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Crypto or Cryptic? Impacts of a Growing Industry

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Crypto or cryptic

Is anyone confused? It has been my experience that the topic of cryptocurrency or “crypto” has two distinct effects on water fountain conversation – complete confusion, sometimes masked as boredom, or extreme interest and engagement. So what’s it all about and what are the possible effects on the day-to-day?

A cryptocurrency is a digital medium of exchange that uses encryption to secure the processes involved in generating units and conducting transactions. As digital currencies, cryptocurrencies have no physical representation. They may be used for online or in-person transactions with any vendors who accept them. Face-to-face transactions using cryptocurrencies are typically conducted through mobile payment from a digital wallet.

There are already hundreds of cryptocurrencies around the world. Amongst them, bitcoin whose origins can be traced back as far as 2008, is the most well recognised, so much so that other cryptocurrencies are sometimes referred to as altcoins, as in alternatives to bitcoin.

The underlying technology, blockchain, was originally developed as a technological solution to support bitcoin. Blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically. The Bitcoin protocol enables peer-to-peer (P2P) exchange in a decentralised system that, unlike conventional currencies, is not associated with any financial institution or government.

Impact on global investments

Crypto has become extremely popular over the last 36 months, although the first cryptocurrencies emerged over a decade ago. While most global equity indices rose by 15 to 30 percent in 2017, the top performing cryptocurrencies showed a comparative 9,000 percent rise, with bitcoin, as the most well-established, rising by 1,318 percent. These extreme figures may be alarming, however there is no doubt of the positive effect on capital markets that new entrants into the crypto market had in 2017 with fundraising exceeding €3.2 billion.

Aside from the many benefits of crypto when it comes to straight-through transactions and inflation control, many investors are adding cryptocurrencies as assets to their diversified portfolios. In particular, the non-correlated nature of the market makes cryptocurrencies a potential hedge against risk, similar to precious metals and hard assets.

However, some experts are fearful that a crash in cryptocurrency could have wider systemic risk consequences, similar to the effect that mortgage-backed securities had on triggering the global financial crisis in 2008. It’s worth noting, however, that the total market capitalisation of all cryptocurrencies is less than that of many public blue-chip companies, such as Microsoft, and it is therefore questionable that their instability would currently have a material impact on global markets.

There are hedge funds that are moving into the crypto space, but the assets under management remain insignificant, and thus far, asset management firms have had limited success in launching crypto-related products.

Cryptocurrencies are still a hot topic in many investment forums, but until their volatility and pricing behaviour are better understood and less subject to market sentiment, few asset managers would take the risk of including them in a significant way in their portfolios.

When it comes to the future of money, there is a growing consensus that cryptocurrencies are set to play a major role. However, it is clear that public understanding of the intricacies, advantages and disadvantages of crypto have not yet matured. And while there have been a large number of studies examining the role and future of bitcoin, there have been few that explore the broader cryptocurrency market and how it is evolving.

Yet the fact remains that cryptocurrencies offer an easy-to-use, digital alternative to traditional currencies. While citizens of more developed economies, such as the US and EU are accustomed to stable currencies, others such as Zimbabwe or Venezuela are faced with a continuous struggle with volatile currencies, inflation and falling living conditions. Consumers in these economies are far more likely to view large swings in crypto prices as an acceptable, natural hedge against their domestic options.

Regulation

Cryptocurrency as a concept has had a historical tendency – although this is changing fast – to attract myth and mystery, with many believing that one’s association with crypto could provide unnecessary financial risk exposure or even legal difficulty.

Money Laundering/Terrorist Financing (ML/TF) is a commonly used argument by detractors of cryptocurrencies when describing the downside of the system. Being unable to track the movement of money could be potentially catastrophic to the financial and territorial security of any country.

Of course, there are those that would seek to take advantage of crypto for less honourable outcomes, such as the evasion of tax or illegal purchase of goods abroad, triggering a response from governments in an attempt at control, but these can safely be described as cautious and mixed.

With billions of euros being poured into the market from various sources, it is incumbent upon government and financial institutions to develop rules and regulations to closely monitor the industry. And indeed, while as yet inconsistent as shown below, the regulation of cryptocurrency is now being given serious attention by many developed countries. While cryptocurrencies are not yet recognised as true currency, they are recognised as property and in some cases legal tender, and as such fall within the scope of capital gains taxation.

Since mid-2017, there have been renewed government efforts to regulate the market, although the majority of these efforts have been focused on Know Your Client (KYC) and Anti-Money Laundering (AML) regulations.

KYC and AML rules are at odds with the fundamental philosophies behind blockchain, which seeks to ensure that transactions remain anonymous and untraceable. This is a significant concern as there are fears that criminals could take advantage of such a system.

Government response

To date, government response to crypto concerns has been less than consistent. At a G20 meeting in April 2018, Argentina’s central bank governor outlined a summer deadline for members to have “specific recommendations on what to do” and said task forces are working to submit proposals by July, while Financial Stability Board Chairman and Governor of the Bank of England, Mark Carney, stated in a letter dated 18 March 2018 that “The FSB’s initial assessment is that crypto-assets do not pose risks to global financial stability at this time.”

Some central banks, including those of Sweden and Canada, have discussed creating their own cryptocurrency in response to the declining influence of cash as a means of payment. However, the Bank for International Settlements, in a release dated 12 March 2018, stated that central banks must carefully weigh the implications for financial stability and monetary policy of issuing digital currencies available to the general public, although the underlying technologies might hold more promise for wholesale payments, clearing, and settlements.

Other recent government action can be summarised as follows:

  • United States Federal Reserve: Technical issues remain, and governance and risk management will be crucial before cryptocurrencies become part of mainstream society.

Legal tender? Cryptocurrencies are not legal tender in any market, according to Guidance Note FIN-2013-G001 of the Financial Crimes Enforcement Network.

  • European Central Bank: EU leaders have voiced concern about money laundering. No EU member state can introduce its own currency, according to European Central Bank President Mario Draghi.
          1. While the ECB believes that cryptocurrencies do not currently pose a real threat to monetary policy, they are concerned about the risk of cyber-attacks. ECB officials are generally wary of cryptocurrencies, calling on commercial banks to provide an alternative by embracing instant payments.
          2. In April 2018 the European Parliament supported a move to bring closer regulation to cryptocurrencies through an agreement with the European Council proposed in December 2017 for measures aimed, in part, to prevent the use of cryptocurrencies in money laundering and terrorist financing. The agreement, known colloquially as “5AMLD”, is the fifth update to the EU’s anti-money laundering directive.
          3. The directive proposes to address the anonymity of the financial technology by implementing rules for cryptocurrency exchanges, platforms and wallet providers. Under the proposed new measures, such entities will be forced to register with authorities and will have to apply due diligence procedures, including customer verification.
          4. The updated directive will come into force three days after publication in the Official Journal of the European Union. After that, member countries of the EU will have 18 months to bring the new rules into national law.

Legal tender? Cryptocurrencies are not considered legal tender.

  • Bank of England: Bank of England Governor Mark Carney has said of crypto that “It is not a store of value because it is all over the map. Nobody uses it as a medium of exchange.” In November 2017, the Financial Conduct Authority called crypto assets “high-risk, speculative products,” in a warning to consumers.

Legal tender? Crypto is not considered to be legal tender.

  • Germany: Bitcoin is recognised as a form of private money and its use is allowed in commercial and private sales. However, given the concerns raised at the EU level and the recent vote for better governance, it is likely that the German financial regulatory authority BaFin’s hands-off approach may come under pressure from increasing demand for more concrete oversight in the near term.

Legal tender? The BaFin has declared that cryptocurrencies are not legal tender and therefore do not need to be centrally regulated.

  • Switzerland: Switzerland has adopted a more open approach towards crypto, with more attention being devoted to regulation of the underlying blockchain technology. Swiss regulatory authorities have been developing a lightweight regulatory system that enables the market to thrive without hindering innovation. It is now possible to pay for municipal services using cryptocurrencies which will likely lead to greater integration into everyday society.
  • People’s Bank of China: The central bank wants full control and authorities are cracking down on the cryptocurrency ecosystem in the country. In 2017, the government banned Initial Crypto Offerings (ICOs) and shut down domestic cryptocurrency exchanges.

Legal tender?  In China, crypto is not considered legal tender.

  • Bank of Japan: Japan is the biggest market for Bitcoin. Almost half of the digital currency’s daily volume is traded in the country’s currency. Exchanges are legal if they are registered with the Japanese Financial Services Agency.

Legal tender? Crypto is considered to be legal tender as of April 2017.

Conclusion

Despite all the attention and hype created by crypto over recent years, the size of the market, as well as its significant imperfections, make it unlikely that cryptocurrencies will become real currency any time soon. However, the underlying technology supporting crypto, blockchain, is likely to have a more significant and long-lasting impact on the investment management and financial services industries.

One of the most redeeming characteristics of blockchain technology is that once records are created they are permanent and unchangeable by a single entity once validated. Not only does this significantly reduce the operational risk associated with high-volume transactions, but it also has a correlated positive impact on transaction costs.

Blockchain is particularly useful in financial areas that require fast, accurate and secure record keeping. For example, in fund transactions, blockchain can help to simplify the subscription and placement process and provide a secure digital record of trade transactions.

Regarding investors, while cryptocurrencies continue to draw significant interest and headlines, their associated volatility, driven largely by investor sentiment and speculation, serves as a strong detractor for conservatively minded investors. There is also a fundamental paradox that the more successful crypto becomes, the greater the necessity for regulation, which reduces the basic reason for their existence. This certainly casts some uncertainty over crypto’s future as an asset class or real currency.

However, the same cannot be said for the practical uses for cryptocurrencies as an online method of payment, or the underlying blockchain technology whose features are likely to have more far-reaching applications. 

This article was contributed by Grek Kok, Head of Management Company Services at Maitland.

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The Golix Controversy: Has the African Exchange “Exit Scammed” Users And Investors?

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Golix exit scam

Prior to May 2018, Zimbabwe-based bitcoin exchange Golix was bullish about its future prospects. The startup claimed it had raised $32 million from a token sale and had plans to set up operations in several other African countries. However, more than a year later, the digital asset exchange has had a reversal of fortunes and, after its forced shutdown in Zimbabwe, some of Golix’s former clients are struggling to get their funds reimbursed despite promises and frantic efforts to recover these. 

Embezzlement Allegations

Former Golix users now point to possible embezzlement of funds by Golix executives while one investor in the startup blames the hostile operating environment as the reason for the company’s general failure.

Tawanda Kembo was the chief executive officer (CEO) of Golix when it was shut down in Zimbabwe. Bitcoin Africa reached out to him to get his side of the story but he had not responded to our questions at the time of publishing.

However, Bitcoin Africa still managed to contact Taurai Chinyamakubvu, an individual who says he was an investor in the company. Chinyamakubvu claimed he is not aware if client funds had been reimbursed or not since he was not involved in the day to day affairs of the crypto startup.

“On funds, you can check with the CEO, he was doing the day to day stuff. I was just an investor,” Chinyamakubvu pushed back when asked if they had recovered client funds that were reportedly locked in banks.

In May 2018, Zimbabwe’s central bank issued a directive that forbade financial institutions from dealing with crypto exchanges. According to Golix, this led to banks blocking access to client funds and the company from using the financial system.

Central Bank Defiance And Crypto Adoption

GolixWhen asked why Golix had not resumed operations following a High Court ruling that set aside the central bank order, Chinyamakubvu suggested that Golix’s Zimbabwe operations remain hamstrung by the central bank’s reluctance to lift the order.

“They (Reserve Bank of Zimbabwe) did not lift the order they sent to banks. So no bank wants to defy a regulator. But that said, you muddy the water once, that’s enough to change its colour for a while,” he stated.

Chinyamakubvu is convinced that the central bank’s apparent defiance of a court ruling continues to hinder the growth of the crypto space in a country that should be embracing privately-issued cryptocurrencies.

Zimbabwe has been plagued by hyperinflation for the past two decades, which is spurred on by a volatile fiat currency. Critics point to the central bank’s penchant for unrestrained printing of money as the main cause of the country’s currency troubles.

The Golix investor called the central bank’s decision to shut down the crypto exchange ‘retrogressive’.

Ironically, the Reserve Bank of Zimbabwe recently announced the setting up of a committee to study financial technologies such as bitcoin. The regulator now says it wants to come up with what it calls a “National Fintech Strategy.”

Disappeared Client Funds

Bitcoin Africa also reached out to former Golix clients as it tried to establish what happened with their funds. Some did not respond but a few did – although they requested anonymity. One lady, in particular, expressed exasperation with the way Golix has been handling the issue.

“I do not know about others but I still have not been reimbursed. Tawanda (CEO of Golix) has made several promises to settle but nothing has happened,” claimed the lady who preferred to remain anonymous.

She further explained that currently there is nothing noteworthy happening but promised to reveal more details as and when they become known. 

Kembo on the Run?

Following the central bank decision to stifle cryptocurrency trading, some crypto traders have gone on to create informal trading platforms using social media networks like Whatsapp, Telegram, and Facebook.

Bitcoin Africa was also able to get access to one such Whatsapp chat group feed wherein clients are discussing strategies of recovering funds from Golix. In a discussion that occurred in July 2019, one member of the group asks fellow members to furnish her with information that includes Kembo’s personal identification number or even a vehicle registration number. This could then be used to help a hired tracing agent to locate him.

Tawanda Kembo

Tawanda Kembo, Golix CEO

It is apparent from the discussions that Kembo has made several promises – including re-payment plans – to reimburse but nothing has happened to date. Adding intrigue to the controversy, this client claims Tawanda told them he had lost the key to the cold storage wallet. Thus, he could not access the bitcoin.

Keys to a crypto wallet are essentially a passcode that grants access to funds and without them, the funds are lost and cannot be recovered.

In the meantime, another post on the same thread suggests that Chinyamakubvu was being disingenuous when he expressed ignorance about the status of client funds. In the post, another member insists that prior to the central bank order, Golix was asked to remove all funds before accounts were closed.

The anonymous member was referring to a part of the central bank circular to banks which states the following:

“Exit any existing relationships with virtual currency exchanges within sixty days of the date of this Circular and proceed to liquidate and restitute existing account balances.”

This central bank circular was issued on May 11, 2018, and Golix seemingly had enough time to exit from banks as well as to reimburse clients.

No Consumer Protection

The anonymous member suggests that since this did not happen, the issue should now be treated as a criminal case.

It is apparent from the rest of the discussion that members were aware of the risks involved with crypto businesses. The central bank had warned the public of risks of dealing with cryptocurrencies and associated businesses prior to Golix’s demise.

Zimbabwe does not have consumer protection laws that specifically deal cryptocurrencies and those dealing with such digital currencies do so at own risk, a point clearly articulated by the central bank circular. Perhaps it is with this in mind that some Golix clients are now pursuing fraud charges against Golix executives.

Lack of legal protection is another factor inhibiting the widespread adoption of cryptocurrencies but that may yet change as the central bank is now having a change of heart.

Bitcoin Africa will continue to follow the events surrounding the alleged exit scam of Golix and update our readers when new information surfaces.

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Alleged Con Man Taken to Court in Kenya Over Fake Bitcoin Deal

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Fake Bitcoin Deal

A man is reportedly facing charges in a Nairobi court after allegedly swindling an accountant out of 375,000 Kenyan shillings (KES) in a fake bitcoin deal. The accused, Patrick Kamau, allegedly committed the fraud on several dates between December 2018 and May 2019.

Bitcoin Investment Deal Goes Sour

Kamau reportedly promised to open a forex trading account for the complainant and invest in forex bitcoin through BNB Forex. Benjamin Mugoya entered into the deal with the hope of making crypto trading profits after a friend introduced him to Kamau. The accused posed as a sales representative for BNB Forex in Kenya.

BitcoinGet

To open the forex trading account, Kamau asked Mugoya to wire KES400,000 to his bank account. However, after receiving a total payment of KES375,000 on May 22, Kamau switched off his phone.

In addition to this payment, Mugoya had sent Kamau KES50,000 in two installments in December 2018 and January 2019.

This is not the first bitcoin-related case that has been heard in a Nairobi court. In 2017, three bitcoin traders were charged with allegedly stealing KES10.2 million from I&M bank and Mpesa. The case involved a purchase of bitcoin from the traders using stolen money.

The case against Kamau has been scheduled for 22 February 2020. The accused was released on a cash bail of KES150,000 or a bond of KES200,000.

Unregulated Crypto Space

Mugoya could be one of many victims that have fallen prey to fake bitcoin investments despite the Central Bank of Kenya’s warning against investing in bitcoin.

The Bank’s Governor, Patrick Njoroge, has been vocal about the risks associated with cryptocurrencies such as fraud.  In 2018, the Governor ordered Kenyan banks to refrain from making crypto transactions or engaging with entities transacting in virtual currencies.

The unregulated crypto space in Kenya means that victims of crypto fraud are unprotected, thereby, preventing them from recovering their funds. However, with sufficient evidence, Mugoya could obtain justice from the Kenyan court system.

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UNICEF to Accept Cryptocurrency Donations Through Newly-Created Fund

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UNICEF Cryptocurrency Donations

The United Nations Children’s Fund (UNICEF) has rolled out a cryptocurrency fund that will enable the organisation to receive, hold, and distribute donations in bitcoin and ether. UNICEF will use cryptocurrencies to support open-source technology assisting children and young people across the globe.

The Cryptocurrency Fund

Contributions to the cryptocurrency fund will be held in the cryptocurrency of donation and will be disbursed in the same cryptocurrency.

UnicefUNICEF’s Executive Director Henrietta Fore stated: “This is a new and exciting venture for UNICEF. If digital economies and currencies have the potential to shape the lives of the coming generations, it is important that we explore the opportunities they offer. That is why the creation of our Cryptocurrency Fund is a significant and welcome step forward in humanitarian and development work.”

UNICEF is the first United Nations Organisation to establish a cryptocurrency fund. The fund is part of the organisation’s current work with blockchain technology. UNICEF and WFP are the leaders of the UN Innovation Network, a body that researches the impact of emerging technologies, such as the blockchain.

First Crypto Contributions

The first crypto contributions to the newly-created cryptocurrency fund will come from the Ethereum Foundation. The contributions will profit grantees of the UNICEF Innovation Fund and the GIGA initiative project that connects schools with the internet.

Aya Miyaguchi, Executive Director of the Ethereum Foundation said: “The Ethereum Foundation is excited to demonstrate the power of what Ethereum and blockchain technology can do for communities around the world. Together with UNICEF, we are taking action with the Crypto Fund to improve access to basic needs, rights, and resources. We aim to support the research and development of the Ethereum platform, and to grow the community of those that benefit from a technology that will better countless lives and industries in the years to come.”

The grantees of the UNICEF Innovation Fund that will receive the initial funds are Prescrypto, Utopixar, and Atix Labs. Prescrypto offers prescription tracking while Utopixar leverages blockchain technology to solve social and environmental challenges. Atix Labs is a blockchain solutions company.

The Ethereum Foundation will make the first contribution through UNICEF’s French National Committee. Other UNICEF National Committees that accept crypto are the US, New Zealand, and Australia. 

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