Blockchain, Cryptos & Web3

FTX in Africa

This post is an extended version, translated to English, of the one I did in French on LinkedIn on November 12, 2022, analysing the potential impact of FTX in Africa.

Following the events of mid-November 2022 with the largely predictable bankruptcy of FTX and Alameda, 2 sides of the same (crypto token) coin, I started to check the potential impact on the African continent, and the situation is likely to be very problematic, very quickly, for all those who have been ensnared in the vast crypto-exchange scam.

First of all, we have to ask ourselves why all the “cryptobros” have rushed to Africa since end of 2021, when Bitcoin was at its highest (see also my posts Bitcoin will save Africa?! and AfroBitcoin conference 2022).

The answer is simple: most Ponzi-based schemes offering digital assets (coins, NFTs…) need a permanent incoming flow of liquidity to allow the whales to get rich (from Pump & Dump manipulation to pure Rug Pull).
When the Western markets started to dry up with willing marks and other “greater fools”, it was necessary to look elsewhere for “hard” money. The African continent has thus become the Wild West for these Wild Cat “private bankers“, as it was still largely underused as a cash cow.
The (young) Africans, eager for beautiful promises around “Cryptos, Freedom and Sovereignty” (see here, in French) and easy money like everyone else in the world, were more than receptive. Especially since pyramid schemes have always worked very well (MLM and others) in most African countries with some local “innovations” on a regular basis.

And so, everyone put the financial and human means to propose “tailor-made solutions”, wrapped in academies, masterclasses and other field operations, on campuses or even in the countryside, with the same motto: cryptos will help to bank the poor and excluded populations, aka “Bank the Unbanked”. So offers have blossomed in all directions, either under the brand name (Binance for example), via a network of subsidiaries, or via investment in “FinTech” startups (Coinbase, FTX…).

FTX in Africa - World Economic Forum

All this, of course, with the support of institutions like the World Economic Forum and many well-known others…

Let’s get back to FTX

I am not going to repeat what has been happening since November, nor the history of the activities of Sam Bankman-Fried, “the financial genius”, compared to JP Morgan, who was to change the world, according to numerous laudatory articles in the international press.

To put it simply, it “suddenly” appeared that SBF was using the funds deposited by its “customers” for many other purposes, and that at some point the “market” saw that the king was naked. It just took a few days for everything to fall apart. While many analysts are looking at what is happening between the US and the Bahamas, where FTX HQ is based, it is important to look at what this means on the African continent as well.

In the list of companies that appear in the petition filed in the U.S. Bankruptcy Court for the District of Delaware for relief under Title 11 of the United States Code, there are quite a few (and probably the selection below is far from exhaustive) on the African continent:

  • Alameda Research Yankari Ltd. (Nigeria)
  • B for Transfer Egypt
  • B Payment Services Nigeria
  • B Transfer Services Uganda
  • BitPesa Kenya Ltd.
  • BitPesa RDC SARL
  • BitPesa Senegal Ltd. – Based in Dakar, Senegal, Bitpesa Senegal Suarl is a Private Limited Company that was established in 2017. The organisation operates in the Services sector.
  • BitPesa South Africa
  • BitPesa Tanzania Ltd.
  • BitPesa Uganda Ltd.
  • BT Payment Services Ghana
  • BT Payment Services South Africa
  • BT Payments Uganda
  • BT Pesa Nigeria Ltd.
  • BTC Africa S.A.
  • BTLS Limited Tanzania
  • Exchange 4Free South Africa Br.
  • FTX EMEA Ltd.
  • FTX Zuma Ltd. (Nigeria)

When digging, for example, on the Terms of Service page for BitPesa™ Services, one can read the following “This Agreement is a contract between you and BTC Africa S.A.”

Then, there’s more information: “BTC Africa S.A is a company having its registered office at 50 Val Fleuri in Luxembourg, L-2520, in the Grand Duchy of Luxembourg and registered with the number B 211.963. BTC Africa S.A. is a registered PSD agent of B Transfer Service Limited, a Payments Services Provider registered in the United Kingdom and regulated by the UK Financial Conduct Authority and located at 1-3 Brixton Road, London SW9 6DE in the United Kingdom.”

The complex ramifications between all of these entities now appear clearly, and shows how complex it will be for anyone who sent funds via one of the publicly accessible platforms, to attempt to recover anything.

FTX in Africa - Twitter header

2 sides of the predatory front

In Africa, FTX/Alameda, like Binance, Coinbase and many others, have spared no effort to conquer customers

For the last few months, FTX has had an aggressive game in campuses and rural Africa and was part of the huge investments flowing into African Fintech.

Some might call this a form of neo-colonialism: crypto-colonialism…

1 – Building “communities”

FTX Africa was “onboarding people like crazy in places that didn’t have stable banking access” in Ghana, Nigeria, Sénégal etc., using the infamous “Bank the Unbanked” approach as cover for their predatory scheme.

The likelihood for those who gambled in the unregulated FTX casino, especially small “investors”, to get their funds back is close to zero. Imagine what this means for all those Africans who have answered the call of multiple recruiters, both online and in campuses or the countryside.

It went even further…

2 – Investing in FinTech

FTX, just like many others, invested heavily in Fintech startups, even looking to create “unicorns” on the African market, mainly targeting those involved in remittance or wallets.

The much praised startup Chipper Cash is supposed to have received $150M in november 2021 at $2B valuation. It’s not at all clear today if they got the total amount of money that was promised, and if the valuation still stands (FTX marked down Chipper Cash’s $2B valuation to $1.25B).

FTX in Africa - Chipper Cash investment

But there are many more:

  • MARA raised $23M from Coinbase Ventures and FTX to build Africa’s portal to the crypto economy.”may 2022
  • FTX and Tiger Global invest $350M in NEAR protocol. NEAR protocol partners with local blockchain community Sankore to launch a regional hub in Kenya dedicated to ongoing blockchain innovation, education and talent development throughout Africa.” – april-may 2022

And the list is much, much longer… with a clear goal to target the numerous Fintech startups that try to build solutions for the continent and onboard customers.

The question to ask here should be if there was a “quid pro quo” in the contract(s) they signed…
Well, as we’ve already seen, some of these startups had to, or decided to, send their cashflows and customers’ funds to FTX and used it as a “bank”. Unfortunately, a few of them already had to lay off part of their staff, as Nestcoin did, and others “monitor” the situation (dLocal…).
What will happen when regular people will try to withdraw from their accounts, now that this sand castle has collapsed.

With the numerous Fintech startups that were created these last years, there was already a big problem: they all try to target the same small Total Addressable Market (TAM) in most countries. When they are incentivized by huge fundings, at ever growing valuations, to onboard even more customers, the risk on local economies becomes systemic, if all the money disappears suddenly.

But there’s an even dramatic aspect already lurking around: clawbacks! Recoveries will probably also extend to VC investments made by SBF/Alameda/FTX. We’ll see in 2023 who gets stripped of their funding rounds…

Can it get worse? Of course!

Crypto market analysts consider that Alameda bought 70% of the USDT (Tether) token, the so-called “stablecoin” that holds (Monopoly-style) the crypto-currencies market, printing money out of thin air to sustain the Bitcoin price, and whose “reserves” are mostly “undetermined”.
Just check what’s happening in San Salvador, if you would like an idea of how Bitcoin and Tether destroy a country.

However, USDT is the “monetary” engine of most P2P platforms, widely used for buying and transferring cryptos, especially in Africa (with platforms like Binance, Paxful…). If the USDT token collapses, which has been a recurring risk for a long time, many if not all crypto-platforms in Nigeria, Kenya, Ghana, South Africa, to name only the biggest countries, will go down after locking withdrawals.

The end of this great unregulated casino may come sooner than many think…

“FTX in Africa” – Conclusion

For months now, it’s been widely known by crypto-sceptics and crypto-opponents that the “industry” is faking it: the system is empty, there’s no liquidity in the various parts of the big Rube Goldberg machine, just expandable gas. All that is missing is a spark for everything to explode.

Other exchanges are on the hot seat and under the microscope, like BlockFi, Binance, Coinbase, etc. They already make analysts worry for the short/medium term, due to how their reserves are built (mostly around their own token, that they then use as collateral for loans, rinse and repeat).

FTX/Alameda could be a first spark…

What will happen to small African investors & users?
Thoughts & prayers are not enough here.

On the African continent, it’s clear that digital innovation, including digital and mobile money, is important, but not at any cost. That’s why it seems urgent to:

– Enforce local or regional digital & mobile money regulations, as too many Fintechs work in “grey areas” without proper impact evaluation, and do so till they get caught or die, leaving customers in disarray.

– Check how companies really operate locally, under what license and regulations. For example, a few days before filing for bankruptcy, FTX Africa allowed to use Franc CFA (XOF) on its platforms.

FTX in Africa - launching XOF (Franc CFA) deposits on 11/3/2022
FTX launching XOF (Franc CFA) deposits on 11/3/2022

Was the BCEAO, Central Bank for the region, aware of it? Was this allowed and under what regulations?

Another example: when a Fintech startup is created by African people in Delaware, California or elsewhere in USA or any kind of fiscal paradise, exclusively for designated African markets, Due Diligence by Central Banks should be mandatory on areas such as governance, funding, regulations, cashflows, tax evasion, money laundering (many alerts already between Kenya and Nigeria)…

– Create mandatory sandboxes in regional and/or local Central Banks and have all Fintechs, old or new, go through them on a regular basis. Self-evaluation and/or certification is far from enough.

– Protect customers with knowledgeable law enforcement.

– Evaluate what the “Bank the Unbanked” motto really means on the ground, to avoid predatory actors to seize this “opportunity” for frauds, scams and ponzis. Banks and Telcos, could offer real solutions to many on the continent, if properly built through specialized mobile virtual operators, such as “financial MVNOs” [post in French].

Many try to push Africa to leapfrog into the digital revolution, without working on the basics, such as enforced laws and regulations.
The dramatic FTX/Alameda collapse should be a wake-up call… if it’s not already too late.