Blockchain and democracy in Africa

Terence Zimwara

The African continent has made great strides in embracing the ideals of democracy and freedom but problems persist when it comes to managing electoral processes. Allegations of rigging and fraud are a common place on the continent where incumbents are known to abuse their position for the furtherance of their personal objectives.

Kenya, Nigeria, Malawi, Democratic Republic of Congo and Zimbabwe are part of an endless list of countries with disputed elections results and until now there has been no real solution to pre-empt this. Blockchain which hitherto, has been largely associated with crypto-currencies like Bitcoin, could potentially come to the aid of democracy on the continent and elsewhere.

Blockchain technology has many uses besides supporting digital currencies, it can be used in the insurance industry to enforce contracts, in the music industry to reward artists, for real estate management, solar energy management, maintaining academic certificates etc. There are ongoing projects exploring this and preliminary results appear to show immense benefits.

Now some crypto entrepreneurs are now suggesting the use of this technology in resolving electoral disputes and other controversial undertakings like the amendment of constitutions to suit interests a small minority.

For instance, some Blockchain specialists have suggested putting a country’s constitution on the Blockchain as one way of pre-empting the common abuses and the subsequent problems. When this important document is on a public ledger, which comes with the usual immutability and is decentralized, it means few individuals in a government cannot force amendments to the constitution without the knowledge or approval by the greater public.

To illustrate this point we look at Uganda. A few years ago, that country was plunged into chaos when long time ruler, Yoweri Museveni, sought to amend the constitution in order allow himself to run for office again by scrapping the age limit. The Ugandan leader had already served the maximum years allowed by the law but that was changed too in 2005 by using a parliamentary super majority. In Africa a dominant political party can change the rules even if that process is unpopular with the voters.

Had the Ugandan constitution been on a Blockchain years prior, this topic would not have come up for discussion to begin with. The Ugandan leader prevailed just like many others before him elsewhere, apparently democracy can be manipulated to suit interests of the elites, the minority. In fact, this problem is seen even in countries outside Africa like Turkey, where longtime ruler Recep Tayyip Erdogan pushed through a referendum that made amendments to the constitution. The amendments increased the powers of the president while reducing the influence of prime minister and parliament.

Now when a country’s constitution is on the Blockchain, it ordinarily means no one party—no matter how popular—will be able to freely change rules. A candidate who has already served a two term limit will be precluded from having his name on the ballot paper because the smart contract built into the Blockchain will reject it. So instead of resorting to demonstrations and violence as way of registering disapproval, citizens should insist on the placement of such an important document on a public distributed ledger.

The same should go for a voters roll, a document containing names and details of voters. Control of such voter records is seen as key for political survival by some political actors on the African continent.  For instance, in Zimbabwe, the voters’ roll is tightly controlled by the incumbent party while the opposition as well as pro-democracy forces virtually have no access to it. Access is only granted briefly during an election period and it is availed in the hardcopy format and as such, no independent observer has been able to verify or authenticate its contents in time to make a judgment before the election. It is on the basis that the country’s opposition has been alleging vote rigging for years, a process which it says is being aided by government’s control of the voters’ roll.

Therefore if such a voters’ roll becomes available on the Blockchain, it means individuals can check to see if their names are properly listed thus avoiding the common scenarios of voters being turned away on election day. When the number of registered voters for a particular county is known well before an election, possible rigging and ballot box stuffing is avoided because a Blockchain based voters’ roll will reject the extra ballots on election day!

So in a nutshell, Blockchain technology has the potential to enhance democracy on the continent and reverse the trend of resorting to armed struggles as a way of fighting dictatorship. Civil conflicts which are specifically rooted in disputed election results will be avoided. Blockchain technology is known to infuse confidence in a monetary system like that of Bitcoin and likewise it will instill confidence democracies thus help reduce conflicts.

Pro-democracy activists as well as the media have greater role to play in ensuring citizens become more knowledgeable about these possibilities. When enough people become aware a momentum will be created and governments will eventually be forced to consider Blockchain for the constitution and many other aspects of its mandate.

Flagging ICO scams

Terence Zimwara

The concept of an initial coin offering (ICO) is not entirely a new phenomenon; in fact it is a borrowed one. ICOs are any attempt to replicate an initial public offering (IPOs), a renowned capital raising practice which has been widely used by businesses and corporations for decades. As the name suggests, this process enables privately owned businesses to fund new developments as well as the expansion of their present operations with capital raised from the public.

In the case of IPOs however, a regulating entity— often a securities and exchange regulator—will issue guidelines on how this process is consummated. For instance, the company seeking capital would have to produce a document called a prospectus. It is that document which typically lays out the responsibilities and expectations of those participating in any such fundraising.

IPOs generally come with many such safeguards in case something goes wrong but the same cannot be said of how ICOs have been handled in the not so distant past. Apparently ICOs were so simple to set up, anyone with basic IT skills could figure out a way to create a token along with a website and whitepaper to support the coin offering. There were neither a regulator overseeing this nor were there any legal remedies available to participants in case something went wrong.

Whitepaper factor

Jelle Rijnink, a fintech expert with Aurus, a crypto start-up explains that a whitepaper—apparently the equivalent of a prospectus— would nominally outline the project’s objectives and how these would be achieved. In reality however, this whitepaper would turn out to be nothing more but part of a well orchestrated scam. The lax ICO atmosphere at the time encouraged a lot of innovation which in turn induced countless yet very ambitious projects to go public.

Such ICOs went on to generate millions of dollars in funding for new projects with 2018 offerings alone raising approximately $20 billion. Indeed many great projects that are functional today were born from such ICOs but it is also safe to say that the majority have since failed.

It is such failings that have led to widespread negative media coverage and this subsequently invited increased scrutiny from regulatory and consumer protection bodies.

For instance, the Financial Conduct Authority (FCA) of the United Kingdom notes these problems in a consultation paper that was released earlier this year.

According to the consultation paper, “2018 saw a significant reduction in the amount of capital raised in ICOs compared to the 2017 amount. Global ICO funding was $65m in the month of November 2018, compared to over $823m in the month of November 2017.There are a number of reasons for this fall, with (some) commentators identifying investor caution as a response to the large amount of fraudulent ICOs as well as a high failure rate of new enterprises that use the ICO process. This can also lead to ICOs missing their target collections. The underlying volatility of cryptoassets used may also be an issue as they are used, in many cases, for payments in ICOs.”

In light of this, the FCA is now proposing regulations that would guide future ICOs and help curb fraudulent coin offerings at least in UK territories. There is no doubt other regulatory bodies and consumer rights watchdogs around the world will make similar undertakings.

But exactly what caused many bad actors use ICOs as a way to dupe unsuspecting investors? Well the fear of missing out (FOMO) plays a part but it could also be the way the process was carried out that invited criminal elements.

Meanwhile Rinjink attributed the high ICO failure or fraud rates to a combination of three main factors namely;

·         The ease of starting the coin offering process

·         Anonymity of the process

·         Lack of regulatory oversight created an opportunity for scammers and money grabbing schemes to emerge.

Apparently it was just too easy not to fulfill the promised deliverables and walk away with the funds without being made liable. There is/was no deterrent! Indeed many masterminds of fraudulent ICO projects which came with flashy websites and well put together whitepapers, managed to raise millions of dollars and disappeared.

Meanwhile, the FCA also concurs with Rinjink’s earlier assertion concerning whitepapers. In its guidance, the FCA notes that the whitepaper, which typically accompany ICOs, is not standardized, and often feature exaggerated or misleading information.

Given this lack of clear information, it is logical to conclude that investors/consumers may not understand that many of these projects are high-risk and at an early stage. Put differently, it means the risk profile of most of the capital seeking projects may not suit the risk tolerance, financial sophistication or financial resources of the investors. FCA has since concluded that regulation of ICOs is an inevitable but necessary response to the problem.

It remains to be seen how such regulations will be enforced given the disparate and fragmented regulatory approach to the issue. Others have largely ignored the problem while others have been quick to respond. So it could well happen that a capital seeking crypto start- up, which may be domiciled in an unregulated environment, can actually invite investors including those from a regulated environment to participate in an ICO. This leaves the supposedly protected investors vulnerable to fraudsters and not to mention that they is no legal recourse or compensation in case such an ICO fails.

Therefore this means even today investors still face the risk of being lured to scams and as such, it will be wise for potential participants in ICOs or anything similar to know the signs of a potential fraudulent coin offering.

So how do you determine that an ICO is potentially fraudulent?

There are a number of key signs to look out for and below we list and expand on some of the usual signs;

·         Too good to be true—as the sayings goes, if something is too good to be true then it probably is. Any investment has a potential to earn healthy returns for investors and equally, any such investment has an element of risk, an investor can lose everything. So when an ICO promises big on returns but is completely silent on the downside, there is a potential problem and investors need to approach this kind of ICO with caution. Usually a higher return means a higher risk. If you are however less risk averse, then murky ICOs could be the thing for you. Always remember there is no free lunch anything that promises surreal returns could otherwise be a scam.

·         Depth of the whitepaper—the whitepaper is the equivalent of a prospectus that crypto businesses seeking funding from the public usually issue out. The difference however is that with prospectus there are set standards, if such a document fails to meet expectations, it will not be sanctioned for distribution to the public by regulators. At the moment there seems to be no such standards when it comes to ICO whitepapers, all that is needed is a website to host the paper. In addition, the information contained in many whitepapers inconclusive, even Facebook’s Libra has been attacked for being scant when it comes to providing vital information. An informative whitepaper must have in-depth details of the ICO process, the objectives of the fund raising and the background of those behind but without exaggerations. A potential investor could well use the services of an experienced crypto advisor to give an opinion about an ICO based on the information from gleaned from a whitepaper. Nevertheless, a novice investor will still be able to unmask outright exaggerations on issues like the professional experience of the proposed project’s key drivers. Crypto-currencies have been around for about 10 years now, therefore it stands to reason that all professionals in this field cannot have years of experience that exceeds ten years. Therefore when a chief executive officer in his mid 20s tells potential investors that he has more than 10 years experience, that could be the clearest sign of a potentially fraudulent ICO!

·          No cap on maximum funds to be raised—dubious ICOs will not state the exact amount that needs to be raised, it is an open ended exercise. A document that essentially invites members of the public to participate in any fund raising activity must clearly state how much needs to be raised, the period of the fundraising exercise and to finance what? Transparency or lack thereof on this aspect will be essential in determining if an ICO is genuine or not.

·         Current project status—as explained earlier, an IPO has been used by businesses that are seeking to raise capital from the public for the first time. The funding is usually needed to augment capital of an existing business. So this means potential investors can seek clues and a better understanding of what they are getting into by examining the existing business. The prospectus usually contains historical information about the existing. It stands to reason that a similar principle need be to applied to ICOs. A whitepaper should have this kind of information available, there must be something happening already that investors can look at in order to get a feel of the business that they are about to invest in. Whitepaper that has in-depth details of the business’ history will undoubtedly enhance the credibility of the ICO exercise.

·         Core team—these are the actual brains behind the project that needs the funding. An IPO prospectus usually is accompanied by names of the management team, the identity of directors and the shareholding structure. A prospectus will go as far as publishing pictures of the managerial personnel, the residential addresses of directors as well the capital seeking company’s physical and contact addresses. This enhances the credibility of the process, potential investors know who they are funding and where they can find them. Whitepapers are not standardized yet but any start-up that wants to endear itself with investors can borrow a leaf from IPOs. At the same time, a shrewd investor should avoid investing in a faceless organization that only lists mobile phones as contact information!

·         Overhyped projects—it may be natural for a capital seeking business to project success but that should fall inside parameters of what may be deemed reasonable. Overhyping means the revenue or profit projections maybe unrealistic when contrasted the present usage of cryptos in general. An overhyped project could potentially be the signal that an ICO is really a Ponzi scheme or a scam. There is no denying that all crypto-currencies face challenges that make the achievement of core objectives impossible, at least in the short term. So it should concern investors when a start-up promises a quick turnaround in a market that everyone agrees is far from reaching its full potential.

There are many more sources of information and diligent investors must always do more to get enough before committing to invest.

Tackling the crypto exchange hacking problem

Terence Zimwara

Regular reports of crypto exchanges getting hacked are increasingly becoming a real worry for those hoping to see the widespread use of crypto-currencies. Hackers are primarily targeting crypto exchanges although they are also known to target individual wallets.

Just like a bank robbery, hacking of an exchange is particularly rewarding for these high tech thieves. In essence, an exchange acts as a ‘vault’ for multiple wallets or private keys, therefore successfully breaking in means the score will be greater than attacking individual wallets. Hackers are known to have made off with millions of dollars in clients’ funds each time they target crypto exchanges.

For example, according to a UK financial services watchdog the Financial Conduct Authority (FCA), in the first half of 2018 alone, $731 million worth of cryptos were stolen from exchanges. This included $500 million from a hack on the Coincheck exchange and $40 million from a hack on the Coinrail exchange. By October 2018, hacking of exchanges increased to $927 million. The problem is quite significant relative to the size of this fledging market.

Perhaps the only small consolation is the fact hackers are only targeting private keys, they are not attacking the crypto-currencies themselves. This once again underlines the efficacy of Bitcoin and alt-coins, that these currencies are immutable and that there is no incentive for hackers to cripple this innovation.

While the overriding concern of all crypto-currency businesses has been getting the message about this fintech across to the masses, resolving the scaling issues and regulatory uncertainty, there is a new challenge they must now grapple with. The question now is; how do you hasten widespread adoption of an innovation that is very vulnerable to hacking attacks? In fact, this may be a worry of not only potential users but of early adopters as well.

An impartial observer may conclude that the infrastructure supporting this technology is not secure enough to help build confidence when there are regular hacking reports. How do you convince folks who have worked hard all their life to convert their savings into cryptos when there is a high risk that all such funds will be stolen with little or no prospect of recovery?

Given this current state of affairs, it is plausible to conclude that many will prefer to keep savings in bank accounts where they are ‘safe’ than in the form of Bitcoin, which is susceptible to hacking!

It is on this issue that the entire crypto-currency community need to seriously self introspect. How can they collectively work nip this problem in bud before it gets even worse? Of course, if everyone listened to Andreas Antonopoulos, a prominent Bitcoin supporter, by keeping funds away from exchanges, then the problem would not be as big as it is today.

However, in fairness, the whole crypto business is a very complex one, without crypto exchanges or similar intermediaries, this market would not have grown to current levels. Asking a non-IT person to suddenly start understanding the complexities of crypto-currencies will be asking too much, they do not have the time for that. Therefore the use of ‘trusted’ intermediaries remains inevitable if the dream of greater adoption is to be achieved. Indeed for hardcore advocates of a decentralized system, this might be a bitter pill to swallow. However, just like medicine, it may have a bitter taste but it gets the job done, crypto exchanges or intermediaries might be seen as a deviation from the peer to peer principle but they do help get the job done ultimately.

Thus for now crypto exchange businesses and custodial wallet providers need to be supported by all crypto-currency issuers for the mutual benefit of all. Sadly as it stands now, the fragmented crypto community is failing to come up with a united response to the hacking problem, individual players are working silos when attempting to combat this threat. Some insist on making or improving security features of storage devices or wallets as the best way of dealing with the hacking problem but others believe solving the problem at crypto exchange level will yield better results.

It goes without saying that compromises will have to be made if progress is to be made on this front. A balance will have to be struck between user security concerns on one hand and the Utopian ideals of crypto-currencies on the other. For those that wish to see decentralized cryptos’ domination of the market continuing, now is the time to consider such compromises before well funded players enter the market.

Failing this, there is every chance that well resourced and bigger players like Facebook and its partners will seize on this, by rewriting the rules and in the process obfuscate the original ideals of a privately issued currency. Until now, the laudable decentralization and permissionless features of crypto-currencies have been the unrivaled hallmarks of this great innovation but that may yet change.

To illustrate this point we look at the proposed Libra stablecoin and how this can potentially change the crypto-currency landscape. A glance at Libra’s whitepaper reveals that this stablecoin will start off as a permissioned Blockchain backed crypto with the possibility of it becoming permissionless eventually. However, Facebook and its partners may ultimately choose for it to remain permissioned a little longer as one way of assuaging and winning over skeptical politicians.

This means the much vaunted Libra stablecoin will not adhere to the fundamentals of a decentralized currency.

To compensate for this, the Libra Association members do have the infrastructure and the financial muscle that they can use to invest in making security features that make it difficult for hackers to target the Libra token. There is no doubt Facebook and its partners will see enhanced security features as one way of cancelling out the less desirable aspects of Libra and will thus work harder on this.

If potential users are more satisfied with Libra’s handling of the hacking challenge they will embrace it ahead of original cryptos. Apparently not everyone is sold to the idealism of crypto-currencies, security is more important for others.

Therefore it may not matter how much permissionless Blockchain supporters bleat, the world could well embrace Libra because it is scalable or due to its superior security features. If Libra succeeds, permissionless cryptos will find themselves behind in every measure; from user numbers, market capitalization, merchant embrace etc.  

Of course, the prospect of Libra taking a giant slice of the market from founding crypto-currencies is not entirely a bad thing. This market needs competition in order for it to continue improving and to be that better alternative to fiat money. However, when one player with ties to the old order becomes dominant, this will not augur well for the future of privately issued currencies.

Creators of pioneering crypto-currencies must be willing to embrace changes just as they have brought change to the way we see money. Adapting to changes will be key to survival for crypto-currencies that have dominated until now. Their survival will keep this market free from monopolies and their malpractices.

Crypto-currency-- Financial inclusion vs Tax evasion

Terence Zimwara

Reports that the United States Internal Revenue Service (IRS) has sent out letters to crypto-currency holders reminding them of their tax obligations adds intrigue to Washington’s changed tact towards this fintech.

In the last few weeks, the US government has come out more vociferous in its opposition towards crypto-currencies in general and against the upcoming Libra stablecoin in particular. The IRS is telling the world that it has ‘evidence’ that some American holders of crypto-currencies are skipping their tax obligations.

Just like other US government agencies, the IRS seems to assert that those opting to use or trade in crypto-currencies are doing so in order to hide nefarious activities like illicit financials transactions, money laundering or tax evasions. According to institutions like the IRS, the US financial system remains solid and effective, therefore there are no valid reasons for American citizens in particular to avoid using it. In fact, that is the case in pretty much all developed states, there is really no reason to start looking for alternatives when the present model works well! . By 2018, it is estimated that at least 5% of US citizens own a crypto-currency, an insignificant but telling figure.

Meanwhile, as an additional plus to the United States, the US dollar remains the world’s most dominant currency—for now anyway—and logically, there should not be any valid reason for an American to own or store wealth in the form of alternative currencies like Bitcoin.

Interestingly, the same arguments are hollow when applied to developing or poor economies which are plagued by unstable currencies. The very architecture of the financial system is designed to benefit the elite, those in living in urban centres or those in formal employment. The unemployed and the rural populations—who are the majority in many developing countries—are usually excluded from such a system.  

Since the financial system cannot accommodate the less affluent or those staying in remote areas , crypto-currencies present a unique opportunity to access financial services. Crypto-currency like Bitcoin are already popular in these parts of the world because they enable ordinary people to make small payments, send and receive money cheaply. The usual barriers like lack of identification documents or high bank service charges are not important thus are ignored. One only needs a Smartphone plus a data package and they are off.

Just like those using mobile money—another popular fintech in the developing world—crypto-currency users in poor countries have not embraced this fintech to avoid paying taxes.  Their miserly earnings mean many fall outside standard taxable income thresholds hence the tax evasion argument does stick here.

Crypto-currencies are primarily used for micro-payments, remittances and cross border payments and here too the perceived tax liability is negligible, if any.

Bitcoin and alt-coins might originate from developed and wealthy states—where the use case is presently insignificant—but for developing countries the same cryptos have emerged, either by design or otherwise, as a viable alternative to the one size fits all fiat currency financial system.

As already highlighted, the now widely embraced mobile money has proven there is place for alternatives to the conventional financial system. And just like crypto-currencies, mobile money initially faced resistance from some traditional players in the financial services sector even as it was embraced by masses.

Technology firms and mobile network operators (MNO) identified this long un-serviced need and went on to provide a solution without the involvement of banks and now the benefits are clear for everyone to see. Even those previously opposed now accept the utility of mobile money and the impact it has had on societies in some lands.

To understand this, one has to familiarize themselves with the findings of a growing number of global surveys on this topic. For instance, in its overview, the World Bank Global Financial Index survey of 2018 states that a growing body of research reveals many potential development benefits from financial inclusion — especially from the use of digital financial services, including mobile money services, payment cards, and other financial technology (or fintech) applications.

As an example, the index quotes a study in Kenya which found that access to mobile money services delivered big benefits, especially for women. It enabled women-headed households to increase their savings by more than a fifth; allowed 185,000 women to leave farming and develop business or retail activities; and helped reduce extreme poverty among women-headed households by 22 percent.

Meanwhile, in countries like Zimbabwe, mobile money has come in handy for citizens grappling with the country’s ongoing cash shortage problem. A glance at the country national payments records reveals that mobile money now leads in terms of transactions volumes, meaning Zimbabweans have largely embraced mobile money as an alternative to fiat cash, which remains in short supply. At the same time, large dollar value transactions are still being settled in the traditional way i.e. bank transfers, point of sale machines etc.

In Zimbabwe’s case, mobile money is currently the preferred method for making micro payments, hardly transactions that fund terrorism. Illicit financial flows involve huge sums of money and only traditional financial channels can efficiently carry out such transactions.

To users in developing countries, crypto-currencies are similar to mobile money in many respects, if not better. Payments are settled much quicker, the service charges or fees are lower because there are a few intermediaries involved and lastly, there are no restrictions or limits on payments across borders.

This latest fintech clearly works well in the developing world and those opposed to it have few valid reasons to justify the opposition.

So perhaps the question now is; Why should crypto-currency users in the developing world be concerned with events in the US congress earlier this month? Why should they be concerned with Maxine Walters and Co. comments and moves to curtail Facebook’s Libra and Bitcoin?

Well, in normal circumstances, crypto-currency users from developing lands need not to worry about events thousands of miles away. Unfortunately, US power is not normal power, domestic decisions made by the American Congress are often felt across that country’s borders. The US can almost single handedly cripple any economy by cutting it off from the global payments system. Crypto-currencies are a little bit more complex but the US can still have its way by attacking or reining on Silicon Valley tech firms that facilitate this nascent industry.

To illustrate this point we look at the African continent. It is true that some on the African continent are confident that Libra will bring about financial inclusion because Facebook, the US based tech firm behind the token, already has the infrastructure to successfully bring this dream to fruition.

However, that the US congress can order Facebook to halt work on Libra until it is satisfied that US government concerns are duly addressed underlines the power Washington has. Therefore this means tax evasions concerns, which primarily concern one country, the United States, could stand in the way of an innovation that can potentially bring financial services to those currently excluded and many of such people are in Africa.

So yes, citizens of developing countries have an interest in the American government’s drive to stop or stifle Libra and other crypto-currencies. American power has the potential to deny marginalized societies a chance to break from their present situation.

So perhaps, a better question would be; at what point do interests or concerns of a small group of politicians trump (no pun intended) the benefits that can accrue to a billion plus people? The question has to be asked because that is precisely what is happening, US congress is only interested in maintaining a system that gives the country an advantage even if it comes at the expense of a greater number of people.

This is a reverse for a country renowned for being amenable to change, a place that encourages innovation and where freedom is celebrated. Many innovative entrepreneurs around the world see it as the best place to launch new ideas.

Attempts to crush new innovations like Libra might as well serve as signal that the country is no longer happy to lead and rivals will now feel encouraged to seize the initiative.

Aside from that, the United States has, by virtue of its position as a global superpower as well as a defender of freedom and democratic ideals, a responsibility to help bring positive change to the poor and those marginalized. This includes supporting innovations that will bring about financial inclusion as well as the improvement of living standards of citizens of the world’s poorest countries.

While tax evasion and money laundering concerns are justified, they should not stop America from remaining a global leader. A balance must be struck between finding solutions to tax evasions or terrorism funding problems and the genuine need to bring financial services to the poor. Facebook might have taken the important steps of seeking audience with skeptical politicians but this has to be reciprocated. A solution can only be found via engagement.