The financial services sector is one of the most regulated sectors in the world. Many governments have enforced stringent regulations to oversee the sector, as the importance of moving money around to the economy of any country cannot be overstated. The large volume of transactions can easily foster an environment conducive to money laundering and other criminal activities.
To prevent this from happening, “know-your-customer” (KYC), an anti-money laundering standard, has been designed to prevent people from passing off illegitimate money as legitimate. The KYC standard has also helped financial institutions better understand and serve their customers.
The KYC standard is a process that financial institutions use to verify the identity and credentials of their customers and assess the risk involved in onboarding them. In the constantly evolving world of decentralised finance, there has been clamouring for increased anti-money laundering practices.
The need for firmer anti-money laundering regulations was echoed at the 6th edition of the Inside Identity webinar series organised by QoreID, a digital identity platform and TechCabal. Speaking at the webinar were Fejiro Hanu, the CEO of Patricia; Emmanuel Babalola, the CEO of Bundle; Erikan Obotetukudo, the CEO and general partner of Audacity Fund; and Jide Ogunjobi, the vice president of products and strategy at QoreID.
The consensus of the speakers was that KYC procedures should be improved by Web3 companies in Africa in order to promote transaction security and trust. That, and the improvement of these two factors will help increase Web3 adoption, cut down on fraud, and promote regulatory compliance.
These assertions are not unfounded, as cryptocurrency fraud occurs frequently in Africa. In October, over 4,000 South Africans lost millions in a crypto-pyramid scheme. According to a Chainalysis report, the biggest crypto fraud in 2020, totalling $1.7 billion, was orchestrated by a South Africa-registered company, Mirror Trading International Proprietary Limited (MTI). Last year, the founders of South Africa-based Africrypt absconded with bitcoin valued at $3.6 billion.
“Web3 is an opportunity to get us on the same playing field as first-world companies,” said Ogunjobi, speaking on the importance of Africans participating in Web3-based technology applications like decentralised finance. He described first-world companies as the best in class and companies that African startups look up to when developing solutions.
“I think one of the biggest overarching challenge that we face in the industry is regulation, and it is by far the biggest challenge, in my opinion, because with regulation, we can finally begin to see the inflow of institutional funds into the industry. They can only do that when there is adequate regulation,” Fejiro said when asked about the challenges facing mass adoption of Web3 in Africa.
“The job of regulators is to provide policies that protect the customers, but at the same time, still leave enough room for innovation from the institutions,” he continued. His answer led to more discussions on how a balance needs to be found between regulators and decentralisation.
In an effort to highlight the significance of regulation, Babalola compared the state of the Web3 ecosystem in Africa to when cars were invented and seatbelt laws had to be enforced to protect road users. “We need to create more awareness in terms of sensitization and direct education to regulators about the Web3 technology for them to appreciate it.”
In addition, Babalola said, “There cannot be true regulation without engagement; otherwise, innovation will be stifled. Regulators must learn to leverage the technology to drive effective regulation and decentralization.”
“We are in that age where identity verification is very important,” Obotetukudo said, emphasising the need for anti-money laundering practices.
Ogunjobi opined that KYC practices would help drive mass adoption. “For mass adoption, we have to go the way of user verification. People need to know who they are transacting with,” he said. He went on to say, “KYC is still very important because protocols are still the same, regardless of what platform people are transacting on.”
Overall, the speakers encouraged businesses in the Web3 sector to embrace regulators more and work closely with them to establish KYC standards so that Africans would not be left behind in the next phase of financial innovation.