Cryptocurrencies pose risks of IFFs in Zimbabwe

ZIMBABWE could be losing millions of dollars to illicit financial flows (IFFs) through virtual currencies that are not regulated by the central bank, market experts said.

The Reserve Bank of Zimbabwe (RBZ) has consistently warned consumers against trading in virtual currencies and in 2018 blocked bank accounts of Golix – a cryptocurrency exchange which had over 50 000 active traders – effectively forcing it to shut down.

Economist, John Robertson

However, this has not stopped enterprising Zimbabweans from dabbling with the virtual currencies, which they use to trade online. Analysts say the platforms could be used to illegally siphon money out of the southern African country which already struggles with illicit financial flows.

Although no independent research has been conducted to establish how much Zimbabwe is losing to illegal cryptocurrency trading, a recent report by the Africa Growth Initiative revealed that the country lost in excess of US$32 billion through illicit financial flows over the last two decades.

Victor Bhoroma, a Harare-based independent economic analyst, said the current regulations on exchange control and national payments do not cover virtual currencies, posing a threat to illicit trades.

“The central bank had earlier warned individuals or businesses on using cryptocurrencies even though the framework is now being developed for regulation only,” Bhoroma said.

“So yes, there is a possibility that cryptocurrency will become (is) an avenue for IFFs from Zimbabwe. Unfortunately, the cryptocurrency figure in terms of value traded in Zimbabwe is unknown since it is informal. Hence it is difficult to assess,” he added.

Cryptocurrencies exist exclusively online and their value is based on speculation and, like fiat currency, existing demand. They are decentralised, meaning no country or central bank controls their supply or price, and transactions are peer to peer with no bank or service as an intermediary.

Bhoroma added that it was highly conceivable that individuals or businesses launder money via virtual currencies considering that local financial controls and regulatory framework does not make it easy for businesses and foreigners to remit their dividends through the formal banking channels.

“This creates a grey market in the country and leads to money laundering,” he said.

Gloria Zvaravanhu, the Institute of Chartered Accountants of Zimbabwe (ICAZ) chief executive

Another independent economist consultant John Robertson based in Harare said while virtual currencies are banned in Zimbabwe, “what authorities might consider illicit is entirely legal elsewhere”.

“It is the existence of regulations that impose limits on ordinary Zimbabwean’s ability to make decisions that have prompted some of them to find ways of using cryptocurrencies to carry out their plans,” Robertson said.

He added that exchange controls and regulations elsewhere in the world are also driving citizens of other countries towards cryptocurrencies.

“Businesses come under so many restrictions that it is probable that only informal sector operators, who do not have to submit audited accounts to the tax authorities and the government’s Registrar of Companies, would make regular use of cryptocurrencies,” Robertson said.

“Individuals trying to move the proceeds of a house sale or another large transaction into a foreign bank account might be persuaded that using the money to purchase Bitcoins would be the best method. If regulations making such transfers were easier to handle, the cryptocurrency route would be unnecessary. Once the country can be made attractive enough to bring in new investors, perhaps the regulations will disappear.”

Prosper Chitambara of the Labour and Economic Development Research Institute of Zimbabwe said authorities are right to be cautious as cryptocurrencies are volatile and unregulated.

While the RBZ has maintained a hard stance on virtual currencies, the Institute of Chartered Accountants Zimbabwe (ICAZ) said it is keeping an eye on developments around reporting issues on cryptocurrencies.

“From an ICAZ perspective we are already up to speed with the accounting and reporting considerations on cryptocurrencies as we get involved in such conversations at international levels,” ICAZ chief executive officer Gloria Zvaravanhu said recently.

This comes as global regulators have warned that the “growth of crypto-assets and related services has the potential to raise financial stability concerns and increase risks faced by banks”.

“Crypto-assets have given rise to a range of concerns including consumer protection, money laundering and terrorist financing, and their carbon footprint,” the Basel Committee said.

Governments around the world, including India and China, have already started to heavily regulate, or even outlaw, the use of cryptocurrency.

In an effort to move with the times, the central bank said it was working on a regulatory framework for cryptocurrency trading platforms operating in the country. RBZ governor John Mangudya said that the central bank was not against financial development as it had formed the national Fintech group to look at digital currencies.

Already circulars have been sent to banks requesting input.

This story was produced by The Financial Gazette. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.