By Emmanuel
Ayomide-Praise(@eapthecolossus)
How did digital currencies or online
payment instruments, creep into the Nigerian cyber space and have remained
unnoticed and absolutely unregulated by the Central Bank of Nigeria and other
financial monitoring and regulatory institutions? While this question still
remains a little difficult to proffer answers to, digital currencies first
began showing up in Nigeria sometime around the early or mid-2000s through
online network marketing schemes (call it scams) as well as various
get-rich-quick ventures or high-yield investment programs (HYIPs) which were
mostly fraudulent and often disappeared online after few months of robbing
Peter to pay Paul.
These digital currencies, such as
e-gold and later liberty reserve, became the preferred online alternative for
Nigeria’s budding cybercrime underworld as against direct bank payments or wire
transfers from overseas which may have to go through the required regulatory
scrutiny before such payments could be cashed.
Thus, Nigeria became an important
conduit for the receipt and movement of funds through digital currencies and
unregulated global internet payment systems. With many online network-based marketing
programs such as 22usd, Get Away Club, Holidays And Cash and many others with
funny names that I can no longer remember showing up online claiming to be from
places such as Australia, USA, Canada (a trick in itself to fool unsuspecting
Nigerians) and promising huge payouts, Nigerians came into these programs in
droves bringing their friends and loved ones along.
Since traditional forms of
international money transfer such as bank wire or foreign draft were not
accepted, many Nigerians who came into these programs had to join the online payment,
call it, digital currency train by opening accounts with companies such as
e-gold, liberty reserve and the likes. Thus, an illicit system of online money
transfer was born; open an account with e-gold or liberty reserve, look for
anyone with the currency in his or her account, pay in naira and get the
equivalent currency of the e-gold or liberty reserve in dollars. In those days,
if one dollar was worth 140 naira, one liberty reserve digital dollar will have
exchanged for 165 naira.
In the same vein, an exchange system
for the cashing and funding of online digital currencies and payment mechanisms
begin to spring up in the country with many online exchangers showing up
willingly to collect your naira and give you the digital equivalent of your
preferred currency or to buy your digital currency from you and pay into your
naira account instead. Both ways, the margin of exchange was at least 10 naira
in difference. So, if you bought digital currency at 175 naira to a dollar, you
were sure to sell it back at 165 naira for the same dollar. A convenient
exchange and online money transfer system was born and many millionaires were
also raised in the process!
While it could be said that most of
the programs from outside Nigeria which accepted or used this system of online
payment or digital currency were not very credible, not all the purposes for
which digital currencies were used, exchanged or sold, were in themselves
illicit or fraudulent. For example, during this period, forex trading also
crept into our national financial system and it was considered to be mostly
legitimate. While the bigger forex brokers did not accept Nigerian traders, the
few who did used digital currency such as liberty reserve and Nigerian traders
were thus forced to open that type of online bank account.
Thus began the flow of Nigerian cash
into digital currency equivalents in sums of millions of dollars. However,
these digital currencies were illegal, unregulated and unlicensed online money
transfer systems that were under close scrutiny of financial regulators and
governmental agencies such as the FBI in the United States and not long after,
many of these currencies were prohibited with their cash reserves and assets
seized by the United States government. First, it was e-gold and later liberty
reserve. In the process of the asset confiscation, several millions of dollars
belonging to Nigerian users of these unlicensed digital payment instruments
were lost. My question is, in all of these, where was the Central Bank of
Nigeria and financial monitoring and regulatory institutions? They were nowhere
to be found!
The case of liberty reserve clearly
highlights the misuse of digital currency for illicit online financial
transactions and fraud and the need for financial regulatory authorities in
Nigeria to develop a regulatory framework that ensures that online transactions
and the instruments through which those transactions are carried out are
adequately regulated and properly monitored.
Liberty reserve was a Costa Rica
based centralized digital currency service that billed itself as “the oldest,
safest and most popular payment processor, serving millions around the world”.
The site had over one million users, including thousands of Nigerians, when it
was shut down by the United States government. Prosecutors argued that due to
lax security, alleged criminal activity largely went undetected, which
ultimately led to them seizing the service.
Founder, Arthur Budovsky, who was
originally an American citizen who denounced his citizenship and took up Costa Rican
nationality, was charged by the United States along with six others for money
laundering and for operating an illegal financial transaction company. Liberty
reserve, also known as LR, is alleged to have been used to launder over
$6billion in criminal proceeds during it’s history. No efforts were made by the
site to verify identities of it’s users making it an attractive payment
processor to scam artists. Deposits were often made through third parties using
credit card or bank wire transfer, among other options. No limits were made on
transaction sizes and the company itself made money by charging a small fee,
about 1% on each transfer. Liberty reserve also offered shopping cart
functionality and other online merchant services.
In addition to alleged criminals, the
service was popular among forex brokers and multi-level marketing companies.
According to Forex Magnates, a specialized forex news service, LR was the
leading payment channel for traders in emerging and frontier markets. After a
multi-year investigation by officials in 17 countries, a sealed indictment was
obtained by the US government in May 2013.
Budovsky was arrested by Spanish
authorities at the Barajas International Airport, Madrid, as he attempted to
return to Costa Rica, where he was based. The LR site was taken offline on 24th
of May 2013 and was replaced with a notice saying that the domain had been
seized by the United States Global Illicit Financial Team.
In Costa Rica, a court order was
issued to seize the financial products and services of Budovsky and his allies.
There was a Nigerian connection, as well, as Nigeria was mentioned in the same
breath as with countries such as Russia, Malaysia and Vietnam, in terms of
inflow and outflow of liberty reserve transactions and directly accredited
currency exchangers.
It is significant to note also that LR had about 200,000
customers in the United States alone, making it probably the country with the
highest number of users in totality.
The indictment against LR was handled
and secured by Manhattan state attorney and US public prosecutor Preet Bharara
who stated that the case was probably the largest international money
laundering case ever brought by the United States.
Although Bharara later said
that LR users who lost their funds to the asset confiscation could contact his
office to ask for a refund of their seized deposits, it is doubtful if any
legitimate Nigerian depositors with LR actually contacted him to effect the
retrieval of their funds and if so how many succeeded in that attempt.
In view of the foregoing, it may be
safe to conclude that several millions of dollars of Nigerian money may have
been lost to the confiscation and seizure of LR funds by Mr Bharara and the US
government. Some of these funds may have been legitimately earned through forex
trading or ecommerce. Assuming that there had been some sort of regulatory
framework in Nigeria guiding the use and exchange of digital currency, it would
have made it easier for a central financial regulatory body like the CBN to contact
Mr. Bharara and the US government in order to help Nigerians achieve a
retrieval of their lost funds from LR’s accounts.
Going forward and in order to prevent
a re-occurrence of these types of incidents, it behoves on Nigeria’s financial
monitoring and regulatory authorities such as the CBN and others to set up a
framework for the monitoring and regulation of the use and exchange of digital
currencies as well as other online payment systems in Nigeria.
It is important
to note that after the prohibition of LR worldwide and the seizure of the
company’s assets, it has become business as usual, again, for many Nigerian
online traders as they have turned to other digital currencies and payment
instruments and the exchange and trading of these currencies in Nigerian online
markets have continued unabated.
These days, I hear of funny names
such as Perfect Money, Payza, Epay, and Bitcoin, amongst others. You would
think that a lot of Nigerians, having lost money in previous years to companies
such as e-gold and liberty reserve, would have learnt their lessons and
desisted from illegally trading in these currencies or in using them for the
purpose of online payments but again such exchange and use of these currencies
continue with reckless abandon in Nigerian online markets.
Many Nigerians
actually seem to have bitten the Bitcoin bug as this digital currency is
becoming increasingly popular, not only in Nigeria, but also in many countries
of the world. Already, the company seems to be under intense investigation of
US authorities such as the FBI and the exchange of this currency and it’s
conversion into local currency in China has already been prohibited.
It is therefore the responsibility of
financial regulators to holistically look at the movement, use and exchange of
digital currencies and online payment instruments, especially as they affect
Nigeria, and come up with a policy framework for the regulation and monitoring
of these currencies and exchange systems to ensure that any of such currencies
acceptable in Nigeria would first have
Emmanuel Ayomide-Praise is a Nigerian
journalist, blogger and TV/Radio host. Email:eapgold@gmail.com.
Twitter:@eapthecolossus, http://ayomidepraise.blogspot
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