‘Cryptocurrencies a pyramid scheme’

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Dr Mangudya

Jeffrey Gogo
As cryptocurrency trading shifts to the social media, the Reserve Bank of Zimbabwe (RBZ), has just confirmed our long held belief: That its tough stance on digital coins was borne out of cautious, if not strange, fear, particularly of Golix’s multi-million-dollar token sale.
And a bit more over money, both in terms of losing it and losing control over it.
Dr John Mangudya, governor of the RBZ, described the Harare exchange’s 32 million Initial Coin Offering (ICO) as a “pyramid scheme”.

Flouting a series of laws that empowered him to make the decisions he made on cryptocurrencies, Dr Mangudya said the exchange’s business model had a high risk of collapsing, in his desperately awaited reply to Golix’s court challenge.

The central bank chief was convinced that the exchange’s links with commercial banks and the inherent risks in cryptocurrency trading disaster for the financial system in the event of failure.

“(The RBZ’s) assessment was that this was a pyramid scheme in the making (especially with the intended initial coin offering) and it had to be arrested at the earliest opportunity,” said the governor, in papers filed at the High Court on June 8.

Golix got some temporary relief three weeks ago when Dr Mangudya failed to turn up at court to defend the digital exchange’s application challenging the crypto ban of May 11.
The exchange argues that the Reserve Bank has no authority to regulate cryptocurrencies.
In the resulting default judgement, the ban was lifted, provisionally.

Digging In
But Dr Mangudya dug in last week, accusing Golix of mimicking banking activities, by accepting deposits, something they weren’t allowed to do because, one, the exchange was not a bank; and two, it wasn’t licensed to do so.

The governor said he had authority to ban virtual currencies — using banks as proxy, essentially — and that laws such as the Banking Act and the Exchange Control Act backed up his actions.

“The Banking Act gives the Bank (RBZ) the power to supervise banks and prescribes a variety of actions that the Bank may take as a measure to correct any conduct that may be a threat to the smooth operation of the banking and financial sectors,” Dr Mangudya says in his opposing affidavit.

His argument is basically that digital coins like Bitcoin must be banned, not regulated, to protect the financial system.

The skepticism broadly resonate with sentiments by some central bankers from elsewhere around the world, but none to have superintended over unique economic and political circumstances such as Zimbabwe’s.

There is a lot to talk about from the central bank’s reply, but this is perhaps the clearest indication yet of where cryptocurrency regulation in Zimbabwe is headed: That there will be no regulation at all, at least for now, just the ban.

We spoke about the crypto soap opera last week, here is the latest episode. By trashing Golix as a “pyramid scheme that could burst at any time”, Dr Mangudya has revealed his deeply held views over virtual currencies, that they are a scam designed to steal money from people while fomenting chaos in the financial sector.

He points to Golix’s — or any other crypto exchange — ability to transfer cash across borders, like a remittance company, without the RBZ’s knowledge, and, obviously, control, as perhaps the highest form of mischief and anarchy.

Dr Mangudya wields control over forex flows, given him by the Exchange Control Act, and he is not ready to lose it to some technological innovation feigning independence!

Dark, unpredictable phase
Last week, we also discussed the possible interpretations of the RBZ’s no show at court and it’s long silence thereafter, how all this pointed towards a tougher crypto trading environment, how the Bank may have been preparing towards a similar eventuality.

The Reserve Bank’s June 8 response confirms our worst fears. Dr Mangudya did not speak about the possibility of regulation at all in his reply.

This would have given hope to the thousands of crypto enthusiasts in Zimbabwe looking for some kind of regulatory oversight, having learnt the hard way that self-regulation, as claimed in digital currency circles, was simply unrealistic.

Instead, he draws inspiration from countries like Pakistan — hardly a model economy — which has outlawed virtual currencies.

Cryptocurrencies have long operated under a cloud of uncertainty here, but the latest position from the Reserve Bank suggests they are now entering a dark, unpredictable phase.

Stable trading platforms shut, investors have now started the shift to social media forums like WhatsApp and Facebook, where the risk of theft, loss and fraud is significantly higher – apparently the anathema to the central bank’s professions.

On social media, criminals could easily dupe customers unfamiliar with the new digital assets of their money. For digital exchanges, the atmosphere was no longer conducive for business.

Styx24 chief executive Tatenda Mabungu, has announced the trading platform is relocating to another country within two weeks while Golix has since opened shop in South Africa, Uganda and Kenya.

About $1 million Bitcoin’s worth was traded on Styx24 and Golix — combined — each month before the ban.

We shudder to think this was a missed opportunity to bring order into the local cryptocurrency sphere, by holding the sector to the same standards as the rest of the financial services industry.

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