Africa isn’t included on the virtual asset regulatory map just yet.
But crypto businesses seeing strong growth across the 54-country continent are working hard on know-your-customer (KYC) rules to meet the exacting standards set out by the Financial Action Task Force (FATF).
A broad range of entities operating in Africa, ranging from crypto exchanges to remittance providers to peer-to-peer marketplaces, are exploring KYC options, which could mean picking up licenses from other jurisdictions or even creating new regulatory frameworks in some cases.
The FATF makes reference to jurisdictions with “weak or non-existent” anti-money laundering (AML) and counter-terrorist financing (CTF) controls in its recently published summer plenary report.
If a so-called stablecoin provider were located in a jurisdiction with poor AML/CTF controls, other jurisdictions could apply their stronger AML/CTF laws to these providers, says the FATF report.
But enforcement of any rules might be difficult if the home supervisor of the virtual asset services provider (VASP) had not implemented the revised FATF standards strongly enough to respond to international co-operation requests, the report continues.
Nonetheless, innovative crypto players in Africa and other parts of the unregulated world are doing their best to be AML-compliant with a view toward meeting the requirements of the Travel Rule. The Travel Rule mandates that the senders and receivers of crypto transactions over $1,000 on regulated exchanges must be identified.
Shopping for regs
“In places where there aren’t really e-regulatory rules yet, firms are doing KYC and using blockchain analytics for AML,” said former Kenya resident Pelle Braendgaard, CEO of crypto identity startup Notabene. “People are shopping around for regulation, looking at remittance licenses to deal with foreign partners so they can have at least some level of clarity.”
This was the approach taken by BitPesa, launched in Kenya in 2013. The cryptocurrency payments and liquidity platform, which rebranded as AZA last year, snagged a license from the U.K.’s Financial Conduct Authority (FCA) in 2015, then acquired money transfer company TransferZero in 2018, gaining a license from the Spanish central bank.
When AZA expanded into Nigeria, it helped the Nigerian central bank address the dearth of crypto regulation, taking part in a government DLT task force, said Stephany Zoo, AZA’s head of marketing.
“Our AML and KYC are of U.K. and European standards, which means we are asking for things that nobody else on the African continent is asking for,” said Zoo, adding:
“We have a number of automated AML and KYC platforms that are integrated into ours, but when you don't have the same kind of access to government databases, it becomes much harder to run these checks. So, unfortunately, we do have to use a combination of automated and manual systems.”
AZA also recently became the first company to get a digital remittances license in Uganda, which involved some hands-on effort.
“We basically lobbied the central bank for three years and finally they created a license for us,” Zoo said. “In Africa, that’s what you kind of have to do, you have to work with the government very closely because these regulations don’t exist, so you have to create them.”
Collecting remittance licenses is one approach; formulating an entire regulatory framework is another. That’s what Cryptobaraza CEO Michael Kimani is attempting to do with the Blockchain Association of Kenya.
Kimani counts South African crypto exchange Luno among the association’s backers, and says members would like to move the regulatory process forward on their own steam, rather than wait for state-led supervision to emerge.
He also expects guidance on this project from the likes of FATF and the International Monetary Fund (IMF).
“We are creating our own virtual currency guidelines and we are hoping to submit about 15 regulations,” said Kimani. “One of the reasons I’m trying to push this, as the chairman of the association, is because I feel it’s important we cater to local peculiarities and don’t just end up adopting some laws that may have been customized for a completely different market.”
Africa is a complex and varied market. Its many local nuances mean Western companies can experience epic failures, such as BebaPay, Google’s bank-backed attempt at travel cards.
There’s also a lesson here for Facebook and the proposed cryptocurrency libra, says Kimani: “I think the challenge is, no one wants to see a foreign company come in here and just dominate the payments scene.”
African countries with more advanced banking and financial infrastructure such as Nigeria are beginning to see impressive growth in crypto, not only in remittances but around investing and trading, said Ruth Iselema, CEO and co-founder of crypto exchange Bitmama.
“There’s not much in the way of government rules,” said Iselema, “but we can KYC users with Nigeria’s BVN [bank verification number]. It’s like a social security number, but not everyone has one. Or you can use an international passport when you have higher transaction limits.”
But exchange-based trading in Africa is only part of the picture, as Cryptobaraza’s Kimani points out. Peer-to-peer (P2P) marketplaces are growing fast across the continent. This type of crypto adoption between so-called “unhosted wallets” occupies the other end of the regulatory spectrum from the FATF’s VASP regime.
“The best way to mitigate the ML/TF [money laundering/terrorist financing] risks posed by such disintermediated transactions remains an area of focus and will be considered in further detail by the FATF as part of its ongoing work on virtual assets,” states the FATF plenary report.
There are, in fact, two types of P2P markets in Africa, said Kimani. The first includes the likes of LocalBitcoins and Paxful. But there’s another whole system of informal networks based on trust and reputation. Pockets of trading using Telegram and WhatsApp are also very popular, said Kimani, who has acted as an escrow agent to such trust networks.
“This happened before crypto with PayPal, Skrill and Neteller,” said Kimani. “People feel comfortable knowing they are dealing with someone they trust. A lot of crypto conversations are fixated on AML, but I think crypto could learn a lot from how these trust networks operate.”
The Paxful challenge
Meanwhile, P2P marketplace Paxful, which is now experiencing explosive growth in Africa, has taken on an inordinate KYC challenge across the region.
(Learn more about LocalBitcoins and Paxful activity worldwide using CoinDesk’s interactive map.)
Paxful CEO Ray Youssef explained his company is building a localized KYC “switchboard,” in rather the same way Paxful itself has evolved into a universal switchboard for money.
“It’s a big job, believe me; it’s like a whole other startup,” said Youssef. “For example, Nigeria has five different types of national ID, most of them don’t have an expiry date. In Kenya, there’s no such thing as proof of address. If someone has an ID from a little country like Malawi, for example, we are routing KYC requests to one of the very few appropriate KYC providers. Sadly, most KYC providers have left Africa behind.”
A large slice of Paxful’s business in places like Nigeria involves the trading of gift cards (Amazon, Apple, etc.) for bitcoin. These gift cards are sold for bitcoin at between 60 cents and 80 cents on the dollar, which critics flag up as inherently scammy.
Some of the business is fraudulent, as Paxful will admit.
“We have made 99.5% of gift card transactions safe, which is a monumental achievement,” said Youssef. “LocalBitcoins dropped gift cards because they don’t have the capability to support this. But we haven’t abandoned gift cards, and they are most challenging. Why? Because they are a key route to onboarding the emerging world.”
There appears to be a vibrant system of gift card remittance (many gift cards are purchased by expat Nigerians in the U.S., who immediately send pictures of the cards, plus receipts back to relatives who then trade for bitcoin). Indeed, gift cards are even described as a kind of “stablecoin” to the Paxful ecosystem; this is not so different from the hack where Kenyans started selling mobile-phone minutes, which ultimately led to M-Pesa.
Youssef said gift card trading, plus the creation of a bitcoin trade route between Nigeria and China, have paved the way for a crypto gold rush in Africa. He also thinks P2P is going to be front and center.
“P2P is how the world works,” said Youssef. “Dare I say it – and I do – in two years time, P2P volume will flippen exchange volume, which is vastly inflated. They’ve got some surprises coming from the people of Africa.”