Challenges of informal crypto trading in Zimbabwe

Zimbabwe is one of many countries that do not recognize cryptocurrencies as a legitimate medium of exchange or as legal tender.

Besides this lack of recognition, cryptocurrency use is also being held back by common barriers like the limited knowledge or internet access by potential users.

It matters little that some outside the country believe to be an ideal candidate for cryptocurrency adoption, a majority of Zimbabweans are simply not using this currency.

The use of alternative of forms of money like Bitcoin in Zimbabwe remains inconsequential when contrasted with the levels of hyperinflation or the lack of confidence in the national currency, that is the reality.

But why should conditions in the country force people to seek alternatives to government money in the first place?

Genuine case for crypto adoption

Firstly, hyperinflation—which Zimbabwe is facing for the second time in just over a decade—causes a serious erosion of earnings, wealth, pension savings when such funds are stored in the form of a volatile national currency like the Zimdollar.

So while government has suspended the release of official inflation figures, some independent economists estimate this to be north of 500% per annum and there a high likelihood it will to get worse this year.

Such a level of inflation causes chaos in markets and forces people to seek unconventional ways of insulating their wealth.

Secondly, the Zimdollar 2.0 or ZWL—which made a controversial return in 2016 after an eight year period of abeyance—has already depreciated considerably, from an initial exchange rate of  1:1 to the current rate of Zwl $22 for every one USD.

That is a decline of over 2000% in just over three years! It is this kind of currency volatility that underscores the need for stable alternatives to government fiat money.

Now in order for new readers to get a better perspective of the extent of value erosion, they may have to observe how the life of a contemporary Zimbabwean has changed in just over three years since the local currency made a return. 

For example, an average Zimbabwean government worker earned about USD $400 per month between 2009 and 2016. This was in a period when the country was using the greenback as legal tender and when inflation averaged less than 5 percent per annum.

During that period government workers were relatively better off as they could afford to pay for most basics items like foodstuff or utilities. Things were normal, there was a level of certainty with respect to one’s financial obligations and thus workers could plan ahead.

Today, the same workers now reportedly earn less than Zwl $1500 or an equivalent of USD $68. This meager figure is way below what would count as a decent wage.

In fact, even the state controlled statistical body, Zimstats, admits that this income level is way below what it terms the national poverty threshold.

Workers, pensioners, students or anyone in Zimbabwe whose earnings are not linked to a stable currency have all been affected the resurgent hyperinflation.

So when decentralized cryptocurrencies—which are borderless digital currencies that are not subject to unfair foreign currency regulations—are brought into the frame, it is the contention of many crypto enthusiasts that this hyperinflation scourge will not have the same effect (if any) on pension savings or fixed account bank deposits as it does now.

In fact, a decentralized cryptocurrency like Bitcoin or Ethereum is totally immune from Zimbabwean inflation because this type of currency has no link to national currencies and the respective monetary policies. Often, it is a country’s monetary policy or general (mis)management of its affairs that determines the level of inflation and the rate of economic decline or prosperity.

For Zimbabwean victims of national mismanagement, it makes sense to switch to cryptocurrencies in order to avoid seeing another hyperinflation episode wipe out their savings.

Ignorance by Zimbabweans

Unfortunately that is not yet the case in Zimbabwe. There has not been that mass switch from fiat currency to cryptocurrency although there is a small but growing community of users.

A majority of Zimbabweans are generally ignorant of possibilities that privately issued currencies can bring, and institutions like the central bank are able to seize on this (ignorance) by issuing public advisories against the use of cryptocurrencies or by imposing a ban on cryptocurrency trading entities.

The famous case of Golix, a crypto exchange, versus the Reserve Bank of Zimbabwe (RBZ) in 2018 immediately comes to mind. The financial troubles that now beset the former appear to have ‘vindicated’ the initial stance taken by the RBZ on cryptocurrencies and on companies that facilitate cryptocurrency exchange.

Golix has reportedly failed to reimburse clients following the forced shut-down of operations in 2018 and some reports indicate that directors of the crypto exchange could be on the run.

The Golix controversy naturally serves as fodder for those working against the growth of cryptocurrency trading and this negatively affects efforts to get more Zimbabweans using this alternative form of money in the long term.

Informal trading platforms

Of course, there are a few more operational exchanges or crypto businesses that have not faced similar challenges. Zimcoin and Cryptogem are some of crypto exchanges still operating from Zimbabwe while Bitkesh, another Zimbabwean crypto start-up, offers services from its South African base.

Nevertheless, the uncertainty around cryptocurrency regulation in Zimbabwe forces a small army of regular cryptocurrency users to resort to informal trading platforms like social media chat groups when trading cryptos.

There are several such chat groups and many are invitation only. The respective group administrators will only add a new member after conducting the necessary ‘background checks’, while invited members are expected to be knowledgeable of cryptocurrencies prior to joining.

Still, even with all these checks or verification of a potential member’s suitability, it has not been all rosy as some traders have lost funds.

It appears the lack of a trustless crypto trading platform is proving to be a major hurdle stalling efforts to increase cryptocurrency trading or awareness in Zimbabwe. For example, in one crypto trading group, a problem arose when two traders could not agree on who had to send what first.

The two traders are members of the same crypto trading group but stay in separate towns, which are several hundreds of kilometres apart. Their only connection is via a Whatsapp chat group—where members are supposedly vetted—but beyond that they are total strangers!

Now with respect to a typical Whatsapp group advertisement, it is the seller who initiates contact by posting what they are selling. It can be any of the common cryptos, the Bitcoin, Ethereum or Skrill (which is quite popular with Zimbabwean crypto traders).  They then go on to state whether they wish to conduct the transaction face to face or via a bank transfer. Buyers who respond must adhere to the conditions set by the seller.

In this case of the two traders who failed to conclude a deal, the seller is located in Hwange, a town some 500 kilometres west of Harare, Zimbabwe’s main city. Hwange ranks lowly when compared to Harare in terms of crypto transactions. Most crypto traders live in Harare.

Clearly, the distance between this seller and the potential buyers usually rules out a face to face transaction more so when the amount involved is insignificant. For this particular transaction, the seller indicated that he was selling Skrill worth USD$10. A bank or mobile money transfer is the most practical payment option here.

Problem of trust or lack thereof

Herein then lies the problem, who should initiate the transaction? Should the seller send the crypto first or the buyer has to send the money first?

It was exactly at this point that a deal broke down but not before an angry exchange of words between the two traders. Africa Blockchain Media got access to this chat feed.

In the thread, the seller insists that the normal practice must apply, i.e. the buyer has to send the Ecocash (mobile money) first and only then will the seller transfer the Skrill.

However, the buyer correctly asks why they must send first when in fact, the two, mobile money and Skrill have an equal value?

A different member of the group then weighs in by agreeing with the seller’s assertion that the buyer has to in principle, send the Ecocash first. This anonymous member argues that this makes sense because mobile money transactions can be reversed or recovered but cryptocurrency trades are usually irreversible.

There is a caveat though; the two traders must trust each other. If there is no trust then there is surely no need to proceed with the transaction.

The transaction between the two traders ultimately collapsed because of lack of trust.

It is exactly this kind of problem that curtails informal crypto trading even when the traders involved are quite knowledgeable about cryptocurrencies. If tech savvy traders are encountering such problems then things can only be worse for the less tech savvy individuals, who are the majority.

Con opportunity?

Africa Blockchain Media spoke to an individual whom we shall call Munyaradzi. Munyaradzi is the seller of the Skrill in the aborted deal mentioned above and a victim of a con.

We asked why he insisted on the buyer sending the fiat first.

Munyaradzi explained he has been duped twice for believing that the other party will honour their pledge to transfer the fiat.

“I remember the guy who first conned me in 2017, he requested that I send him the money first. When I did sent him the money (USD$90), he immediately started claiming that he was experiencing network and electricity challenges. Many days passed while his mobile number was continuously unreachable. This went on for some time until I gave up.”

Ecocash mobile money service is provided by Cassava Smartech, a division of Econet Wireless Group, Zimbabwe’s largest mobile network operator (MNO). The Ecocash service does occasionally experience service outages but these are often quickly solved.

Munyaradzi in the meantime thought his first encounter with a con artist was just an aberration; it could not happen again he surmised.

He was wrong as he explains;

“Again, some few months ago I gave it a try with a small lot of $10 for Skrill. Immediately after I sent the money first, the guy started making excuses for not sending the Skrill and he even apologized for the delays. In the end he promised to reimburse, but up to now nothing has happened, he has not reversed the transaction.”

Munyaradzi’s experiences have taught him to be more circumspect when dealing with new traders and this is evident from his conversation with the buyer. Not even the attempts to vouch for the buyer by another member of the crypto group could sway him.

Clearly, informal crypto trading between strangers is not going to grow if more people get conned like this (and they will get conned.)  It is stories like that of Munyaradzi that build a negative perception of cryptocurrencies in general thus creating another barrier to a wider adoption of these digital currencies.

Cryptocurrencies will be seen not tools of improving financial inclusion or cheaper ways of making payments abroad but as instruments used by conmen to swindle unsuspecting people with little or no hope of recovering the stolen funds.

Case for a trustless technology layer

It is paramount therefore that a technology layer or a decentralized escrow of sorts, which eliminates the need for parties to trust each other, be created or be made known if it already exists.  

Zimbabweans, and indeed all Africans need cryptocurrencies to insulate themselves from the effects of poor economic choices yet such digital alternatives are still fraught with challenges which make their adoption by the masses a long shot.

Crypto entrepreneurs and technology companies need to devise ways of making cryptocurrency trading better for ordinary folks. When that happens, the use of cryptocurrencies like Bitcoin in everyday life will increase and the vision of an emancipated cashless society will become a reality.

More importantly, central banks will be forced to reform when it becomes clear that the majority are dumping the national fiat in favour of privately issued currency. A reformed central bank will prove beneficial to all stakeholders in the end.