Nigerians Are Using An Old Approach To Beat Bitcoin Scams

bitcoin scams

Bitcoin Mania Created by a Ponzi Scheme

It was once said that opportunity often comes disguised in the form of misfortune. Though it is one of the biggest cryptocurrency hotbeds on the planet, Nigeria’s bitcoin mania actually took off because of an infamous Ponzi scheme that roped in millions of Nigerians from late 2015 to the end of 2016.

The Mavrodi Mondial Moneybox (MMM) scam, which first started in Russia and lasted as long as 30 years, promised investors a 30% return in as little as 30 days. When the Nigerian government started cracking down on accounts linked with the scheme, MMM operators were able to cut out the banks and started to require investors to use bitcoins. At the end of 2016, MMM suspended its payouts to investors, causing an estimated three million people in Nigeria to lose their money.

But out of all that chaos, something fascinating happened: people realized that bitcoin was just as valuable as money — that bitcoin is the future.

According to Lucky Uwakwe, co-founder of Blockchain Solutions Ltd., a cryptocurrency firm in Lagos:

“It was MMM that made Nigerians understand how Bitcoin worked.”

Today, Nigerians are trading about $4.7 million worth of bitcoin a week, up from about $300,000 per week a year ago. This number puts Nigeria at No. 23 globally, comparable to the volume of activity in Chinese yuan or Indian rupees.

“The growth has been crazy,” said David Ajala, who runs NairaEx, one of about a dozen digital currency exchanges in Nigeria. “It took us two years to get 10,000 customers. Within the last year, we’ve added 90,000.”

What’s Behind Bitcoin’s Growth in Nigeria

Because of Nigeria’s high fraud rates, online sellers do not process payments from Nigerian credit cards. This is why bitcoin has become an attractive option for consumers there. With bitcoin, there aren’t any costly chargebacks, and on the basis of transaction origin, it can’t be blocked. The majority of Nigerians keep it as an alternative asset class by using it as a store of value.

In addition, as many emerging market currencies are struggling against the U.S. dollar, investors began using bitcoin as a hedge against the local currency depreciation.

Bitcoin Scams are Prevalent in Nigeria

MMM was just one of the many scams to flood a nation that’s notorious for criminal activities of this sort. With bitcoin quickly gaining popularity, the rise of scams involving the cryptocurrency was inevitable. Phony traders have inundated Nigeria’s cryptocurrency exchanges, messaging apps, and even the streets of every city in Nigeria, pledging fast and guaranteed returns to civilians and disappearing once they’ve taken their money.

“A lot of people have had their fingers burned,” said Adeolu Fadele, founder of the Cryptographic Development Initiative of Nigeria, a group that aims to educate regulators and the public about digital currency.

Most of these scams follow the same pattern: a potential victim would receive a message from a supposedly beleaguered Nigerian prince, and the target is asked to wire over money in exchange for bitcoin. In some cases, the scammer uses the ID of a real dealer and creates a trading profile on a local exchange that’s good enough to pass a cursory background check, a technique known as cloning. Others will make an offer not of bitcoin, but of “billion coin” or some other non-existent cryptocurrency.

“Everybody I know has been scammed in one way or another,” says Bashir Aminu, a digital-security expert and bitcoin enthusiast in Lagos.

How Nigerians are Beating the Bitcoin Scams

Like in any other Ponzi scheme, the early investors in Nigeria’s bitcoin scams get paid with the money coming from subsequent investors. Since this kind of manoeuvre relies on new sign-ups, the scheme would collapse if no new investors are drawn in.

To combat these scams involving something that’s not properly regulated, Nigeria has started developing informal groups of traders and follow an old-school approach to verify transactions.

For instance, after seeing his friends lose thousands of dollars to scammers, bitcoin fanatic Aminu set up an informal exchange on the messaging app Telegram that would allow him and his friends to trade among themselves. Anyone else who seeks to join the group would need to go through a review procedure, where Aminu would look at their ID and banking documents and compare the papers in face-to-face meetings. Sometimes, he would even act as a trusted broker, holding a buyer’s money in escrow until the seller came through with the bitcoin transfer.

According to Aminu, his group has grown to almost 800 members over the past year, and there are dozens of similar networks out there. Some networks arrange face-to-face meetings in homes, the backs of small shops, and other private places, where a buyer hands over cash and watches the seller make the bitcoin transfer over a smartphone.

This kind of facilitation is pretty similar to those black market exchanges taking place all over the streets of Nigeria. As these informal networks grow and multiply, they would become increasingly populated by people who trade digital currency as a full-time occupation. Because of all of this informal trading, the size of Nigeria’s market is probably even bigger than what’s being reported.

The emergence of informal networks in Nigeria has fortified the value of not just bitcoin but cryptocurrency in general to Nigerian investors, especially as the local currency continues to undergo wild swings.

“For many, the potential profit is too good to pass up,” said Smart Oluwadola, a cryptocurrency peddler in Kano, a desert city in northern Nigeria. In August, a friend persuaded him to ditch a job hawking health supplements for a suspiciously pyramidal “business club” and buy a couple hundred dollars’ worth of bitcoin. His investment is now worth thousands of dollars.

“If you don’t take a risk, you can’t get anything,” said Oluwadola. “And if it’s going to be the future of currency, then you better start now.”

As those living in any politically and economically unstable country could tell you, anything that leads to money entails its fair share of deceptions and unlawfulness that the government would rather turn a blind eye to, let alone fix. The cryptocurrency enthusiasts in Nigeria are doing everything possible to make sure this market is clean and absent of fraudulence — even it means following the most primitive and uninspiring method possible.

Featured Image: Depositphotos/© PromesaStudio

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