Public Key Podcast

GEO Report: Crypto Adoption in Sub-Saharan Africa: Ep. 83

November 21, 2023 | by Chainalysis Team

Episode 83 of the Public Key podcast is here and we are happy that you love the refreshed look.  Our 2023 GEO Report revealed that across the Sub-Saharan African region, centralized exchanges are the most-used platform type, facilitating over half of all transaction volume and in this episode we speak to an expert on the ground, Marius Reitz (General Manager Africa, Luno), to understand what’s driving this grass-root adoption. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 83.

Public Key Episode 83: The crypto African market – from bans to blockchain dependency 

Our 2023 GEO Report revealed that across the Sub-Saharan African region, centralized exchanges are the most-used platform type, facilitating over half of all transaction volume and in this episode, Ian Andrews (CMO, Chainalysis) speaks to an expert on the ground, Marius Reitz (General Manager Africa, Luno), to understand what’s driving this grass-root adoption. 

Marius shares his early journey into the crypto industry and discusses the challenges and opportunities in the African market. He highlights the importance of education and the need for regulatory clarity and collaboration between the crypto industry and regulators, in order for growth and stability in the market. 

He also identifies the rise of peer-to-peer trading, and the potential for real-world asset tokenization and how Luno’s products and services continue to evolve to meet the needs of its customers and expand its presence in the African market.

Quote of the episode

“In markets where governments do not impose regulatory bans, right? Such as the one in Nigeria, you typically tend to see the market flourish, grow more responsibly,  develop more responsibly and you see more interaction between the private sector and the public sector” – Marius Reitz (General Manager Africa, Luno)

Minute-by-minute episode breakdown

  • (2:09) – Marius’s chance encounter with cryptocurrency and decision to join Luno
  • (5:08) – The landscape of crypto in South Africa in 2016 and challenges in the industry 
  • (8:20) – The role of education in Luno’s operations and challenge and focus on providing safe access to the unbanked sector
  • (12:45) – Crypto use cases in Africa: unmet needs and access to global markets
  • (16:50) – Crypto regulatory climate in South Africa and relationship with traditional banking industry
  • (19:35) – Ease of buying and selling crypto in and the peer-to-peer market in Africa
  • (29:08) – Regulatory landscape and its impact on the African crypto industry
  • (33:24) – Decentralized exchange landscape and the appetite for Real World Assets in Africa 
  • (37:45) – Regulation to drive exponential growth expected in the African crypto market

 

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

  • Placeholder for breaking news

Speakers on today’s episode

This website may contain links to third-party sites that are not under the control of Chainalysis, Inc. or its affiliates (collectively “Chainalysis”). Access to such information does not imply association with, endorsement of, approval of, or recommendation by Chainalysis of the site or its operators, and Chainalysis is not responsible for the products, services, or other content hosted therein.

Our podcasts are for informational purposes only, and are not intended to provide legal, tax, financial, or investment advice. Listeners should consult their own advisors before making these types of decisions. Chainalysis has no responsibility or liability for any decision made or any other acts or omissions in connection with your use of this material.

Chainalysis does not guarantee or warrant the accuracy, completeness, timeliness, suitability or validity of the information in any particular podcast and will not be responsible for any claim attributable to errors, omissions, or other inaccuracies of any part of such material. 

Unless stated otherwise, reference to any specific product or entity does not constitute an endorsement or recommendation by Chainalysis. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by Chainalysis employees are those of the employees and do not necessarily reflect the views of the company. 

Past Episode Mentions

[CHAINALYSIS PODCAST EPISODE 32] Remittances Are Powering Crypto Markets In Sub-Saharan Africa

Episode 32 of Public Key, the Chainalysis podcast, is here! In this episode, we talk with Ray Youssef,  CEO of Paxful and he gives us his candid thoughts on how crypto is powering a new economy in Africa and providing an alternative payment system.

[CHAINALYSIS PODCAST EPISODE 37] Powering the Digital Asset Transformation in Nigeria and Beyond

Episode 37 of the Public Key podcast is here! In this episode, we talk with co-founders Michael Adeyeri (CEO & CTO) and Moyo Sodipo (COO & CPO) of Busha, one of the fastest-growing cryptocurrency exchanges in Nigeria, about challenging access to fiat and the gray area of crypto regulations in Nigeria.

Transcript

Ian:

Hey everyone, welcome back to another episode of Public Key. This is your host, Ian Andrews. Today I’m joined by Marius Reitz, who is General Manager Africa at Luno. Marius, welcome to the show.

Marius:

Hi, Ian. Yeah, thank you very much for having me today. I look forward to the conversation.

Ian:

Well, I think you absolutely qualify as being crypto OG, right? You’ve been at Luno for over eight years in a variety of different roles. You’re now running the show on the African continent, which I’m excited to talk to you about. But I’m always curious how people, particularly people of your vintage who have been in crypto for a long time, how did you first encounter cryptocurrency, and then what made you want to move into the space professionally?

Marius:

So, my crypto journey started in 2015. It was actually by chance, so I was still in my traditional accounting role, 8:00 to 5:00, and one of Luno’s co-founders, Peter Hanks, who was the CFO at the time, pinged me on LinkedIn. He was saying which was Luno’s first name, just went through a fundraise with Naspers, and Naspers is an African tech holding company with shares in Tencent. So, Naspers at the time just invested, I think 5 million dollars into in the end of 2015. So, obviously being a share trader myself, Naspers attracted my pension and I think I was due for a new challenge in . So, I worked in business rescue work, audit and accounting work. So, yeah, I think in general I was up for a new challenge. So, I took the interview, I had a couple of conversations, a couple of barbecues on the balcony of the small office.

And then I think ultimately, I think what convinced me to join the team was the global nature of the operations. There was opportunity for me at the time to work with Nigerian customers, Nigerian stakeholders. Similar at the time, Luno was active in Malaysia as well, Luno had just launched in Indonesia. So, there was a region operations across emerging markets, mainly Africa and Southeast Asia. So, that was quite appealing, I think, Luno being able to work across many different currencies, different cultures. But of course, I didn’t have that good understanding of the technology behind Bitcoin. So, for the first year, I still wore 100% finance hat, the debits and the credits. But I think due to the nature of startup companies, and I think we were… I think was employee number 13 or 14 at the time.

The hands-on nature of the business, I was helping out in customer support and compliance and a bit of marketing. But the real first encounter that I had with crypto users, crypto early adopters, was midway through 2016 when a colleague and I traveled to Nigeria. It was just six months after Luno launched its operations in Nigeria, and we hosted a Luno/Bitcoin meetup in Lagos in mid 2016. Now that was very, very early on, and we managed to fill the… It was called the co-creation app, which is a startup incubator co work space in Lagos, managed to fill that venue.

Ian:

Wow.

Marius:

And just the enthusiasm and the interest from the Nigerian public was just mind-blowing. And I think the key point there is that at firsthand experience the challenges that people, the mass market experience on a day-to-day basis in terms of having unmet needs or needs not being made by the traditional financial system. And I think from there I started getting more involved in other aspects of the business and started interacting more with customers as well.

Ian:

Now in 2016, what was the landscape of crypto like in South Africa? When you took the job, you left your accounting job, which is probably seen as very secure and conservative role, and you jump into this startup crypto company. Did your friends and family look at you like you were crazy?

Marius:

Yeah, I think there were many skeptics out there. And I did convince my dad to also invest in Bitcoin in 2016. So, I think-

Ian:

Wow.

Marius:

… no regrets from his side. But yeah, so I think the market was mainly retail, retail market, early adopters, trading volumes on exchange and then was low, I think only until the 2017 bull run from June 2017 that we see volumes on the exchange spike. And yeah, it was very, very slow-going in countries like Nigeria, like Malaysia. And I think the challenges were apparent. I think there was a complete lack of education, so we had to do a lot of educational work. We also started operational challenges at the time, so it was not as safe and well, we tried to make it as safe as possible, and that’s the nature of centralized exchange acting as intermediary. But it was not as easy as possible for our customers to transfer from their bank accounts to Luno to purchase crypto. So, that was one of the biggest challenges still at the time. Liquidity of course, and the marks not as liquid as they are today.

So, that was also a challenge for us. But yeah, I think it was not only smooth sailing, that’s for sure. And the journey has been reveled with roadblocks and challenges, and we take the long road, we follow an approach of hyper localization. We establish a local presence in each of the markets in which we operate. We have put local boots on the ground. And yeah, I think as a result of that, we wholeheartedly believe that that’s still the best model for us today to make it as safe and easy as possible for the public to dip their toes in crypto. I think as a result of that, we have had to manage quite a number of challenges over the last couple of years. Yeah.

Ian:

Yeah, tell me more about that. So, Luno’s in 40 countries around the world today, is that right? I recall that from the notes when I was researching. Where in the world do you see the most interesting market opportunities and conversely maybe some of the biggest challenges?

Marius:

Yeah, so we have customers across 40 markets globally. We are active across three continents, Africa, Azure Pacific, and then also Europe. We have just over 13 million customers globally at this moment, but the largest section of portion of our customer base being in emerging markets, so between SA, Nigeria, and Malaysia. And we view those three countries as our core markets. We have offices around the world, so Cape Town is our global operation’s hub. So, we have a team of just over 300, 350 team members based in Cape Town. I’m based in Johannesburg, so African HQ. And then we have our global HQ in London.

So, we also have a team on the ground there. And then local teams in Kuala Lumpur, Malaysia, Jakarta, Indonesia, and then also in Australia. So, I think we spread out across the world, but we have our base in South Africa, I think, probably around two thirds of our global workforce being based in Africa. And we follow similar model in most of these markets. And I think that is what we are good at. That is the skills and expertise that we’ve built up since launching in 2013. And by the way, we are celebrating our 10-year anniversary this year.

Ian:

Congratulations. That’s amazing.

Marius:

Thanks a lot. I think we were probably one of the first traditional crypto exchanges to exist back then. And I think we’re one of a handful of crypto exchanges that existed back then that still exist today, and I think of and Coinbase and those names. Yeah. So, it’s been ten eventful years, and yeah, we’re just grateful. I think that the one thing that’s very clear is that there’s still a growing demand for cryptocurrency and especially in emerging markets, and that is what gets us up in the morning.

Ian:

I’m curious about the perspective, given that you’re operating primarily in emerging markets, thinking about the role that Luno plays, I mean, obviously you’re providing custody and you’re facilitating transactions, but I’d have to imagine there’s a lot of education that goes into it as well, like explaining just the basics of how do you purchase cryptocurrency, how do you hold cryptocurrency, what are all the different cryptocurrencies? Is that the case?

Marius:

Definitely, definitely. And it’s not easy feat to educate people that know nothing about crypto. And I think that’s the role that we play. We see ourselves as an intermediary. We don’t try and convince people to invest in Bitcoin or to invest in any crypto asset. We provide people with information and the knowledge to do their own research, and then we provide the safe and easy to use platform and products for them to enter the space. So, it’s an ongoing process. We obviously have many efforts that run through marketing through the traditional channels in terms of social media. We also host in-person meetups. We also have education built into the app. So, we’ve contextualized many of our products and services from a crypto perspective as well. So, we educate the customer through that journey. But it’s been tricky because especially if you operate in emerging markets, because there are many challenges.

And if you look back to 2015, 16, the three or four African markets that were the continental leaders back then from a crypto adoption perspective, they’re still the leaders to this day. So, African, Nigeria, and Kenya. And then there’s a long tail of other smaller markets that also have increased volumes or transactional volumes, but only slightly. And I think the main challenge with expanding into as many markets as quickly as possible is firstly around education. You can’t create a crypto market out of nowhere and each of these markets replicate localized effort in terms of setting up local entities, local regulators, local bank accounts. And so, what we had to realize very quickly was that it actually, it slows you down and it can actually be very costly if your client market is the mass market in each of these countries. So, actually I think, so there’s different strategies in different markets.

Some of the new African markets, the focus is purely on the early adopter community, those with existing traditional investments, those with the banked segment of the market. In other markets, like , it’s also that, also focused on those with bank accounts and those that are included in the financial system. But we have a little bit more room because of scope of the operations, other established processes around education, the advanced stage of regulations that we can also now start to really focus on providing a safe for those in the unbanked sector. So, those that are not financially included.

Ian:

Yeah. In the past, we’ve had some terrific guests on the program, Ray Yusef of Paxful who has built with Bitcoin initiative seems to really go at the heart of the unbanked audience, like teaching basic financial literacy and then extending that to the opportunity provided by Bitcoin. We’ve also had the founders of Busha, one of the Nigerian exchanges on the program, and they told some really interesting stories about the challenges of international currency controls. And so, anyone trying to run a business that imports goods or raw materials from outside of Nigeria is incredibly challenged by the traditional financial system. And Bitcoin and stable coins have opened up a new financial services path for them. I’m curious your reaction to that, is that consistent with what you’re seeing in your business where access to global markets is a big driver for customers of Luno?

Marius:

Yeah, I think firstly, I think it’s have to say that African crypto firms and also crypto investors and others are probably some of the most resilient and creative people globally considering the extreme operational challenges that we experience. But despite that, the African continent still contributed billions and dollars in transactional volumes. I think in your report you state that it represents 2.3% of global volumes.

Ian:

Yeah.

Marius:

But we categorize the use cases in two categories, it’s those with unmet needs. And I think that sums up the category of crypto is that buys crypto as a hedge against political instability, as a hedge against local currency valuation. You mentioned import restrictions and issues with cross border payments, that’s absolutely also one of the drivers. And we’re seeing that especially play out in Kenya and Nigeria where there’s dollar shortages and individuals, but also small businesses simply cannot access dollars to continue trading and to continue earning a living. And so, I think there are definitely elements of that. It’s much more difficult for us to distinguish in the data to say, “This customer is using crypto for remittances versus arbitrage trading, for example, between different crypto platforms.” But we know that the rise in adoption in Africa over the last 10 years, it’s primarily driven out of need. And it’s been largely from a grassroots level perspective.

And I think it just, again, shows the creativity. We issued a white paper a couple of years ago, and one of the key findings that highlighted in there was that people in Africa tend to be more creative in finding ways to solve and to supply for their families. And so, when people face a hardship where they need to put food on the table, when they need to pay for school fees, where they need to pay for bonds, they tend to take on a little bit additional risk as well in trying to generate additional yield. And I think that’s also… You can argue that that’s out out of need, but I think there’s also an element, the need to generate higher yield and the need to let their money earn and more in return for them. So, yeah, I think that Nigeria, Kenya and South Africa is again, different demographic, different regions. And SA you see more sophisticated crypto traders, traders trading high volumes, high frequency, lower margins.

There’s a rising and growing arbitrage trading use case in SA as well. And that’s primarily there because of the price differences between the dollar price of crypto and global platforms like Coinbase,and the RAM value of crypto in SA. And that premium exists because of the existence of capital controls in SA. So, it’s not as easy to move funds cross border and to move funds back into SA compared to other markets where capital controls on that’s restricted. So, that premium exists and many of our traders, which is good for liquidity and also good for stability of the local market, trade arbitrage.

So, they move large volumes between local platforms and overseas platforms and in relatively small yield on those high volumes. So, yeah, I think it’s interesting to see within the same continent how different use cases have emerged and how our people’s need differs between different markets. But just the one thing on remittances, I think, as I said, it’s very difficult for us to distinguish between regular crypto payments to Bitcoin address and remittances. I think that probably the vast majority of the volume is still associated with Bitcoin as a store of value or bitcoin as a means to speculate or to trade. And yeah, so I think that’s contrary to popular belief, I think that’s still the predominant use case across Africa.

Ian:

The arbitrage trade is fascinating because that was some of the very early days of Bitcoin trading was the US to Japan market arbitrage that I know made people a lot of money back in the earlier days of Bitcoin. I’m curious about something you said a couple minutes ago about the regulatory climate in South Africa. With previous guests we’ve talked about some of the challenges in markets like Nigeria where I would categorize it broadly as unfriendly towards crypto. Talk about the situation in South Africa, I’m much less familiar with that.

Marius:

So, in South Africa, so firstly, I think in markets where governments do not impose regulatory bans, such as the one in Nigeria, you typically tend to see the market flourish, grow more responsibly, develop more responsibly, and you see more interaction between the private sector and the public sector. And I think that’s the role that we at Luno tried to play. We share learnings and experiences that we’ve gained and built up over the years with regulators in each of our markets. For example, Luno was the first crypto exchange to obtain a license through the securities commission in Malaysia in 2019. So, that really gave us good learnings to share locally in SA. But the relationship of the SA regulators have been right from the start. I recall, think back to 2016 when we did a pilot with the Reserve Bank and the FCA in the UK and one of the SA banks where we tested a remittance product.

So, we were included in the FCAs first cohort of companies in the sandbox. So, the interactions with the SA Reserve Bank started 2015, 2016 already. And they, from the start, I’ve acknowledged that they need to stay ahead of the market, that they can’t afford to ban crypto players from operating or ban the financial institutions from banking, cryptocurrency businesses. And I think that has done a lot to ensure stability in the crypto market. So, what we see in Nigeria, for example, and Kenya is completely different, people are… There’s still the same need for crypto, so the overall volumes in the market stays the same. You don’t see declining volumes or you don’t see a declining demand for crypto, but you see the crypto volume shift to avenues that are less transparent and more

In SA, vast majority of the crypto volumes have continued to flow through centralized exchanges that are registered with the local financial diligence agencies that have clear lines of communication with the central bank that are able to open up local bank accounts, which makes it a lot safer for our customers to buy and sell crypto in their local fiat currency. But long story short, I think all of those efforts have culminated in the financial sector conduct authority kicking off their So, all cryptocurrency asset service providers had to apply for a crypto specific financial service provider license between June and November this year. And we expect the first crypto FSP licenses to be awarded within the next couple of months. And I think it’s a watership moment for the SA crypto industry. We anticipate traditional financial institutions sitting on the sidelines to also enter the market. And as a fact, we know that many traditional firms have also applied for that license as well. So, I think it’s going to open up the market and really, hopefully inspire other African markets to follow suit.

Ian:

Yeah, it’s such a good point. I mean, this is consistent with all the research we’ve done here at chain analysis, which is bans don’t work. You can look at a market like China as a perfect example of this. The transaction activity that we can attribute into the Chinese, inside the country there has not declined at all since the ban a few years ago. And I think your point about do we want transparency in the market? Do we want well-run companies that follow the law, or do we want to have this black market operating on the side? That’s a very clear choice.

You create a ban, you’re going to end up with this black or gray market type operation, or you can have a reasonable licenser scheme that provides transparency and responsibility throughout the ecosystem. So, that’s really exciting. I’m curious about your relationship with the traditional banking industry. If I’m living in South Africa and I’ve got and I want to turn that into a tether or Bitcoin, how difficult is it for me to get money out of my traditional bank account and actually use it to buy crypto? Is it trivially easy for me to transfer to Luno, to my account at Luno, or is that a difficult operation for folks?

Marius:

No, so it’s very easy and we are fortunate enough to have banked with standard banks since 2013. So, our bank leadership also spans 10 years now. But it’s easy over the years, we’ve also evolved the buying of crypto. So, initially customers could only do normal bank transfer until obviously with the delays and the cost associated with normal bank transfers. And then a couple of years ago we’ve added card payment options as well. So, African customers can buy crypto with debit or credit card. And more recently we’ve also added instant Eastern EFT option. So, it’s very easy, you can instantly buy crypto with and when you want to withdraw your , we also process instant withdrawal. So, within two, three minutes, the funds can reflect back in your bank account. So, I think from an infrastructure perspective, South Africa… And again, it comes back to our point around bans and the unintended consequences of bans.

So, governments that impose bans expect bans to solve all the risks or to address the risks that they identify, in terms of money laundering, in terms of illicit financing and flows volatility. But in fact, it results in a more volatile crypto market results in much less visibility from a banking sector. And I have to say that have to commend Reserve Bank. Last year, around mid last year, they issued a guidance note to local South African banks where they cautioned them against the risks or the unintended consequences of de-risking the businesses from crypto and said that if you de-risk yourself on crypto, so if you close the bank account off a reputable and credible cryptocurrency firm, you reduce your ability to effectively monitor transactions because what is happening? And that’s if what we’re seeing in peer-to-peer markets in Africa.

So, the peer-to-peer business model absolutely gained a foothold in Africa and it’s great because it makes possible for Africans to still purchase crypto. But people still use their bank accounts to purchase crypto. Instead of sending the payment to centralized exchange with segregation of funds and controls and risk management, et cetera, that payment goes to another individual’s bank at another bank. So, the flows within the banking system remains exactly the same. The counterparties to those resections are just individuals that the banks do not necessarily have visibility on. So, yeah, and that’s the point that we’ve tried to convey Africa to regulators. And that’s the role we playing to this day. We had excellent workshops with regulators recently in other African markets where we really try and assist with the thinking, assist with the processes. And yeah, I’m confident that there’s a lot of potential, a lot of good potential for Africa. Yeah.

Ian:

Yeah, it’s really interesting as someone living in the United States, the peer-to-peer market is not something that I think many people talk about. The entry point for a typical American is a firm like Coinbase, publicly traded company in the United States, very well known, they run ads on TV. Or maybe one of the FinTech providers like PayPal or something like that where you can now purchase in the PayPal experience. So, talk a little bit more about how people get involved in that peer-to-peer setup. If I wanted to buy crypto from somebody in a peer-to-peer marketplace, where do I even start? What does that look like?

Marius:

So, you have two different models. So, you have the completely underground public model, and that is where people meet in chatrooms on private messaging apps, for example and they establish crypto groups and the communicate and then send DMs and agree on a price. And you have to then actually send fiat currency to a stranger and hope and trust that they will release the crypto to you. So, that’s the one form. Or the other form is entities, companies offering a crypto custodial service. So, they enable you to store your crypto on the platform, but the fear click happens peer to peer. So, it’s almost like an online marketplace in SA is a company called Gumtree where you can Facebook Marketplace for example.

Ian:

Yeah.

Marius:

So, those models have absolutely gained a foot out since the ban in Nigeria in 2021. But in Kenya, since 2016, Luno actually operated in Kenya. We had operations in Kenya, we had growing customer base until a similar ban was put in place in the end of 2015. And since 2016, the PATP model has actually been the defacto model way for Kenyans to access crypto and they know no other model. And that’s what I mentioned right at the start, the African landscape has grown very little. There’s been a massively growth in demand, but the infrastructure across Africa has remained relatively the same since 2016. You have no new centralized exchanges operating in any African markets. You have one or two new peer to peer platforms. But for most part, the infrastructure is completely the same and it’s a massive challenge and it’s one of the reasons why you’re only seeing 2.3% contribution to global volumes, it’s because of a lack of infrastructure. And yeah, that’s partly what we aspire to help solve those challenges and to make it easy and safer for people in Africa to access crypto.

Ian:

Yeah, that last point about safer, that’s what strikes me as someone that’s never used one of these peer-to-peer services. It seems ripe for scam activity where I’m advertising, “Send me money, I’ll send you Bitcoin,” and then I never send the Bitcoin. That seems like a fairly easy scam to run all over the place, right?

Marius:

Yeah. So, I think in the private messenger chatroom rooms, I think there’s a real risk there.

Ian:

Yeah.

Marius:

But the second model where centralized entities, the custodian, they won’t release crypto to the buyer unless the seller confirmed that they’ve made payment. So, there’s some measure of control, but there’s still some exploitation that’s taking place as well. So, yeah. Yeah.

Ian:

Yeah. I’m curious more broadly, when you think about the scams and other types of fraud happening, how do you approach that? I would imagine it’s challenging in certain markets where you have a relatively newer population of users who are learning about crypto for the first time. It seems like they’re going to be primed to chase the advertisement for the unreasonably high yield savings opportunity. I would imagine you all spend quite a bit of time thinking about how to protect users.

Marius:

No, definitely. And I think last year in South Africa, early this year, the industry got together and we worked with the advertising regulatory board, which is the white stock for public advertising. And Luno stated those efforts and we drafted crypto specific inclusion for their product advertising practice. And that’s been accepted, it’s been published, it’s been updated. And certain rules have been put in place, for example, you have to include risk warnings in your ad, and it provides rails and guidelines to broadcasters that started accepting advertising money from scammers in South Africa. And they have to do a lot of due diligence now before they accept any advertising money. So, I think that’s a good example of how the industry came together and we decided we need to address this issue. But from a Luno specific perspective, we try and attack this problem from any different perspective.

I think firstly from a technology side of things, and of course we use for that and , just the on chain visibility that we have through that I think has helped us to prevent customers from sending crypto to potential scams. I think one recent example in the SA is Mer Trading International, where through analysis we were able to identify that customers were sending crypto to this scam. At first we warned them and later on we actually blocked the payments. So, we knew it was confirmed scam, was internal analysis list of confirmed global scams. So, from technology perspective, we rely a lot on our service providers to do the monitoring. We also, obviously the issue of phishing and fake websites and impersonation is also quite real. And again, through a partnership with the service provider, we were able to remove more than 200 fake phishing links or fake Luno websites over the last 12 months and more than 1,000 fake social media profiles.

And so, we’re really trying to clean that up as much as possible. And then we have quite a big grant team as well, and they have relationships with local banks in SA, had in Nigeria as well. And we also then support the banks in investigating and also recovering payments made into our bank accounts that was a suspect. So, yeah, on many fronts, it’s a big issue. And it’s crippling and it actually… Scam activity was one of the main reasons why Luno had to exit markets like Zambia and markets like Uganda eventually because of absolute rising scams, making it very, very difficult to operate in those countries.

Ian:

Wow. And this was because you had people who were impersonating Luno or Luno executives and ripping people off?

Marius:

Yeah. So, that, and people pretending to be agents of Luno, Luno salespeople offering returns to the general public.

Ian:

Wow.

Marius:

People with topology people, people then started… Scammers started reporting Luno to law enforcement saying that, “Luno stole my funds,” or, “Luno lost my money,” in the hope that is a settlement payment or there’s a bribe or something. And so, it just became so crippling and it’s a real challenge. And then people always understand the cost of operating in any market if you don’t follow centralized exchange model, but more so in emerging markets where you have to build the infrastructure, the integrations between banks and the exchanges, we have to build that from scratch. Yeah. It’s a real challenge.

Ian:

I saw that even you were a victim of this where someone ripped off your LinkedIn profile and was running around offering crypto services using your photo and your background.

Marius:

Yeah, it’s one of those things. I think my wife obviously had a heart attack when she saw that. And she actually also got impersonated.

Ian:

Oh, God.

Marius:

But I think it’s part of the game. There will always be bad actors out there that try and deceive the public and trying to get the public to part ways with their hard-earned money. And we have a big responsibility as the industry, not only Luno, but all exchanges, whether peer to peer, centralized exchange, we all have a big responsibility to act as the first line of defense for our customers. So, it’s an area of the business where we continue to invest in terms of headcount, in terms of financial resources, and as I said, just using technology has been greatly useful for us in that regard.

Ian:

Yeah. I’m curious internationally, maybe zooming out from Africa a little bit, I know that Luno recently left the Singapore market, and I’m just curious if you can share the strategy and drivers behind that business decision.

Marius:

And in terms of Singapore, I think that was purely a business decision for us in evaluating our strategy and our global footprint. We still have operations in Malaysia, Indonesia, as I said, we fully licensed crypto exchange in Malaysia. We have a local office in as well, Malaysia in focus, our second-largest market globally for Luno. So, still fully investing in the region, southeast Asian region. It’s still an important continent for us or area for us.

Yeah, so, I think we’ve… So, first UK, we’ve always been pro-regulation. Always worked very closely with authorities in the UK to ensure compliance, whether this was enforced or not, so we follow a proactive approach there. So, adapting to working with regulators in the UK was nothing new for us, it’s part of our DNA. They recently announced UK regulations, the fund prime regulations. I think it’s an important step for the crypto industry and it supports Luno’s mission to ensure that all our customers invest responsibly. So, I think we are working very closely with the FC in the UK. We still operate in the market. We’ve not exited the market per se.

We’re still serving our existing customers in the most responsible way possible, and we will continue to be agile and adapt to regulation. 

Ian:

It’s one of the things that’s really interesting to me as we look at the evolution of the regulatory landscape and the relationship between crypto industry and traditional financial industry that’s driving entry into new markets. Because I think you’ve also just recently won regulatory approval in France, and I would assume that’s under the new Mika regime in Europe. And so, it seems like there’s a push and pull action happening. A lot of companies that I’ve spoken to recently have either exited the US market or are contemplating that decision because of the lack of regulatory regime here in the US and it seems like there’s a draw into the European market. Am I thinking about that correctly?

Marius:

Yes, I think so. I think there’s a clear theme globally now, and we see the regulators moving into two directions. So, I think the first theme of market is A and R regulations. And I have to say it’s been fairly consistent across most global markets, and that’s things like ML screening transactions, having the ability and expertise to report on to speech activity. And so, that would typically require registration with a local financial intelligence agency. And that’s one of the first steps we take when we consider moving into new market. Is it possible to register with the local financial intelligence center? And then second piece from market conduct perspective, there has to be regime from a conduct perspective that scrutinizes the operating models of crypto as service providers, shares that they have sufficient capital, they have the skills and the ability to actually safeguard customer funds, to safeguard customer information, and to ensure that they have good corporate governance.

And I think those, if you consider those things that I just mentioned now, I think those were probably some of the main reasons that led to  downfall as well, proper risk management or lack of proper risk management, the lack of good corporate governance. So, I think those two regulatory teams, we absolutely welcome. But from a centralized exchange perspective, I think there are many other challenges. Firstly, the cost to enter and localize your operations in an African market or any market for that matter with relatively low levels of adoption, it can be extremely costly. Secondly, liquidity, so in many cases in Africa, and I think that’s why we’ve seen limited growth in other markets outside these core countries, is they’re simply not sufficient liquidity locally. So, if you think of a use case like remittances, someone, the African diaspora, someone that resides in Malawi works in South Africa and they need to send money back home to their family.

They cannot spend their crypto in Malawi because vendors don’t accept crypto as a means of payment, and it’s not easy for them to convert the Bitcoin into local currency. So, the lack of liquidity in these markets also make it less appealing to global crypto businesses to set up operations there because it takes between three to four years to build up sufficient liquidity, so that you reach a point where you’re able to provide a fair quote to a customer when they want to buy crypto, the sufficient liquidity, not only on the buyer side, but also on the sell side. So, it must be as easy as selling Bitcoin as it was when you bought the coin initially. So, yeah, there are many challenges from that perspective, but mainly regulatory uncertainty that is making banks the defacto regulators in many African markets. So, the banks decide we get to play or we get to stay away. And secondly, a lack of liquidity locally, and also because of the fact that many African markets have exchange control regimes. So, it’s very difficult to send dollars in and to send dollars out as well.

Ian:

Yeah, it’s fascinating to watch the ebb and flow of into and out of other markets. Shifting gears a little bit, I’m curious, your take on . And this is something that I’m always interested in the perspective of the centralized exchange operator in the realm of this new layer of technology that I think in some ways is seen as complimentary to centralized exchanges. In other cases, I think people imagine becomes the future of all crypto exchange. It’s all facilitated by a smart contract living on chain rather than a company really operating there. What’s your take?

Marius:

Yeah, I think centralizing exchanges and decentralized patterns, I think they’re complimentary. Centralized exchanges make it possible for people to enter the crypto landscape using the fiat currency. I’m particularly excited about the potential for in Africa because you have a new generation of investors, investors that don’t necessarily hold traditional assets. It’s people that for the first time have been able to come online, get access to a smartphone with internet that don’t necessarily have traditional investments, traditional investment apps for many reasons. But for example, they cannot meet the minimum deposit requirements. So, crypto created absolutely new class of investors across the African market, and I think for the first time it’s going to give those investors holding crypto assets access, for example, to capital.

So, they can, through decentralized platforms and protocols, actually borrow funds against the crypto collateral to start out their local businesses in Africa. And I think that is probably the most exciting use case for me locally on the African continent. It’s the power of crypto at play real time. From a perspective, I think we obviously, as I said, we think that we are complimentary to many of the services offered by decentralized finance, lending, borrowing, staking, yield farming. We recently launched a Luno staking wallets as well. But I think we think that sensible long term approach, getting the basics done right, that’s our core mission at this moment. And we think that will give us as a business the base shot at upgrading the financial system, playing that role as people’s first experience with the crypto market. Yeah.

Ian:

I’m curious too, about real world asset tokenization. This is in the headlines of all the crypto trade publications that I read regularly. It seems to be one of the hotter areas. Are you seeing any moves in South Africa or maybe more broadly on the continent to tokenize corporate debt or government debt and actually put that on chain?

Marius:

Yeah, so I think again, markets where there are more regulatory clarity, I think you tend to see more conversations like this taking place. Pan Africa, absolutely zero that I’m aware of. But in South Africa specifically, there are many financial institutions that are exploring opportunities to tokenize corporate debt, for example, putting bonds on the blockchain, tokenizing bonds. So, yeah, so there are really interesting opportunities locally in SA, and I think probably relatively soon, traditional crypto exchanges will probably soon evolve the offering from pure cryptocurrency tokens to more real world assets as well. So, yeah, I think it’s an that’s going to open up significantly over the next 12 to 24 months in, you say.

Ian:

Yeah, it’s exciting. Well, this has been a fascinating conversation. I love to end the episode looking to the future. You’ve got eight years of experience in this industry, which is probably a lifetime for most people. I’m curious, what are you thinking about over the next year to two years as being most exciting in the crypto landscape and for Luno’s business?

Marius:

Yeah, I think firstly, I think we will start seeing exponential growth, I think not from a crypto price perspective, but the after effects of properly well run and regulated crypto market. Not talking about crypto assets itself as being regulated, I’m talking about regulation around the platforms, intermediaries that provide crypto related services. I think as we’ve seen in the US and each of these regions are on different maturity and different growth curves. We’ve seen financial institutions enter the market in the US two, three, four years ago. In SA, that’s about to happen. And I think that’s hugely exciting. It’s going to lead to a lot of inflows of capital into the crypto market locally. It’s going to lead to a more robust, stable crypto industry as well. And it’s going to lead to more partnerships between crypto firms and traditional firms to drive adoption. So, I think in the institutional opportunities in SA, I think, and as soon as regulations become clear and Kenya and Nigeria will be absolutely huge and will have a massive impact in the adoption curve of crypto locally.

For example, quite a large chunk of the SA population with disposable income use financial advisory firms to manage all the investments. At this moment, no financial advisory firm are able to render financial advice or intermediary services with regards to cryptocurrency. So, that opens, the regulatory regime, will open up and create a completely new channel or completely new set of potential investors into the market. I think we’ll continue to see Bitcoin has a store of value, or crypto is a store of value as the property, the most predominant use case. Although we’ve had exciting projects in South Africa over the last couple of months on the crypto as a payment channel payment network use case.

So, one of the largest grocery outlets in SAa couple of months ago announced that it’s not possible for you to buy groceries with Bitcoin, so at checkout you scan a QR code. Luno has also enabled that feature. So, Luno clients can spend their crypto. That’s just the very, very early stages of the spend use case. And I think it will develop as we see more critical mass of crypto holders that spend use case and payments use case will start to develop. For now, I think from a transactional perspective, it will probably still be limited to cross-border payments, remittances in emerging markets at large.

And then, yeah, I think I’m extremely positive about Luno’s prospects over the next 12 months to continue to evolve in a crypto app, to continue to build on our current suite of products staking crypto bundles, and to continue to upgrade our product in line with what our customers want. And then lastly, I’m very excited and passionate about the impact that crypto can have on people or people across the African market. And that’s mainly why I’m still in the crypto industry eight years later. So, I’m hugely excited about countries like Ghana and countries like Kenya, countries like Uganda, just to work with Luno and to put Luno in a position to be able to offer a safe and easy way for people in those markets to also access crypto. So, I think, yeah, I’m very, very, very excited about the prospects for crypto in the African market, and, yeah, I’ll be working day and night at Luno to make that a reality.

Ian:

Really exciting. Marius, this has been a fantastic conversation. Thanks so much for joining us on Public Key.

Marius:

Awesome. Thank you again. I really enjoyed the conversation.

 

BlockchainChainalysisCryptocrypto adoptioncrypto podcastCryptocurrencygeography of cryptoPodcastPublic Key