On the 17th August 2021, CBN took action against 4 extremely popular Fintech companies by freezing the accounts they hold with a number of commercial and microfinance banks. CBN seems to be continuing in its ‘war’ against Fintechs and laying the blame for the terrible state of the Naira on them. This post considers whether this, and prior action taken by CBN, is justified and what we as investors can or should learn from what is happening to safeguard our wealth.
Illegal foreign exchange activity
Foreign exchange and the state of the naira continues to be the bug bear of the Central bank (and all of us) as the devaluation slide continues. Dollars were on offer at BDCs / parallel market today for ₦520 and the motion filed states that the activities of the Fintechs are contributory. Their activities are apparently in contravention of a 2015 CBN circular which lists ‘Eurobond/Foreign Currency Bond/ Share Purchases’ as items that are ‘not valid for foreign exchange in the Nigerian foreign exchange markets’.
The ‘illegality’ of their activity seems to be linked to their sourcing of dollars from formal / informal channels and the use of those dollars for cryptocurrency investments / activity which, as we know, has been banned in Nigeria. CBN also seems to be saying that no foreign exchange purchased in Nigerian markets should be used for the purchase of foreign investments assets. This is a really worrying sign that we should all take note of.
Many financial analysts and commentators have addressed the obvious point that the current value of the naira is a function of supply side shortages and to make a meaningful difference, that is where the focus of CBN should be. Blaming fintech companies that are providing the populace with products that they need is a very visible but ultimately ineffective way of making any difference.
Asset Management activity without license.
The Securities and Exchange Commission, the regulator of the capital markets and capital market operators, is not named as a co-plaintiff but this charge is firmly in their territory. Asset management is a specialised activity that requires a license and the charge is that Risevest has not been doing so.
What does Risevest actually do?
Their website states that Risevest operates under a cooperative license and holds non-Nigerian investments with entities that are regulated in the jurisdictions in which they operate. The asset management activity that they are accused of is linked to this – they are essentially pooling money from the public and making investments, both of which are regulated activities that other players in the market, who do the same thing, currently have to obtain a license for. Some Fintechs partner with an asset manager to get around this, or get a Fintech license themselves like Chaka does. Risevest does not appear to have done this and goes so far as to use the brand ‘Rise Capital’ on its website despite not being regulated by the Capital markets regulator.
Tip: When selecting a Fintech or other company to to invest your money with / through make sure that they are licensed for the activity that they carry out in all of the jurisdictions that they are carrying it out in. This approach may not be completely foolproof though – remember earlier in the year when Chaka was restricted from selling or advertising stocks even though they had partnered with a local securities firm? That activity is also regulated so the Fintech itself has to ensure that their partner is in full compliance at all times otherwise it may affect their business.
A key goal of all regulators is consumer protection and the typical way in which they go about this is to exert as much control over the market and players as possible. For the Fintechs whilst difficult, prior engagement with regulators to clarify your activities is advised rather than having to explain your self and risk your business being publicly named, shamed and curtailed afterwards.
Tech or Financial services companies?
CBN gave an additional clue to its concerns when it listed, in detail, the business objects of a couple of the companies, in the motion. Business objects of a company are the activities which it may lawfully carry out. Whilst all 4 identify as tech companies with objects including software development, technological and business consultancy etc, nowhere in their objects are activities such as asset management or other financial services stated.
This lack of alignment between the stated objects and the reality of their businesses and the fact that a number of the companies are registered outside Nigeria is certainly also part of the regulatory beef.
Cryptocurrency transactions
In February of this year the CBN issued a circular advising that transactions in cryptocurrency were banned. Risevest’s account activity showed that outflows from one of their accounts went to a cryptocurrency trading company ‘for the purchase of cryptocurrency’ which is in contravention of the CBN circular.
The last 12 months have shown us that CBN shows no mercy to those involved in cryptocurrency and if this is the case it shows a lack of adherence to the rules by the company as well as the bank that allowed / facilitated the transaction. The dates of the transaction(s) were not stated but certainly if they occurred after the CBN circular the naming and shaming appears justified.
What next?
The ex-parte nature of the action shows that CBN is inclined to act decisively first and talk later. All 4 companies have an opportunity to iron things out with the regulator and hopefully find a way forward that allows them to continue to build their businesses. We as consumers need the Fintechs and other Technology enabled and driven companies to push boundaries and disrupt economies in order to discover new markets and make things better but in this environment, and to be fair globally, the regulatory authorities have to also be satisfied given the power that they hold.
What should you do next?
A wise person once said that worrying never solved anything. This is true for this situation but tough to avoid if you hold money or assets with any of these entities. I personally don’t have an account with any of the 4 but if if did, here is what I would do.
- Contact them to get assurance and answers to key questions: Is my money safe? What happened, why did you not see this coming? What are you going to do to prevent this happening again? I would also ask what plans they have to get regulated in future. I realise that the questions are a bit OTT but I would still try! Risevest and Chaka have come out to reassure their clients that their money and assets are safe, this is a good step and hopefully they are backing this up with talks with the CBN to forge a way forward.
- Hold on investing more money with them. If I’m able to get clarity and concrete answers (with evidence) then i’d go ahead. If not, I would follow the advice that I give for an investment that I don’t understand and take my money elsewhere. Be ready to test whether their liquidation / redemption procedures work and you can really get your hands on our cash.
- Hold off on opening a new account and look for alternatives. It is an imperative to find investment outlets that allow you access to markets outside of Nigeria so that you can conserve and grow your wealth in a more stable environment and currency. If you have foreign accounts, consider moving them o an overseas provider if this is an option for you. Alternatively stick to Firms that are regulated directly by the SEC or CBN since these should have fewer issues.
- Keep investing!
As always, thank you for listening!