With the continuous rejection of bitcoins by most central banks around the world, the International Telecoms Union is of the view that the recent move by some to assess the Central Bank Digital Currency, is a welcome development that will address global cryptocurrency fraud, writes Emma Okonji
As the world embraces a cashless approach to transactions, digital currencies are taking centre stage, according to a news letter released recently by ITU, the United Nations’ agency responsible for all matters related to Information and Communication Technologies (ICT).
According to report from the ITU News Letter, “In the wake of the COVID-19 pandemic, countries are moving increasingly to introduce digital forms of fiat money issued by central banks that can be used as legal tender. To date, 68 central banks around the world have announced they are assessing central bank digital currency (CBDC), and 28 have already launched pilot CBDCs.”
The Central Bank of Nigeria (CBN), in October last year, launched the country’ digital currency called eNaira.
CBN Governor, Mr. Godwin Emefiele, during the launch of eNaira, said the it would support a resilient payment ecosystem, encourage rapid financial inclusion, reduce the cost of processing cash, enable direct and transparent welfare intervention to citizens, and increase revenue and tax collection.
“The eNaira is Nigeria’s CBDC and it is the digital equivalent of the physical naira. As the tagline simply encapsulates, the eNaira is the same naira with far more possibilities. The eNaira – like the physical naira – is a legal tender in Nigeria and a liability of the CBN. The eNaira and naira will have the same value and will always be exchanged at one naira to one eNaira,” Emefiele said.
President Muhammadu Buhari also said: “Indeed, some estimates indicate that the adoption of Central Bank Digital Currency (CBDC) and its underlying technology, called blockchain, can increase Nigeria’s GDP by $29 billion over the next 10 years. CBDCs can also help increase remittances, foster cross border trade, improve financial inclusion, make monetary policy more effective, and enable the government to send direct payments to citizens eligible for specific welfare programmes.”
The Central Bank of Nigeria (CBN) digital currency, eNaira, has continued to attract the interest of Nigeria’s banking public at home and across the world, as its total downloads reached 694,000, exactly 95 days after it was launched, according to THISDAY’s report.
Enhancing Stable Coins
Stablecoins, which meaning cryptocurrencies pegged to a reference point such as the US dollar or another fiat currency, are also gaining attention as they counterbalance the volatility associated with cryptocurrencies like bitcoin.
In the ITU newsletter, the Chief of Study Groups at the Telecommunication Standardization Bureau of the International Telecommunication Union (ITU), Bilel Jamoussi, said: “The key is dialogue among digital ecosystem stakeholders and regulators on lessons learned from cryptocurrency pilots.
According to ITU, such conversations were held virtually during the Digital Currency Conference (DC3 Conference), which took place between 25 and 27 January, this year, as part of a joint initiative by ITU and the Future of Digital Currency Initiative at Stanford University.
“Since its 2020 launch, the Digital Currency Global Initiative (DCGI) has convened top minds from industry and academia to construct a set of metrics by which to evaluate the robustness of various digital currency technologies,” Jamoussi explained, adding that the requirements are set by stakeholders with the aim of identifying potential areas of standardisation.
The Digital Currency Global Initiative is a collaboration between ITU and Stanford University and its main objectives are: Conduct further research on technical architecture, security, the technical implications and challenges in deployment caused by regulatory and policy requirements for Central Bank Digital Currency and other Digital Currencies; Construct a set of metrics by which to evaluate the robustness of various digital currency technologies against the requirements set by various stakeholders; Identify areas for standardization to enable implementation of digital currency; Organize a conference on an annual basis to share information on best practices, technical standards and lessons learned on digital currency implementation.
To achieve its objectives, the activities of the Digital Currency Global Initiative are focused around three main pillars to drive the synergistic engagement, innovative use, and standardization of Digital Currencies.
The Digital Currency Global Initiative is designed to provide an open and neutral platform for dialogue, knowledge sharing and research on the applications of Central Bank Digital Currency (CBDC) and other digital currency implementations.
A Moving Target
Digital currencies are “very much a moving target,” according to European Commission Advisor and Leader of the DCGI’s policy and governance working group, Mr. Peter Kerstens,
His group is tasked with finding policy and governance areas would benefit from international standardization. These could range from consumer protection, financial inclusion, privacy and digital identity policies to know-your-customer (KYC) issues and anti-money laundering.
“A lot of regulatory and legislative work hasn’t taken place yet – and may not take place,” Kerstens said, adding that there is a lot of scope for standardization.”
With malware and ransomware attacks growing increasingly frequent, trust and security are of chief importance when it comes to the standardization of digital currencies.
Despite all the innovation happening in the crypto universe, many grey areas remain on the security front.
The founder of advocacy group Security Inclusion Now and leader of the DCGI security and assurance working group, Jacques Francoeur, said: “We have yet to determine how to best protect consensus mechanisms. Today, security is very complex, costly, manual and fragmented. Though myriad security standards exist, small Fintech companies often find them nearly impossible to deal with.”
According to ITU, to alleviate the challenge, Francoeur’s working group developed a security validation platform specifically designed for digital currencies. It starts by identifying commonalities between digital currencies and understanding, which areas can be treated with a prescribed set of security controls.
Making Digital Currency Stable
Eight promising stablecoin use cases have been studied by DCGI’s architecture, interoperability and use cases working group.
According to the stablecoin work stream’s leader, Jean Marc Seigneur, who is a senior lecturer at the University of Geneva, “Having stablecoins in a cryptocurrency ecosystem brings stability to the economics of that system. On the other hand, some users may move crypto into stablecoins assuming they are all trustworthy, which is not always the case.”
Both CBDCs and stablecoins offer promising avenues to build trust and confidence in the basic idea of electronic tender. “If we assume these coins are stable, they are less volatile than cryptocurrencies such as bitcoin or ethereum,” Seigneur explained, adding that users may feel more confident in using these new technologies, which allow users to transact from one part of the world to another, more easily than previous digital payment solutions.
With several countries now embracing CBDCs, experts predict that CBDCs will soon start competing with cryptocurrencies, especially stablecoins.
Global Crypto Crime Decline
Reported fraud across the financial services industry in Africa has spiked however, while financial crime is on the rise, there has been a decline in illicit crypto transactions according to Eva Crouwel, Head of Financial Crime at Luno, a leading global cryptocurrency platform, who credited the source to the foremost blockchain analysis company Chainalysis, in the ITU News Letter.
According to Crouwel, “The 2020 UN Report on Trade and Development, estimates illicit losses of $88.6 million each year in Africa alone. In 2019, 2.1 per cent of all global crypto transactions globally were categorised as illicit, but in 2020 the number dropped to 0.34 per cent of all global cryptocurrency transactions. This translates to roughly $10 billion globally.”
Giving reasons for rise in financial crime in Africa, Crouwel said: “There is a perfect storm of three main reasons for the rise in financial crimes across the African continent. First, financial education levels tend to be lower in Africa and combined with financial hardship caused by Covid-19, citizens are seeking good returns. Second, crypto is a new technology, so users are uncertain about how it works and how to protect themselves. Finally, personal data in Africa has not been well protected compared to Asian and European markets. This makes it easy for people with bad intentions to get hold of personal information.”
Among its nine million customers across 40 countries, in around 95 per cent of Luno’s current financial crime cases, customers have been scammed. This varies from traditional ‘get-rich-quick’ scams to cases where customers are scammed into surrendering their login information to fraudsters, who sometimes pretend to be from Luno.
“Luno fully supports regulation of crypto and believes that it will help to combat fraud. But the reality is that even highly regulated sectors experience financial crime, especially scams,” Crouwel said.
Given that crypto is so new, crypto businesses have a significant role to play in teaching customers how to stay safe and protecting customers. Luno uses external blockchain monitoring companies and restricts crypto movements when the data indicates that customers are at risk.
According to Crouwel, “Interestingly, there is no specific demographic for victims, despite widely-held perceptions that scammers target either the ignorant elderly, or young mavericks looking to make a quick buck or previously disadvantaged users.”
Keeping Customers Safe
Luno recently underwent the rigorous process of independently verifying the existence of customer funds by means of a proof of reserves report prepared by Mazars South Africa.
In addition, Luno conducts financial audits, security audits, audit of reserves and compliance audits. “We invest heavily in advanced technology that allows our dedicated investigations team to access real time, tech-driven insights, which means we are able to respond much more quickly to behaviour that has been identified as risky. We have always said that Luno is a safe platform to secure and store cryptocurrency and we now have external validation of this,” Crouwel said.
Customers also need to be alert and careful. “We also count on our customers to keep the best interest of their funds in mind when dealing with cryptocurrency. We recently embarked on an email campaign to our customers to explain the risks and what to look out for,” Crouwel said.