between cryptocurrency and terrorism is complex and multifaceted. While there have been instances where terrorist organizations have used cryptocurrencies to fund their activities due to the perceived anonymity and decentralized nature of these digital assets, the extent of such usage remains a matter of debate among experts. Cryptocurrencies can potentially provide a means for terrorists to raise funds, transfer money across borders, and finance illicit activities with reduced risk of detection. However, it’s important to note that traditional financial systems still play a significant role in terrorist financing, and cryptocurrencies are just one of many tools available to them.
Cryptocurrency and Fraud
Cryptocurrency and fraud often intersect due to various factors inherent in the digital currency ecosystem. One significant issue is the lack of regulation and oversight in many cryptocurrency markets, which can make them vulnerable to fraudulent schemes. Scams such as Ponzi schemes, fake ICOs (Initial Coin Offerings), pump and dump schemes, and phishing attacks have been prevalent in the crypto space. Moreover, the pseudonymous nature of cryptocurrency transactions can make it easier for fraudsters to operate anonymously, making it challenging for victims and authorities to identify and recover stolen funds. Additionally, the rapid evolution of blockchain technology and the proliferation of new cryptocurrencies create opportunities for innovative but potentially fraudulent projects to emerge, enticing investors with promises of high returns or revolutionary technology. As a result, investors and users must exercise caution, conduct thorough research, and remain vigilant to avoid falling victim to cryptocurrency-related fraud.
Regulatory Response
In response to the growing risks posed by cryptocurrencies, Nigerian authorities have taken steps to regulate the industry. In 2021, the Central Bank of Nigeria (CBN) issued a circular instructing financial institutions to close accounts associated with cryptocurrency transactions, citing concerns about financial stability and the integrity of the financial system.[7] While this directive elicited mixed reactions, with some advocating for stricter regulations to curb illicit activities, others argued for a more balanced approach to foster innovation while addressing risks. The International Monetary Fund (IMF) has also recognised the need for regulation and has recommended that global crypto trading platforms should be registered or licensed in Nigeria and subject to regulatory requirements.[8] The regulatory landscape surrounding cryptocurrencies in Nigeria remains fluid and uncertain, characterized by ongoing debates and deliberations about the optimal approach to regulation.
Future Prospects
The future of cryptocurrency regulation in Nigeria hinges on striking a delicate balance between fostering innovation and safeguarding against financial crime. While cryptocurrencies hold immense promise for driving economic growth and financial inclusion, their unchecked proliferation poses risks to consumers, investors, and the integrity of the financial system. Moving forward, policymakers, regulators, and industry stakeholders must collaborate synergistically to develop comprehensive regulatory frameworks that promote transparency, security, and investor protection. By harnessing the potential of blockchain technology while mitigating its associated risks, Nigeria can leverage cryptocurrencies as a catalyst for sustainable development and inclusive growth.
Conclusion
The nexus between cryptocurrency and financial crime in Nigeria underscores the complex challenges and opportunities at the intersection of technology, finance, and regulation. While cryptocurrencies offer the potential for financial inclusion and innovation, they also pose significant risks, particularly concerning illicit activities. As Nigeria navigates this evolving landscape, it is imperative for stakeholders to adopt a proactive and collaborative approach, leveraging regulatory interventions, technological innovations, and industry partnerships to mitigate risks and maximize the transformative potential of cryptocurrencies. Only through concerted efforts can Nigeria harness the benefits of cryptocurrencies while safeguarding against their associated risks, paving the way for a more inclusive and resilient financial ecosystem.
FOOTNOTES:
[1] 26 crypto adoption in Nigeria statistics: Facts and usage trends 2024 – [Source: ITEdge News]( https://www.itedgenews.africa/26-crypto-adoption-in-nigeria-statistics-facts-and-usage-trends-2024) <Accessed 14 May 2024
[2] ibid
[3] Cryptocurrencies – Nigeria – [Source: Statista]( https://www.statista.com/outlook/fmo/digital-assets/cryptocurrencies/nigeria) <Accessed 14 May 2024
[4] Nigerian Securities and Exchange Commission (SEC) warning on cryptocurrencies – [Source: Nigerian SEC](https://sec.gov.ng/warning-against-investing-with-binance) <Accessed 14 May 2024
[5] Norry, A. (2018, July 2). An in-depth look at bitcoin laws & future regulation. Blockonomi. https://blockonomi.com/bitcoin-regulation/ <Accessed 16 May, 2024
[6] Binance Nigeria Moved $26B Worth of Untraceable Funds in 2023, Central Bank Chief Says: Reports. (2024, February 28). CoinDesk. Retrieved May 16, 2024, from https://www.coindesk.com/policy/2024/02/28/binance-nigeria-moved-26b-worth-of-untraceable-funds-in-2023-central-bank-chief-says-reports/?_gl=1*44e2w0*_up*MQ..*_ga*ODYzOTQzOTQxLjE3MTU4NTE0MTQ.*_ga_VM3STRYVN8*MTcxNTg1MTQxMy4xLjAuMTcxNTg1MTQxMy4wLjAuMzg4MTI2NDU0
[7] Central Bank of Nigeria. (2021, July 2) Response to Regulatory Directive on Cryptocurrencies. https://www.cbn.gov.ng/Out/2021/CCD/CBN%20Press%20Release%20Crypto%2007022021.pdf > accessed 16th May, 2024
[8] Tunji, S., & Tunji, S. (2024, May 10). IMF recommends registering, licensing global crypto trading platforms in Nigeria. Nairametrics. https://nairametrics.com/2024/05/10/imf-recommends-registering-licensing-global-crypto-trading-platforms-in-nigeria>Accessed 16th May, 2024
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