But as the cryptocurrency boom evolves it brings with it myriad problems. The Chairman of the Financial Conduct Authority (FCA) in the UK recently likened the cryptocurrency ecosphere to the Augean stables from Greek mythology, which required two rivers to wash away a decades high pile of manure. While the analogy may be unpleasant, it does neatly encapsulate the size of the issue facing regulators around the world.
There are dozens of huge multi-billion cryptocurrency exchanges operating completely unregulated, offering their services to retail speculators and traders all over the world. In the layer below these behemoths, there are hundreds of smaller exchanges and brokers whose operations are even more opaque.
Throw into the mix thousands of con-artists and scammers and a number of powerful investment banks looking for quick profits and you have the makings of a gigantic headache for regulatory authorities.
Regulators are mandated to protect their citizens from financial crime and provide stability to the financial markets. Cryptocurrency trading and speculation in its current form serves neither purpose, As the Chair of the FCA said in his recent speech:
"We'll need two streams to tackle the problem of online financial scams: appropriate regulation, including self-regulation by online platforms and robust enforcement by the authorities; and greater consumer awareness about online scams. It’s essential to find the right balance between appropriate regulation to protect consumers and markets and encouraging useful new ideas in this space."
African Regulators Ring the Changes
The winds of regulatory change are blowing across Africa, too. In February 2021, the Central Bank of Nigeria (CBN) placed an outright ban on commercial banks providing services to cryptocurrency brokers and exchanges. Commentators condemned this iron-fisted approach, so it was interesting to hear the head of Nigerian Securities Exchange Commission (SEC) confirming that the SEC are working with the CBN to create a regulatory framework for legalising cryptocurrency exchanges.
In South Africa, following the infamous collapse of the Mirror Trading International scam last year and the Africrypt scam earlier this year, the South African Financial Services Conduct Authority (FSCA) has made it clear that regulation of all crypto assets will be brought about as fast as possible.
When making its recommendations to the FSCA for the regulation of crypto assets, the Intergovernmental Fintech Working Group raised three concerns. First, was cryptocurrency’s role in financing terrorism and organised crime. Second, was its role in the circumvention of exchange controls. Finally, the Working Group also raised the spectre of fraud, scams, and market misconduct.
Forex Trading: Been There Done That
If the first and third of these concerns sound familiar to those with longer memories, it’s because we have heard this before.
With the advent of ubiquitous internet access in the early 00’s, Forex trading went through a similar boom period that we are seeing with cryptocurrency now. Regulators watched in horror as retail traders with little experience or knowledge of financial markets were given access to institutional-grade trading tools and high levels of leverage.
Forex trading scams proliferated and “market misconduct” was rife. Organised crime networks used online Forex brokers to launder vast amounts of money and many retail traders fell victim to their own lack of knowledge and greed.
While there was much handwringing in the offices of national regulators not much was done until after the financial crisis of 2007-2008.
Following derivative trading’s role in the Great Recession of 2008, the G20 economies decided to restrict it – not only on an institutional level, but also for retail traders. All online Forex trading is derivative trading, so suddenly the legions of Forex brokers found themselves in the regulatory crosshairs.
No Quick Fix
Regulatory changes of this magnitude take time, and developed economies only started placing serious restrictions on Forex trading in 2018, starting with the UK and the EU. Australia followed suit earlier this year, making negative balance protection mandatory, banning binary options trading, banning enticement bonuses, and restricting leverage to 1:30.
Many South African Forex brokers believe it is only a matter of time before the FSCA follows suit, with a new licencing regime currently being rolled out and a much harder tack being taken by the enforcement arm of the regulator. Similarly, in Kenya there are signs that the Capital Market Authority is starting to flex its muscle – serving 40 cease and desist orders to unlicenced Forex brokers in the country.
Lessons Learned?
So where to for African regulators looking to create a legal and stable environment for cryptocurrency exchanges and consumers? What lessons are there to learn from the slow rollout of Forex regulation? The first lesson is that the regulators should move faster this time around.
The number of cryptocurrency scams across the African continent is growing exponentially and large exchanges have to operate in a grey zone, where they are neither legal or illegal – living in constant fear of being smacked down by the regulator. This is not a sustainable long-term situation, neither for the victims of scams or for legitimate businesses trying to follow the rules.
Secondly, regulators need to work fast on capacity building. Monitoring cryptocurrency flows through exchanges will require legions of skilled employees, complex IT infrastructure and deep cross-border collaboration between regulators. There will be quite a bill to pay for this regulatory expansion, and governments will need to show a willingness to assist.
Finally, consumer education is key. Cryptocurrency scams proliferate because many people do not understand how the cryptocurrency market functions. Education drives are necessary on social media, in schools and universities and on key websites. Once licenced, cryptocurrency exchanges should also be roped in to assist with the education effort.
Change is the Only Constant
The financial world is going through a remarkable process of transformation. Not just in the cryptocurrency markets, but in traditional markets too. Long-term market watchers are uncertain what the future holds, with some predicting a financial apocalypse and others rallying around the banner of never-ending growth. In the midst of this rocky landscape, it would serve African regulators well to provide some modicum of stability as quickly as possible.