The rise of cryptocurrencies has revolutionized financial transactions and investment strategies globally. However, as the industry expands, regulatory bodies face the daunting task of ensuring compliance with financial laws and combating illicit activities.
A recent report by the Financial Action Task Force (FATF) an independent international organization that creates and advocates policies to safeguard the global financial system from money laundering, terrorist financing, and the funding of weapons of mass destruction. FATF highlights a significant challenge: 97% of African countries are struggling with cryptocurrency compliance.
Cryptocurrencies, such as Bitcoin and Ethereum, offer numerous benefits, including decentralization, security, and accessibility. However, they also pose regulatory challenges due to their anonymous nature and cross-border capabilities. The FATF has raised concerns about the difficulty African countries face in regulating digital currencies.
The FATF’s report underscores that while cryptocurrencies can enhance financial inclusion and innovation, their lack of oversight makes them susceptible to misuse for illegal activities, including money laundering and terrorist financing. As a result, regulatory frameworks across Africa are struggling to keep pace with the rapid evolution of the crypto industry.
Nigeria, Africa’s largest economy, has experienced significant issues with cryptocurrency regulation. Despite the Central Bank of Nigeria’s (CBN) efforts to curb cryptocurrency transactions through banking restrictions, the use of digital currencies remains widespread.
In 2021, the CBN prohibited financial institutions from facilitating cryptocurrency transactions, aiming to address concerns about financial stability and illicit activities. However, this move led to increased reliance on peer-to-peer trading platforms, complicating regulatory enforcement.
The FATF’s report highlights that Nigeria’s struggle with compliance stems from its rapid adoption of cryptocurrencies and the need for a comprehensive regulatory framework that balances innovation with oversight
South Africa has emerged as a major player in the African cryptocurrency market, yet it faces its own compliance issues. The Financial Sector Conduct Authority (FSCA) has issued warnings about the risks associated with cryptocurrencies but lacks a robust regulatory framework for digital assets. The absence of clear guidelines has led to confusion among investors and difficulty in enforcing AML and CFT measures.
South Africa’s challenges illustrate the broader issue of regulatory gaps across the continent, where varying levels of awareness and infrastructure contribute to the struggle to manage cryptocurrency activities effectively
“Low effectiveness often occurs because governments have not yet had time to implement policies and co-ordinate with public and non-public bodies to respond effectively to their risks1 . Adoption of new risk assessments shows the clear impact of the FATF’s assessment process.
It also has demonstrated that many countries are in the initial stages of developing comprehensive, risk-based AML/CFT/CPF frameworks. Countries must continue to share up-to date national and other risk assessments as widely as possible with relevant stakeholders. Prevention and supervision, “the report said.
Kenya is another example where cryptocurrency regulation is in its nascent stages. While the country has shown interest in leveraging blockchain technology for financial inclusion, regulatory oversight remains limited. The Central Bank of Kenya (CBK) has expressed concerns about the risks associated with cryptocurrencies but has yet to implement comprehensive regulations.
The FATF’s report emphasizes that Kenya’s difficulties reflect a common challenge across African nations—how to foster innovation while ensuring that digital currencies do not facilitate financial crimes.
According to this report “Nearly all (97%) of 120 assessed countries have low to moderate effectiveness ratings for preventing money laundering and terrorist financing in the private sector. In particular, the non-financial sector performs poorly in terms of risk awareness and applying preventive measures.
In general, private sector entities need a change of culture in applying a true risk-based approach to conduct customer due diligence, keep records, and file suspicious transaction reports .”
Countries need to make substantial improvements to their criminal justice systems by enhancing specialized expertise, focusing on large-scale money laundering operations, and targeting terrorist financing networks based on identified risks. They should also implement penalties that are both proportional and deterrent.
It is essential for the FATF to take steps to address deficiencies in asset recovery identified during national evaluations and support international efforts to boost the recovery of criminal proceeds. The FATF members have committed to leading global initiatives to strengthen asset recovery frameworks and regional networks that facilitate cross-border asset recovery and repatriation.
This effort aims to create a robust system that removes criminal profits, eradicates criminal activities, and safeguards the financial system. Additionally, the FATF has recently decided to ban the establishment of new physical bearer shares and to enhance disclosure requirements.
The FATF’s report sheds light on the significant compliance challenges faced by 97% of African countries regarding cryptocurrencies. As digital currencies continue to evolve, African nations must prioritize the development of comprehensive and harmonized regulatory frameworks.
By addressing these compliance issues, countries can harness the benefits of cryptocurrencies while safeguarding their financial systems from misuse. Collaborative efforts and international support will be crucial in overcoming these challenges and fostering a secure and inclusive digital financial environment in Africa.