Crypto, forex scammers thrive on financial illiteracy
Mbongeni Mguni | Monday December 20, 2021 06:00
Rather than raw greed, local authorities believe the increase in victims of cryptocurrency and forex scams is being driven by poor financial literacy in the country.
Scammers coast past the country’s existing laws and safeguards by using the Internet and social media, to target the financially illiterate with offers that are simply too good to be true.
The most common complaint received by Non-Bank Financial Institutions Regulatory Authority's (NBFIRA) Capital Markets Department is around pyramid/ponzi schemes cash contributions, forex trading, the latest get-rich activities being promoted aggressively within and beyond the country’s borders.
Those who claim to be skilled in Internet forex trading, claim that the entry costs are low and the returns plenty.
“We have had complaints about people putting in thousands of pula into an electronic platform somewhere with people that they did not know and at some point, they seemingly get returns which entices them to put more money,” explains Juliana White, NBFIRA’s Capital Markets director. “This goes on for sometime, then all of a sudden that platform disappears and the victims come to us saying they have put so much into the scheme and the site is nowhere to be found.”
NBFIRA as the regulator of non-banking financial institutions and activities, is the go-to regulator for such complaints. Unfortunately, there is little that the authority can do except refer the complainants to the Botswana Police Service where, to White’s knowledge, no perpetrator has ever been caught or prosecuted.
“When it’s a product from the Internet, it is quite difficult to know who the players behind that product are or where it is coming from,” she says. “We don’t investigate those and we ask the police to come in because at least they have the forensic capacity to do so.”
Botswana Investment Professionals Society (BIPS) chair, Tapologo Motshubi says as far as he knows, no forex platform has had its origins in Botswana. They are all from outside the country, but marketed or targeted at Batswana, by-passing the existing laws and regulations.
Under NBFIRA’s legal framework, capital market players and their products are individually registered and regulated. Recognised products include shares, bonds, treasury bills, debentures and derivatives.
“My understanding is that these forex platforms are mostly foreign so besides the risk that is naturally associated with investment, it also means that if there is a problem, there’s no regulatory recourse,” he says. “Some of these platforms also lend money to people to buy forex which magnifies the potential gains and also potential losses from these activities.”
NBFIRA and BIPS have joined forces on an educational campaign aimed at sensitising Batswana about the hazards of crypto and forex scams.
Sensitising people to the risks is not an easy task. To begin with, no one expects ordinary members of the public to know the differences between shares, bonds and other legitimate investment products as compared to the get-rich quick scam products.
Secondly, unsuspecting victims often miss or overlook the red flags in the phoney investment schemes, such as promises of unrealistic returns. In the example above, a one percent per day return on a P100 investment may sound doable to the average Joe, but in reality, it would mean if you invested that amount today on a compound basis, in 12 months' time, you would have 3,678% profit.
To understand how impossible this is, the average return for the S&P 500, the global benchmark, is about 10% per year and while within that, there will be companies whose returns far exceed that, none of them will likely touch 3,000% in a year.
Even in cryptocurrencies, returns of 3,000% in 12 months are outlandish. The most well-known cryptocurrency, Bitcoin, gained 800% last year, its best year, and that also involved deep falls and upticks, making it one of the most volatile assets to put money in.
The trouble, White and Motshubi say, is low financial literacy, which opens the door to other factors such as desperation and reckless risk taking, key ingredients needed by scammers in their exploits.
“Financial literacy is at the core of why there’s such a huge problem with people into risky forex and others,” Motshubi says. “Those pictures you see on social media of people sitting on a Maserati and saying they can help you get that one percent per day, if you don’t have financial literacy to say this cannot be real, you may fall for it.”
White chips in: “People believe that it’s possible that you can get rich and get that amount of money overnight. “Even some of the institutional investors get trapped in similar situations where they put money into schemes, some of which are licensed, without paying attention or understanding the underlying risks associated with such products . “The advice is that you should know the type of questions to ask the promoters of these schemes and don’t just fall into the promises. “As for institutions, if they don’t understand, they should ask for advice, because some of these licensed products are meant for more sophisticated investors and will require professional advice.”
Institutions such as the Botswana Stock Exchange are pushing for financial literacy classes to start in early education as part of the curriculum. For several years, the BSE has held a senior secondary schools finance and investment competition to go alongside its initiatives to boost financial literacy in the classroom.
The financial literacy issue is not just about pensioners being scammed of their lump sums or non-urbanites being preyed on. It actually cuts across, White says.
“We have realised that there is a huge information gap that relates to the area of investments in general,” she says. “It’s not only about the retail investors out in the streets but also the educated cadre with university degrees. “They don’t understand the dynamics of investment. When talking about investments, people don’t understand them as much as they understand what banking entails. “Whenever I am interviewed on radio, the calls are almost all about microlending activities because that’s what most people understand. “Capital markets are a bit more abstract.”
As part of their educational campaign, NBFIRA and BIPS will be sending out more public messages on various products and the risks, including outlining the phrases around investment that Batswana should watch out. More campaigns are also being done in Setswana, in recognition of an important communication barrier.
Another key hurdle NBFIRA and BIPS have to tackle, however, is the perception that the mainstream financial products have low returns, are 'boring' and are designed more as a buffer against inflation than a wealth-creating mechanism.
“Our marketing messages are a bit muted versus someone who goes on Facebook and promises that one percent per day, while siting on top of a Lamborghini,” concedes Motshubi. “There’s no NBFIRA licensee who could market that way because they would be doing the market a disservice. “However, we are saying there are great products out there from reputable companies that can do you very well over the long term.”
White explains that NBFIRA does not view the Internet as the problem itself, but rather the manner in which scammers use its 'borderlessness' to target Batswana.
“We actually have online trading regulations because as a regulator we have to align ourselves with international trends relating to how securities are traded,” she says. “In Asia, on electronic billboards, share prices are being shown and even on the mobile phones, so we cannot run away from technology, but rather we have to embrace it. “We do embrace and encourage an environment where licensed non-bank financial institutions can use these online platforms to offer their products. “These platforms should be established in Botswana and as long as they target Batswana, they require a licence from the NBFIRA.”
As the economy’s performance remains constrained, more Batswana will be on the look-out for any high-return investment opportunities. NBFIRA and BIPS are cautioning consumers that “what the bold text giveth, the spidery text taketh away”.