News broke on Tuesday 17th of August 2021, that a federal high court in Abuja granted the request of the Central Bank of Nigeria (CBN) to freeze accounts of six FinTech companies over its investigation of “illegal foreign exchange trading” by the companies.
According to reports, the CBN wants to freeze the accounts of the companies for 180 days pending the conclusion of its investigations. The companies affected are Rise Vest Technologies Limited, Bamboo Systems Technology Limited, Bamboo Systems Technology Limited OPNS, Chaka Technologies Limited, CTL/Business Expenses, and Trove Technologies Limited. All six companies are being accused of operating without a license.
This report has spooked many Nigerians who use these platforms to invest in foreign stocks or cryptocurrencies, afraid that the freeze might affect their deposits and investments. However, soon after the judgement was made public, the FinTechs issued a press release assuring their users about the safety of their investments.
One of the FinTech apps, Bamboo, told investors, “We’re aware of the recent reports about us. Our legal and government relations teams are looking into it but we thought it was important to let you know that your money remains safe with Bamboo and will always be readily accessible.”
Rise also responded saying, “With regard to the latest news about us and our FX dealings, you can be sure that your investments and funds are safely managed, that funding and withdrawals will continue to be processed as normal and that our U.S operations remain intact. We will work with regulators, as we always have to ensure that all issues raised are properly addressed. However, this does not affect our users or their investments, which are managed by regulated third-parties in all jurisdictions in which we operate.”
But beyond these statements is your money truly safe?
Firstly, if the CBN freezes their accounts it supposes that they will be unable to take on your deposits for the period of the freeze. For those who may have deposited but have yet to invest, it is also likely that their money might be affected by the freeze especially if they are yet to transfer it to their brokerage account.
From what we understand, the FinTechs operate under the license of a brokerage account in the US where they transfer all the funds which are used to acquire shares on behalf of Nigerians. Those accounts are out of the reach of Nigerian authorities and cannot be frozen.
However, should you decide to liquidate your investment, you risk the danger of getting your funds frozen or trapped. This of course is based on our prognosis of the issue and understanding of the Nigerian financial system.
The FinTech’s will have to be able to separate their own funds from that of depositors for transfers to function. This is the case for some of their applications. For example, when transferring funds through Trove, you are given a Providus Bank account in the name of Trove/Account Owner. This is where you deposit the money which is then used to purchase stocks on your behalf. Whether this avoids been frozen is another thing.
In addition to the assurances given by the companies, they also stated clearly in their applications that investor money is insured against loss of cash and securities (such as stocks and bonds) held by a customer of a financially troubled Securities Investor Protection Corporation (SIPC) member.
The SIPC protects investments to the tune of $500,000.
In whose interest?
It is unlikely that the Central Bank will allow depositors to lose their money just to punish FinTech companies that they believe are flouting their rule. Rather, we expect the likely outcome here is that the companies will be fined and told to desist from accepting deposits to convert to dollars via the interbank market or via BDCs.
Another outcome could be that they ask them to refund all investor account which is yet to be transferred to the broker accounts.
Based on this assumption, we believe depositors money will be safe during freeze even if they won’t be able to access it immediately. Unlike banks who lend out depositors money, these companies are only conduits for investing money on behalf of their depositors. This makes it very unlikely for your typical bank run.