A CRITICAL ASSESSMENT OF THE SURGE OF CRYPTOCURRENCIES AND ITS USAGE IN AFRICA (A CASE STUDY OF SELECTED FINTECH COMPANIES IN NIGERIA)

CHAPTER TWO

LITERATURE REVIEW

INTRODUCTION

Currency as a legal tender is accepted as a unit of account, store of value and medium of exchange (Gaudamuz & Marden, 2015; Prasad, 2018). Historically, money originated through public enterprises in the ancient Mesopatamian temples and palaces as standardized weight and also assisted in the development of internal accounting for recognition of credits and debits and as an instrument of taxation (Forstater, 2005; Tcherneva, 2005). According to Davies (2002) and Henry (2004), money predated minting for about 3000 years. Considering the development of money in Egypt, it became clear that the State plays important role in establishing the appropriate measure of value for the purpose of accountability (Henry, 2004). Cowries, Fijian whales’ teeth, Yap stones, Wampum, cattle and metallic currencies were the earliest forms of money in existence and thereafter, notes were issued as money but in each instance, the State played important roles such as determining the value of the currency and administrative control (Davies, 2002; Henry, 2004; Tcherneva, 2005).

While certain currencies, like the US Dollar, are said to be backed by commodities such as gold, most other real currencies are fiat (Kien-Meng Ly, 2014; Prasad, 2018). According to Mandeng (2018), Bank notes were introduced by China in the 10th Century and in Europe in the 18th century, later in 19th century, it gained legal tender status. Before the establishment of Central Bank, Private Banks of Issue were involved in rapidly conducting and facilitation of monetary transactions. Each country later established a central bank to regulate bank note issuance, address proliferation and promote stability (Mandeng, 2018).

Similarly, in the history of recording business transactions, the financial industry had always experienced gradual transition from one era to the other. There had been three major phases so far, beginning with pre-paper, paper and electronic. The pre-paper era was the oldest when different materials such as bones of animals, clay, wall, line dates, papyrus, bullae, cuneiform, charcoal sticks, plant stems, feathers and other physical materials served as means of capturing and recording business transactions (Akinyemi et al., 2015). The ancient practice became gradually outdated when paper was invented around 100 BC (Zhangmingwu, 2011).

During the second phase, financial transactions were recorded first in the three main books comprising the journal, the ledger and cashbook with the help of merchants and scribes in the days of Italian Monk, Luca Pacioli, the inventor and father of the double entry system of accounting (Akinyemi et al., 2015; Ovunda, 2015). Since then, paper had been in use until the introduction of computers. Although, paper as the medium for recording accounting information had not been totally eradicated even with the advent of computers, most of the accounting procedure was automated in order to appropriate the host of benefits offered by the use of computers (Nkuah et al., 2015). The use of paper was gradually overtaken by computer spreadsheet and other application software which are still being used. The move from the paper to computer spreadsheet and other application software is seen by many researchers as encompassing third industrial revolution (digitization).

However, the arrival of cryptocurrency which has its root in cryptograghic technology with online distributed ledger appears to be introducing the finance industry into another phase (fourth) of development which incredibly is a combination of both the Central Bank function as well as Accounting functions as it produces and manages the supply of virtual currency as well as producing and managing the record of transactions simultaneously (Zheng et al., 2017). This technology is indeed a pointer to the fact that we have moved to the era of the fourth industrial revolution.

Literature is replete with descriptions that establish the relationship between the concepts of digital currency, virtual currency and cryptocurrency. Digital currency according to CPIM (2015) are assets with zero intrinsic value, whose value is determined by the forces of demand and supply as in other commodity money like gold. They are not a liability of any entity and are not backed by any authority of the State. Their current value is dependent on the future expectation of being exchange for goods, services or a certain amount of sovereign currency (CPIM, 2015). According to Baron et al. (2015), a virtual currency as a digital representation of value is accepted by people as a means of payment, although, it is neither issued by a public authority, nor necessarily attached to a fiat currency. Electronic money was “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community” (European Central Bank, 2012). Mandeng (2018) described cryptocurrencies as private, digital, de-nationalised, unreserved, floating rate, convertible monies. Bitcoin, the most popular among other cryptocurrencies has assumed several names among other, the digital currency, digital cash, virtual currency, electronic currency and as cryptocurrency.

Our focus in this chapter is to critically examine relevant literature that would assist in explaining the research problem and furthermore recognize the efforts of scholars who had previously contributed immensely to similar research. The chapter intends to deepen the understanding of the study and close the perceived gaps.

Precisely, the chapter will be considered in two sub-headings:

• Conceptual Framework
• Chapter Summary

2.1 CONCEPTUAL FRAMEWORK

Cryptocurrency

The year of 2007 set a new rhythm when it comes to the financial sector and how much people were willing to trust the system. After the crisis, many people who had lost everything, or almost everything, had to turn the page and look for new possibilities. The end of the last decade opened the door for new opportunities, and cryptocurrencies were right around the corner when it happened, which led to a great opportunity for many people who wanted to invest their money on something totally different and with a good growth margin. “In the 19th century, you could find a dollar coin made of silver and a paper dollar that in those days could be exchanged for the same silver coin. More than 100 years ago paper dollar bills were backed by silver, a precious metal that theoretically should always have value. However, today that has changed, a modern dollar bill is backed by nothing but the word of the U.S. government.” (Rose, 2015: 617). Nowadays, cryptocurrencies are a daily topic. But what are exactly cryptocurrencies? The first thing we need to understand is how to settle the difference between a virtual currency, a digital currency and a cryptocurrency, because these are often used interchangeably. The European Central Bank released an article about “Virtual Currency Schemes” in October 2012, where virtual currency was defined as a” type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among members of a specific virtual community”. A digital currency can be defined as a form of virtual currency that is electronically created and stored. A digital currency can or cannot be a cryptocurrency. And last, a “cryptocurrency can be defined as a subset of digital currencies, however, it uses cryptography for security so this makes it extremely difficult to counterfeit” (Gilpin, 2014).

When referring to cryptocurrencies, it is precisely all about a certain type of virtual currencies. Rogojanu and Badea (2015) stated that “virtual currency continues to maintain the main features of a traditional currency, in other words, virtual money is a symbol or synonym for a value, a payment system technology which continued to grow over the past 20 years”. However, due the newness of this phenomenon and its rapid growth, suggesting a universal definition of cryptocurrency is still a challenge. Abboushi (2016), from Duquesne University tries to explain it according to four core dimensions: (1) virtual currency is a form of digital currency which is digital representation and measurement of economic value for an object or transaction; (2) it is issued by non-government party and remitted for the exclusive use by another private party; (3) it is denominated in units of account of its own system that may or may not be exchangeable to real currency; (4) it is used as a medium of exchange similar to real currencies but does not have legal tender status in any jurisdiction in the world. Sauer (2016), describes cryptocurrency as money which does not exist in reality as coins, banknotes or bank deposits, but rather exists in digital form. The author also makes clear that cryptocurrencies are not e-commerce or e-payment systems or other ways of transferring money such as credit card systems or online banking. According to Sauer (2016), the first cryptocurrencies, or virtual currencies, were first seen in online gaming where it could be used to buy new equipment or characters. With time, the online gaming operators began to exchange their virtual currency for real money. The problem was that this market didn’t work both ways, it was a one-way market as the players were unable to swap the virtual currency into real money. In 2015, Edward V. Murphy, a specialist in Financial Economics published an article with questions and answers about cryptocurrencies to allow everyone to understand what was this new emerging market. According to him, “a cryptocurrency is a medium of exchange such as the US dollar” (Murphy, Murphy and Seitzinger; 2015: 1). Later in the same article, Edward clarifies that “like the US dollar, cryptocurrency has no intrinsic value and that it is not redeemable for another commodity, such as gold. Unlike the US dollar, however, cryptocurrency has no physical form, is not legal tender, and is not currently backed by any government or legal identity. In addition, its supply is not determined by a central bank and the network is completely decentralized, with all transactions performed by the users of the system” (Murphy, Murphy and Seitzinger; 2015: 2). “Cryptocurrency is based on the idea of exchanging value without the approval of an institution” (Maftei, 2014: 55). While being aware of a broad developments of various payment mechanisms and creation of alternative currencies, the bold question of what cryptocurrency is should be answered. Legislative acts of United States explain cryptocurrency to be a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency, which points the absence of legal tender status in any jurisdiction. So, cryptocurrencies can be described as a digital asset with the intention to function as a medium of exchange, based in the concept of cryptography, which refers to “techniques for secure communication in the presence of third parties called adversaries.” (Rivest and Ronald, 1990).

Characteristics Of Cryptocurrencies

Cryptocurrencies have several different characteristics when compared to the “traditional currencies”. Some of these characteristics are: intrinsic value, legal tender, medium of exchange, how can it be used as a storage method, its structure, supply, cost of production and risk of inflation. It is obvious that neither cryptocurrencies or the US dollar have intrinsic value. However, there are several differences when it comes to the rest of them. These new cryptocurrencies are still unregulated, and that means that they do not have, yet, legal tender. Also, the US dollar can be used as a medium of exchange with any other currency, while cryptocurrencies work as a medium of exchange with the limited number of participants who also own it. While the US dollar has a public supply source, the cryptocurrencies have a private one. The cost to produce a US dollar bill is relatively low, while producing another cryptocurrency unit has an attached cost, the cost of the computer utility power, through a process called mining. Another major characteristic of cryptocurrency is the fact that they are decentralized, which means that they are not backed by any governmental authority. And last, while the US dollar or any other real currency is subject to inflation, cryptocurrencies are not. Even though they are highly volatile and their value can go “zero to hundred” in a couple of days or even hours.

With this, we can say that cryptocurrencies have four completely new characteristics when compared to real currencies: they are unregulated, they are decentralized, they are highly volatile and they are “born” through a mining process that is available to every user, which will be explain forward. When we describe cryptocurrencies as being decentralized, we mean that they are not controlled. Every currency in the world, apart from cryptocurrencies, is governed by some kind of authority. Every transaction goes through a bank, where people are charged enormous fees, and it normally takes a long time for the money to reach the recipient. Cryptocurrencies, on the other hand, are not controlled by anyone. It’s a decentralised network and it’s built on the cooperation and communication of all the people taking part in it. Because of that, even if some part of the network goes offline, transactions will still be coming through. Cryptocurrencies are also unregulated. Ever since their first appearance, cryptocurrencies are still a skeptical topic to many people. While some believe that they are the future and investing on it is a really good opportunity, a lot of people are still uncertain about trusting something that is still unregulated and is only now being adopted by the financial authorities, and not by many. Franklin (2016) states that the lack of regulation is one of the biggest issues when talking about cryptocurrencies: “One significant issue of virtual currency such as the Bitcoin is the lack of regulation and lack of bank or governmental control. Without the regulation, there is opportunity for investors, some of which are already taking advantage of opportunity, but also the risk that comes from the speculation that comes with investment around such an uncharted territory.” (Franklin, 2016: 83). The lack of currency regulation is, as much as over regulation, a burden to many. When dealing with currency and market opportunity, basic regulation is needed to control markets from taking unfair advantage of arbitrage opportunity. Varriale (2013) discussed how should a cryptocurrency be regulated because in that same year, The New York Banking watchdog issued subpoenas to twenty-two cryptocurrency companies. The biggest concern with this currency is the ease that it can be used for illegal activities due to the anonymous nature of the transactions. Drug trade and terror funding are two significant concerns.

Tu and Meredith (2015) looked at the possible consequences of unregulated cryptocurrencies, as they currently are. The authors understand that the lack of regulation can create issues, like the opportunity to foster funds transfers for illegal activities. Slay, Kim-Kwang, and Lui (2014) alert that money laundering and terrorism funding can easily take place in the cyber environment, as a result of the high levels of anonymity, low levels of detection and ease to transact. Another important characteristic of cryptocurrencies is its volatility. Ever since 2009, after the appearance of the first cryptocurrency, Bitcoin, the price had a lot of ups and downs. By being subject to so many speculation, the price of cryptocurrencies goes up and down every day, based on what people say, read and believe. From 2009 on, when Bitcoin started operating, the price has raised more than 8000%. Dibrova (2016), state “… interesting how a digitally created code that has no back-up from any central government, nor financial institution or is ensured by any commodity could ever hit a price as, for instance, 1.145 USD, in January 2013”. This concerns many investors, experts and Central Banks, due to its volatility, which leaves no suspicion about the absence of economic reasons to those. According to Coindesk4 , cryptocurrency carries a lot of uncertainties. The volatility of Bitcoin against the dollar on a Bitcoin exchange is about five to seven times the volatility of traditional foreign exchange trading. Gavin Anderson5 , a cryptocurrency enthusiast, consider that these new currencies are going to be the future, and presented us with the pros and cons of cryptocurrencies. The pros are:

• Freedom: cryptocurrencies where designed with freedom in mind, freedom from governing authorities controlling transactions, imposing feed and being in charge of people’s money;
• High portability: it should be easy to carry and use. Cryptocurrencies are completely digital, which means the money can be easily stored online, in a wallet;
• Safety and control: cryptocurrency users are able to control their transactions. No one can withdraw money from your account without you knowing and agreeing it;
• Transparent and neutral: one of the most unique aspects of cryptocurrencies, and mainly Bitcoin, is the Blockchain technology. This technology allows every single transaction, every single bit of information to be always available to everyone, which can be checked online;
• Cannot be counterfeited: one of the most popular ways of counterfeiting in the digital world is using the same money twice – the double spending situation. Due to technologies like Blockchain, this cannot be done.

The cons are:

• Legal parameters: obviously that the legal questions concerning cryptocurrencies is the most important aspect for some people to still doubt about it, and until they are not regulated, this dubious question will remain unanswered. However, there are already some countries where cryptocurrencies, or some of them, are encouraged. While in other countries they are being banned or remain outlawed;
• Level of recognition: in some countries, cryptocurrencies are perfectly legal, however some governments still do not have regulations regarding them, while others are trying to ban them;
• Volatility: probably the most concerning aspect about cryptocurrencies for those who are holding them. The price of several cryptocurrencies like Bitcoin has been up and down, going through various cycles of skyrocketing and plummeting, being referred by some agents as bubbles and busts.
• Development: the continuous development of cryptocurrencies is not a con, per se. This is referred by the author because cryptocurrencies are still evolving, and governments are trying to regulate it more and more, and when that happens, the cryptocurrencies as we know it nowadays, might change completely.

Crypto Technology

For better understanding of crypto currencies is essential to be aware of certain facts related to the field of crypto technology.Crypto technologies aretechnologies that arebased on cryptography. Cryptographyhas a longtradition in humanhistory. However, modern mathematical cryptography has been developed only over the last few decades. Public key cryptography, that will be mentioned below, was introduced for the first time in 1976 and first attempts to createa cryptocurrency weremade in thebeginning of 1980´s(Omohundro, 2014:19). Crypto-technology is a class of software systems that use cryptography. Generally, these software systems can implement a system to transfer virtual goods and at the same time they can implement complex agreements between parties. There are various kinds of virtual goods such as songs, online documents, or pieces of software. However, there are other kinds of virtual goods that might notbe that obvious such as ownership ofalmost anything, an approval, notarization or verification of almost anything or aunit of currency (Eckersley, 2004:87).There are threemain problems, relevant for thepurpose of thiswork that are addressed by crypto technologies. First of all, it is counterfeiting in other words, assurance of the parties that the original virtual good was transferred, not a copy. Secondly, it is trust. This means that the trust of the counter-party is not required to transfer the virtual goods. This is because thetransfers are verified.Last but notleast, another problemaddressed by the technology is central authority, meaning that it enables absence of such an authority in order to process transactions or maintain the ledger – there is no middleman involved (Boneh, 2015, lecture 1). All crypto-technology is underpinned by the two main ideas: Public Key Cryptography and the blockchain. The first one – public key cryptography – is a sophisticated math concept that allows an individual toencode a virtual good thatcan only be decodedby the intended recipient. Even the sender cannot decode it once the good has been encoded. In this concept there are two numbers deployed:a private key and apublic key. The second idea isthe blockchain which can be described as a special form of ledger that keeps track of evidences who holds what, and that is extremely hard to be deceitfully modified (Antonopoulos, 2014, lecture 3). Also, one of the important properties of the blockchain is its pseudo-anonymity. In the next chapters, these ideas will be described more into details.

Arguments on Cryptocurrencies in Africa

Cryptocurrencies and blockchain assets are the newest and potentially most promising new asset class. Investment returns in cryptocurrencies for 2017 year-to-date have by far outperformed traditional assets such as global stocks and bonds. The Lawnmower Blockchain Index, the premier gauge of performance for the blockchain asset class, is up +374% versus the world primary equity indices at +15.7% and +3.95% for Bonds (Bloomberg Barclays Global Aggregate Total Return Index). However, public opinion and investors’ minds on cryptocurrencies are divided and it often comes down to a philosophical and even emotional debate. This is also true about African policymakers and their official stance on cryptocurrency. The cryptocurrency-based blockchain economy is an asset-based economy, while the fractional reserve banking systems based on fiat currency, is a debt-based system. High volatility and unexplained falls, risks of hacking attacks and ransom with the subsequent sensational media headlines are reasons why many investors still shy away from cryptocurrencies and merely think of it as “magical internet money.” In a free decentralized global market where volatility is not suppressed by trillions of central bank-created quantitative easing (QE), the market becomes more volatile as it becomes more efficient, acting faster to information changes. The biggest fallacy many casual observers and some government officials have, is that they say they like blockchain, but they do not like cryptocurrencies like Bitcoin, Ether and Litecoin, etc. That argument is the same as people in 1994, before the introduction of the Internet web browser, arguing that they do not like the public censor-free Internet (it is not regulated and not “owned” by anybody etc.), but rather have a privately controlled intra-net. A private blockchain without a trustless and distributed consensus-based cryptocurrency is nothing more than a shared database or intra-net. Proponents of cryptocurrencies are of the firm belief that blockchain could soon give rise to a new era of the Internet even more disruptive and transformative than the current one. Blockchain's ability to generate unprecedented opportunities to create and trade value in society via cryptocurrencies will lead to a generational shift in the Internet's evolution, from an Internet of Information to a new generation Internet of Value. Any government that embraces cryptocurrencies is going to benefit so much by owning the money that is native to the internet. Cryptocurrencies are native to how code works. The reference implementation, Bitcoin Core, is written primarily in C++. Imagine if one country cracks down on Bitcoin and cryptocurrencies protocol. That would be the same as saying no more TCP/IP. You will be driving out innovation. The countries that did adopt TCP/IP (Transmission Control Protocol/Internet Protocol) are going to be so much better off. In a similar fashion, in this case the Internet of money, one can see the disruption potential of cryptocurrencies. Just like the Internet took out Hollywood with Netflix, Spotify took out the music business, and Google and Facebook took out advertising and media businesses, cryptocurrencies will take out the finance industry as we know it.

The Case for Cryptocurrencies in Africa

There is high potential for Africans to leapfrog some of the existing financial services, in the same way that many Africans skipped the part of owning a cumbersome and expensive landline and went straight to owning a mobile phone. In the “old” or “traditional” system, traditional bankers in suits were the miners of the old generation, getting paid in the currency of the central bank run by un-elected officials. That system is also characterised by fiat currency being mined by the fractional reserve banking system, bank bail-outs and large costs to ordinary tax payers, amid the rise of populism. The new central bankers are the cryptographers. The new owners of the financial infrastructure are the holders of the cryptocurrency coins, which is or could be everybody. While cryptocurrency has been hailed for its potential in the financial sector of the developed world, one of its greatest applications has been virtually overlooked. In nations that lack dependable economic systems or governance, digital currency may offer hope. Access to finances, security and privacy of funds, and faith in a common medium of exchange, can aid many across the African continent. Several African countries have exchanges and start-ups in the crypto space, and their businesses are recognizing the significance of cryptocurrencies in fostering crossborder trade and payment. Moreover, the infrastructure for the take-off of digital tokens is solid. Telecommunication liberalisation across the continent has enabled Internet accessibility remarkably. Figures from GSMA indicate that half of Africa’s population is subscribed to mobile telephony. Also, the statistics indicate that for the past two years, smartphone usage in the continent has doubled to reach 226 million. The new finance industry will settle on where the innovation will be for smart contracts and cryptocurrencies. It is Silicon Valley’s replacement for the old infrastructure of finance and Africa’s chance to leapfrog the old system. It will position the economies of Africa for the future of finance. With Africa not having a strong legacy system in place, as is the case with the developed world, is suddenly a great advantage. Still, too many adult people in Africa do not have access to bank accounts. This wretched situation denies countless numbers of people financial freedom. Bureaucratic tenors and economic exclusion, amongst others, have paved the way for this situation. In 2016, a study of 10 African nations with unusual inflationary ratios, indicated that South Sudan had a huge inflation rate of 295%. Egypt had the lowest rate with 12.30%. High inflation and weak African currencies allow Bitcoin and cryptocurrencies to offer African consumers a stable store of value and an inflation hedge. African nations have lagged in traditional banking, but the phenomenal success of Kenya’s Safaricom M-Pesa shows that this is and can be an advantage in the coming blockchain economy. Safaricom’s success has shown that Microsoft Founder Bill Gates’ adage of “Banking as a function is necessary, Banks are NOT”, holds very true. What Safaricom’s M-Pesa achieved on a country scale, cryptocurrency can achieve on a pan-African scale. Cryptocurrency remittance services in Africa have sprung up as an alternative to Western Union, and international organizations have employed blockchain technology to assist refugees. Still, it appears that many of the communities most desperate for this innovation have yet to embrace the monetary haven. Africa’s wide adoption of cryptocurrency would further progress the move to the democratization of financial services. Kazakhstan became the second country in the world, after Japan, to recognize the need for the development of the cryptocurrency market system at governmental level. The development of the digital currency market, based on the Astana International Financial Centre, is the first step towards the creation of a fully-fledged ecosystem for the digital economy. Forward-looking governments in Africa should try to emulate the developments in Japan and Kazakhstan.

Cryptocurrency In Africa And Other Continents Of The World

While the legislators of most countries are trying not to oppose the new wave of Bitcoin because of its future potentials, the absence of Government control of the supply of this virtual currency raises a question of whether or not it has emerged as a disruption to the world's financial order (CPIM, 2015). The report of illicit transactions, promotion of terrorism financing and other potential uncertainties surrounding the future of cryptocurrency constitute another bone of contention among law makers. Countries like Russia, Nepal, Algeria, Colombia, Bangladesh and Argentina are among those that had declared Bitcoin as illegal and some of these countries would jail anyone using the virtual currency under anti-money laundering laws (Belomyttseva, 2015).

At the moment, no nation across the globe has a clear, leading voice as to how, when and what exactly should be the response to this disruptive surge (Belomyttseva, 2015). Bitcoin, by its unique features is seen to be operating in a legal grey area (Grinberg, 2011). That is why different countries have demonstrated different disposition and reactions towards legitimizing its usage. The scary threat to legislators across nations is the speed and high propensity with which an increasing number of the current generation of technologically inclined youths and curious adults embrace Bitcoin which is the leading variant in the crypto world and most recognized and traded among others (Benavides & Verme, 2014). Again, there is the realization of the potential for exponential growth and the possibility of increased adoption of Bitcoin by individuals and businesses. He (2018), CPIM (2015) and Prasad (2018) indicated that there is also evidence of the possibility for the technologically advanced countries to leverage on the loopholes of Bitcoins by harnessing resources to correct the defects and to come up with local and superior model that could ensure financial sanctity and offers protection for the citizens.

There had been debate on the attitude of the Government of the United State of America on the issuance of private money that no special action was taken against it and the government did not consider it as breach or unlawful activities (Godlov, 2014). So, it becomes difficult for the USA to oppose the introduction of cryptocurrency (Godlov, 2014). However, Mexico proposed to regulate it by FinTechLaw while the Bank of Jamaica serves as a signal to general framework and Argentina governs Bitcoin by the rules established for the sale of goods under the civil code. New York State Department of Financial Services (2015) enacted “BitLicense” regulation in 2015 which expressly prohibited BitLicensees from “using assets”, including cryptocurrency on behalf of another person. The regulation further required BitLicensees to continue to maintain records of accounts and transactions for at least five years, after which the property (cryptocurrency) must have been deemed to be abandoned (Hansen & Boehm, 2017). This regulation is reckoned to be the most comprehensive to date.

While many European countries including Austria, Ukraine, Croatia, Hungary, Ukraine, Italy, Czech Republic, Malta Germany accept Bitcoin as legal and some including Slovenia, Finland, Australia and Norway subject Bitcoin to tax (Belomyttseva, 2015), they have not developed any comprehensive framework for its operation within the continent. It is noted that, Belarus, Sweden, France and Luxembourg have all proposed plan for the development of alternative cryptocurrency (Bech & Garratt, 2017). Spain applies barter law to Bitcoin transactions while United Kingdom has proposed a code of conduct that includes the provision of Anti-Money Laundering and extra security measures (Bech & Garratt, 2017).

Among the Asian countries that endorse the use of Bitcoin are United Arab Emirates with the declaration of Dubai Multi Commodities Centre (DMCC) as the only Free Zone in the Middle East having a government-issued license to trade in crypto-commodities. The Central Bank of the Philippines also regulates cryptocurrency exchanges under Circular 944. Thailand issued a comprehensive edict prohibiting business transaction in Bitcoin in its domestic market (Hughes & Middlebrook, 2015). In some other Asian counties including Saudi Arabia, the use of Bicoin ATM machines are allowed (Everette, 2017).

Apart from few African countries like Algeria that categorically ban the use of Bitcoin, most other African countries only warn against the risk associated with the it, but do not expressly ban the use of Bitcoin. Zimbabwe endorsed the use of BitMari which is another type of cryptocurrency but skeptical about Bitcoin (FSD, 2017). Morocco has called for a framework for consumer protection (The Law Library of Congress, 2018).

Practices and Challenges of Cryptocurrency in Africa

Large scale adoption in Africa, however, is still slow. Awareness, education and user experience are some reasons why the take-up is taking time. Switzerland and Singapore are both successful countries with strong currencies, and as such have nothing to lose by embracing fintech and cryptocurrency. Countries with high inflation and currency controls in place seem to be paranoid about the rise of cryptocurrency. However, similar to the Internet, it is difficult to ban and/or control. Over the past 12 months, the African market has seen the emergence of more than 10 Bitcoin exchanges seeking to provide cheap and efficient trading services to African consumers. Some exchanges have expanded their services and have established an office in Africa to serve the new market and observe the demand of Bitcoin in several African countries. In East Africa, local innovators have introduced cryptocurrency systems to support cross-border transactions, as exemplified by initiatives like BitPesa. In South Africa, cryptocurrencies are becoming particularly popular. In Nigeria, local traders and activists believe this new money presents an opportunity to democratize the economy. This is propelled by the fact that people in Nigeria have been failed by conventional money. The Central Bank of Nigeria, which oversees an inflation rate of 14%, making it the 6th highest inflation rate in the world, recently announced that they cannot stop Bitcoin. Their statement read: “Central bank cannot control or regulate bitcoin. Central bank cannot control or regulate blockchain. Just the same way no one is going to control or regulate the Internet. We don’t own it.” This is very sensible and the correct and forwardlooking approach. While several exchanges offer conventional payment methods, such as bank transfers and account top-ups, a few platforms, like BTCGhana, provide local users and the underbanked population simpler methods of purchasing and selling Bitcoin. On the BTCGhana platform, users can make Bitcoin purchases through established exchange platforms and can, within minutes, send the payment to local remittance platforms, including TigoCash, Airtel Money and MTN Mobile Money. This service allows African users to pick up cash at local remittance outlets with ease, without having to deal with complex withdrawal and deposit methods involving bank accounts and credit cards, which are difficult and timeconsuming to obtain.

Cryptocurrency in Nigeria

Considering the experience of Nigeria, Ponzi schemes appeared to have gained popularity among the Nigerian citizens prior the introduction of Bitcoin. A Ponzi scheme according to the U.S. SEC (2018) is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors”. Ponzi schemes have been described as financial frauds under the promise of high profits by Bartoletti et al. (2017). Vasek and Moore (2015) conducted an empirical study on Bitcoin-based scams and reported that 21% of 192 cases of Ponzi schemes, mining scams, scam wallets and fraudulent exchanges were associated with Bitcoin addresses. Likewise, Gilbert and Loi (2018) provided the cases of theft involving Bitcoin during years 2013 to 2015 with the names the companies affected and the amount lost. During year 2017, the Federal Government has made official release twice, intimating citizens about its non-readiness to support the use of Bitcoin and warning individuals, corporate bodies and Banks not to get involved in Bitcoin transactions. This warning became imperative because of the devastating effects of the various Ponzi schemes in Nigeria which suddenly collapsed towards the end of year 2016 up to the first quarter of 2017 in which case, many Nigerians lost their fortunes (Bartoletti et al., 2017).

This study was undertaken to ascertain the view of Nigerian Professional Accountants towards legislating cryptocurrency in Nigeria. It also examined the ostensible benefits from the legislation of cryptocurrency. It was hinged on Chartalism theory which states that the origin of money is located outside private markets and rests within the complex web of social (debt) relations where the state has a principal role. This implies that the state both denominates and institutes the role of money (currency) as a unit of account prior its role as a means of payment and a medium of exchange. Only the government has the power to levy taxes and to declare what will be accepted at pay offices for extinguishing debt to the state. Ingham (2000) maintained that the essence of state as the final authority does not lie in the ability to create laws or to print money, but in the ability of the government to create ‘the promise of last resort. With the introduction of cryptocurrency, the Central Bank must still be in place to guarantee monetary stability and political legitimacy with the introduction of the new electronic form of legal tender (cryptocurrency) with regard to the soundness of monetary hierarchy of the issuing institution or state (Miller et al., 2002). In a nutshell, the state determines what to accept and what not to accept as a medium of exchange. Therefore, the power to either abate or legislate the use of cryptocurrency by citizens of any country resides with the state.

Bitcoin

Bitcoin was generally believed to be the product of an unknown inventor with pseudonymous name known as Nakamoto. However, before the white paper of Nakamoto was released in 2008, there had been earlier propositions by various writers regarding the efficiency role the market could play in the creation and control of money instead of leaving it in the hand of the government and the Banking system (Rothbard, 2010). Chaum and Naor (1988) elaborated and expanded the work of Chaum (1983), a foremost researcher in Cryptocurrency, identified and addressed the deficiencies relating to anonymity and double spending attack protection, other contributors to the improvement of the template for cryptocurrency include Haber and Stornetta (1997), Back (2002) and (Lansky, 2016) among others.

Miller et al. (2002) had aptly spelt out the plan for cryptocurrency, its desirable attributes and the challenges that would characterise the currency at its introductory stage. The authors further revealed that its features would include, inter alia, efficient global economies and societies on one side; and increased anti-competitive behaviour, exclusion and inequality, economic volatility; criminal activity; and debilitated macroeconomic policy on the other hand. Although, Bitcoin was the first-known coin in the world of cryptocurrency (Nakamoto, 2008), there have been several other virtual currencies including litecoin, namecoin, quackcoin, peercoin, anoncoin, zerocoin among others since the introduction of Bitcoin (Gaudamuz & Marden, 2015; Bhosale & Mavale, 2018). They also operate on technology similar to Bitcoin (Hameed & Farooq 2016).

Raskin and Yermack (2016) noted that Bitcoin was strategically launched by its developer(s) at the climax of global economic meltdown when the Central Bank and the State with all the regular policies, were almost being seen as incapable and investors no longer trust in the ability of the government to sustain the economy (Roth, 2009; Chris et al., 2015). As such, many believed that Nakamoto surfaced to play the role of universal liberator from the scourge of economic crunch and from the monopoly power of the Government (He, 2018). This somewhat indisputable claim was evidenced by the encoded text, “Chancellor on brink of second bailout for banks” dated 03/Jan/2009 which accompanied the first brand of the coin mined by the anonymous owner of Bitcoin (Raskin & Yermack, 2016). Hauxley (2018) claimed that Bitcoin is “unlike anything we have ever seen, it’ll change the world.” The world cannot be static and change is inevitable. More so that the internet had turned the world into a global village and being information age, it is not out of context to experience another global-shaking change including the introduction of cryptocurrency.

Despite the fact that Bitcoin seems to enjoy wild adoption, the concern is that the Bitcoin technology seemed not to be fully or perfectly developed to maturity before its lunch. Nakamoto (2008) acknowledged the tragic effect of conferring the strategic decision of the custodian and beneficiary of investment gain and transaction control to greedy attacker(s) who by technical expertise could choose to defraud people “stealing back his payments by undermining the system and be mindless of the validity of his wealth.” This in-built loophole in the system of coin mining became enough incentive for promoting fraudsters, violating rules at will, invariably populating defiance in the society and defrauding the innocent and inexperienced participants.

At the moment, cryptocurrency technology does not detect any difference between the rightful owner of an account and a successful attacker because crypto private key is accessible to attackers who can conveniently calculate the account address of the rightful owner and gain immediate control (Hameed & Farooq, 2016; Zheng et al., 2017). Worst still, the rightful owners cannot reverse the transactions already executed by crypto attacker, not even with the help of any law court (Lansky, 2018).

Many countries have classified Bitcoin differently based on their evaluation of its characteristics (Godlov, 2014). European Central Bank (2012) described cryptocurrencies as resembling real assets or commodities more than currencies at present, but argued that their role could expand in the future to include functioning as medium of exchange. In the United State of America alone, it has been classified as convertible decentralized virtual currency by US Treasury in 2013; as commodity by the Commodity Futures Trading Commission in 2015; as property by US Internal Revenue Service and as Fund by Supreme Court of the United States in 2018. Classification by other countries include intangible asset by South Africa; money (but not legal currency) by Argentina; means of payment to conventional currency by Canada and Japan (Prasad, 2018); commodity by Kyrgyzstan, United Arab Emirates; virtual commodity by Hong Kong; taxable asset by Israel and Norway and payment tool by Indonesia. Lack of consensus about what Bitcoin really is complicates the decision for its legislation (Bech & Garratt, 2017).

Attribute Of Bitcoin

Bitcoin possesses certain attributes that may be considered attractive to users for its adoption. At the same times, some the attributes also pose challenges to users as well as lawmakers. This study reviews four of such features which are considered as most relevant to this research. They include anonymity; low service charge; international acceptance and lastly, lack of central control.

Anonymity

The concept of anonymity implies that transacting parties do not know the real identity of each other. This feature of anonymity most times are reckoned as strength of the Bitcoin technology. Anonymity complicates the possibility of identifying individuals who engage in illegal transactions and other illicit activities (Zamani & Babatsikos, 2017). However, individuals with a single wallet address for various transactions stand the risk of having their details tracked down by smart attacker who can swiftly identify the user’s alphanumeric keys. It could be said that the participants duly recognize the risks and are willing (by their signature) to totally lose out in the event of sudden attack. In the occasion of death of a crypto account owner, his wealth automatically goes into extinction. Whereas, in the traditional banking system, allowance exists for next of kin to claim the benefits of the deceased because anonymity implies that no other person except the owner of the crypto account could access and extract his details from the account data. With the knowledge of the risks, the participants who invest heavily and frequently could be suspected to be potential attackers or those who engage in illicit transactions, ceteris paribus (Meiklejohn et al., 2016). They invest either to attack or to be attacked. Further research can be carried out on this. Although, the regime of Know Your Customer could help, Carlisle (2017) posits that it weakens anonymity which innocent users might seek to enjoy.

Lower Transaction Cost

Operating cryptocurrency account is believed to be cheap because the services of experts like bankers who act as intermediaries, are not required to verify transactions as in the traditional business (Dierksmeier & Seele, 2016). Although, transactional costs may appear low but in actual fact, the miners are paid substantial amount for the process of mining. Again, it has been argued that the lower cost of transactions may not be sustainable in the future.

International Acceptance

This attribute of Bitcoin stemmed from the fact that Bitcoin could promote a cashless environment and overcome all the limitations posed by the use of cash. Being an online-based transaction which could be easily accessed by anyone, this innovation promises to be less strenuous, allowing any unit of transaction, with no territorial boundary. European Union (2012) viewed a unit of Bitcoin as being divisible to eight decimal places and can be used in any kind of transaction irrespective of the magnitude. This is where Bitcoin differs again from other forms of currencies. These features present cryptocurrency as very attractive to users. However, IMF (2016) refuted the claim that Bitcoin enjoys universal acceptance as a medium of exchange. This is because, certain nations have publicly declared the use of cryptocurrency illegal and would be ready to prosecute anyone that contravenes such policy (The Law Library of Congress, 2018). Other features “cum benefits” that could make the use of cryptocurrency attractive includes foreign payments and payments in countries with high inflation rate (He, 2018). Even, though it seems to gain attraction from many users, no country had legislated its use thus far.

Lack of Central Authority

Lack of central authority is an in-built feature of Bitcoin Technology which connotes that there is no single administrator or an entity particularly in charge of the administration of cryptocurrency. All users are independent of one another. Although, the account details of transactions of each participant is within the public domain, yet, there is no responsible authority for the coordination of its activities. Cryptocurrency accounts maintenance contains an inbuilt, self-regulating mechanism that is similar to internal control mechanism found in client-oriented organisations (IPA, 2018). Transactions are chronologically dependent on each other by virtue of the cryptographic hash of the preceding block contained in the subsequent block. It was launched by anonymous developer(s) and patronized by anonymous users. FATF (2016); Meiklejohn et al. (2016) & Zamani and Babatsikos (2017) noted the difficulty of identifying, locating and holding any individual or entity liable by law enforcement agents for investigative purpose since there is no traceable central administrator in charge of the functionality of Bitcoin. This feature of Bitcoin appears very risky for investors in case of any unforeseen contingencies. This accounts for one of the main reason why no country is eager to legislate its use (Godlov, 2014). The problem of hoarding of currency by the wealthy few for speculative reason could also throw the economy into a serious mess (Gaudamuz & Marden, 2015). This problem can become worse, in a case which is similar to Bitcoin where there is no central authority.

2.2 THEORETICAL FRAMEWORK

Mises Regression Theorem

The regression theorem assumes that all money must ultimately derive their purchasing power from a historical tie to a commodity that was valued in a state of barter. The theory of the value of money is able to trace the objective exchange value of money only to that point where it is no longer the value of money but just the value of a commodity (Jeffrey, 2014). In this way one can continually go further and further back and must eventually get to a point where one can longer find any component in the objective exchange value of money which emanates from valuations based on the function of money as a medium of exchange. At this point, the value of money is nothing other than the value of an object that is useful in some other way than as money. Mises solved this circularity through the regression theorem. Mises further identified that people expect future purchasing power based upon current and previously observed purchasing powers. For the regression theorem to work, a medium of exchange must already have the attributes necessary for a medium of exchange, having a price and be accepted on the market.

2.3 CHAPTER SUMMARY

In this review the researcher has sampled the opinions and views of several authors and scholars on cryptocurrencies, its characteristics and use(practice) in Africa. The works of scholars who conducted empirical studies have been reviewed also. The chapter has made clear the relevant literature.