05 Mar 2019

What to do about cryptocurrencies?

Cryptocurrencies allow for an untraceable money exchange, and have created new, lower-risk opportunities for organised criminal groups.

There is a growing push to embrace cryptocurrency in Africa. While governments are still weighing up the pros and cons of adopting moving in this direction, start-ups and actors in the informal economy seem to be embracing it. According to the International Labour Office, more than 85% of employed workers on the continent operate in the informal sector. This is because of weak socio-economic development that has widened the poverty gap. However, it is in this  domain that digital currency has a strong appeal, especially as a way to raise funds for individual start-up businesses.

The so-called Dark Web is the intentionally concealed part of the Internet, which can only be accessed through TOR – short for The Onion Router, a network that encrypts connections and ensures anonymity. Organised criminal networks navigate the Dark Web using fake identities, making it hard for law enforcement agencies to trace them. The Dark Web is separate from the ‘deep web’ ­– which simply refers to all the information online, including information that isn’t indexed by search engines. This may include information like government and bank records. The third part of the web is the conventional or surface web, which refers to content made discoverable by conventional search engines.

According to a 2017 report on cybersecurity in Africa, published by an IT and business consulting firm called Serianu, cyberattacks cost African businesses US$3.5 billion annually. The figure in 2016 was US$2 billion. In East Africa, it is estimated that Kenya loses almost US$200 million per year, while businesses in Tanzania lose $100 million annually.  

According to a 2017 report by Serianu, cyberattacks cost African businesses US$3.5 billion annually

The money stolen from businesses through such attacks directly affects the growth of the economy of a country. It is likely that in some form or other, these attacks originated, or were made possible, by the Dark Web.

Cryptocurrencies also allow for an untraceable exchange of money, and have created new, lower-risk opportunities for organised criminal groups, including in the illegal wildlife trade and counterfeit pharmaceuticals. Digitial currencies, such as Bitcoin, therefore make it extremely hard to monitor or regulate markets and financial flows.

African governments have battled to formulate appropriate responses to address the links between organised criminal threats and cryptocurrencies. In Tanzania, for instance, the government has been indecisive. Although cryptocurrencies are legal, they are not regulated by the country’s central bank. The South African Reserve Bank does not recognise cryptocurrencies as legal tender, although profits generated from cryptocurrency transactions are subject to regular taxation.

According to one cybercrime expert from the United Nations Office on Drugs and Crime, attempts by government to regulate Bitcoin and other cryptocurrencies have led to a rise in so-called ‘mixing’ or ‘blending’ services. As blockchain analysts work to unravel transactions and make financial flows traceable, mixing and blending services work to restore anonymity.

African governments have battled to address the links between organised criminal threats and cryptocurrencies

In October last year, Rwanda, in partnership with the Conference of Western Attorneys General, hosted a workshop on substandard and falsified medical products. To demonstrate the complexity of illicit trade on the Dark Web, a Pfizer global security director presented an example of how a criminal group might set up a website that showed a Ugandan phone number, while its computers servers were in Israel, all payments would be routed through Bulgaria and the illegal product selling would come from China.

African merchants have embraced many digital currencies. For example, in Kenya, BitPesa is being used, among other things, to purchase cosmetics and second-hand Japanese vehicles, which are multimillion-dollar industries in Kenya’s regulated economy.

At the Africa Transform Summit in Rwanda last year, President Paul Kagame emphasised the need for a tech-led fourth revolution in Africa. At the same occasion, two banks launched the country’s first blockchain technology to replace physical currency with digital currency.

East African governments should welcome a tech-led revolution as a tool for achieving progress in development

Blockchain technology may address the anonymity nature of digital currencies by making transactions and interactions between parties more traceable, verifiable and permanent. This has led most countries in East Africa to adopt blockchain technology.

While East African governments should welcome a tech-led revolution as a tool for achieving progress in development, they should also focus on setting up mechanisms to deter organised criminal groups operating from the Dark Web. Initiatives such as the European Union-funded TITANIUM (Tools for the Investigation of Transactions in Underground Markets) project provide benchmarks to shield against the expanding threat of organised crime.

Mohamed Daghar, Researcher, ENACT project, ISS

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ENACT is funded by the European Union
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ENACT is implemented by the Institute for Security Studies in partnership with
INTERPOL and the Global Initiative against Transnational Organized Crime.