CHAPTER ONE

INTRODUCTION

This section of the study gives an insight to the historical background of the study, problem statement, research question, research objective, hypothesis, significance of the study and how the following chapters of the study will be organized.

1.1 Background to the study

In the developed world, the transition from an analogue to a digital financial industry started to occur in the late 1960s with the emergence of the handheld financial calculator and the automated teller machine (ATM), (Anuli & Ricky, 2012).  There has been successive rapid growth in technology leading up to the latest decade of extraordinary swift technological developments (Douglas et al., 2017). This led to the major rise of financial technology instruments according to Henry (2014) who believed that, the global payment infrastructure also provided the basis for the rise of alternate payment systems such as PayPal and Alipay. Therefore, the financial industry must assess the opportunities and challenges presented by technology.

Finance has its origins in administrative systems from state administration necessary in the transition from hunter-gatherer groups, to settled agricultural states. For instance in the context of Mesopotamia, in which some of the earliest examples of written records shows evidence of financial transactions, (Mathew, 2010). The development of money itself and finance are clearly intertwined, with fiat currency that is, a technology evidencing transferable value. Mathew (2015) sees it as one of the defining characteristics of a modern economy. This evolutionary development can also be seen in the context of trade, with finance evolving from an early stage both to support trade as well as to support the production of goods for that trade. Double entry accounting according to Goode (1985) is another technology fundamental to a modern economy emerged from the intertwined evolution of finance and trade in the late middle Ages and the Renaissance.

Financial technology is the application of technology to deliver financial products and services (IMF, 2018). Financial technology has also been defined by the Financial Stability Implications from FinTech (2017), as technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services. The traditional banking system comprised of individuals going to the brick-and-mortar institution to carry out financial transactions. Generally, the financial system involved the physical presence of individuals, institutions and a trusted third party in order for a transaction to be carried out. But in recent years, most transactions are carried out digitally and do not require all parties involved in a transaction to be present. This is gradually creating a cashless society where consumers no longer have to purchase with hard cash and financial services can be offered to customers every day of the week (24/7). Wu et al., (2006) said, as compared with traditional banking, labour is replaced by machines very significantly which is low in cost and available easily 24/7.  It can then be said that this is the fourth stage of evolution after barter, commodity money, fiduciary issue and now digital cash.

According to Douglas et al. (2015), the interlinkage of finance and technology has a long history and has evolved over three distinct eras, during which finance and technology have evolved together: first in the analogue context then with a process of digitalization of finance from the late twentieth century onwards. Since 2008, a new era of FinTech has emerged in both the developed and developing world. This era is defined not by the financial products or services delivered but by who delivers them and the application of rapidly developing technology at the retail and wholesale levels (Douglas et al., 2015).

The origin of FinTech can be traced to the early 1990s referred to as the “Financial Services Technology Consortium”, a project which was initiated by Citigroup to facilitate technological cooperation efforts (Marc, 2015). According to a Google trend (2015), it is only since 2014 that the sector has attracted the focused attention of regulators, industry participants and consumers alike. The term now refers to a large and rapidly growing industry representing between $12 billion (Chloe, 2015) and $197 billion (Gareth et al., 2015) in investment as of 2014, depending on whether one considers start-ups (FinTech 3.0) only or the full spectrum of applications, including traditional financial institutions (FinTech 2.0). This rapid growth has attracted greater regulatory scrutiny, which is certainly warranted given the fundamental role FinTech plays in the functioning of finance and its infrastructure.

However, the link between finance and technology has a long history as financial and technological developments have long been intertwined and mutually reinforcing. The Global Financial Crisis (GFC) of 2008 is part of the reasons why FinTech is now evolving into a new paradigm (Douglas et al., 2015). This evolution poses challenges for regulators and market participants alike, particularly in balancing the potential benefits of innovation with the potential risks.

The financial services industry has been one of the prime purchasers of information technology (IT) products and services globally, with total spending of over $197 billion in 2014 (Gareth et al., 2015). This dates back to the mid-1990s, when the financial services industry became the single largest purchaser of IT, a position it retains to this day (Douglas et al., 2015). Thus, for at least twenty years, traditional financial services have been a driving force in the IT industry and this trend is not slowing. In fact, the industry is predicted to double its IT spending, at least partially as a result of the modern evolution of FinTech (Elliott, 2015). From the late 1980s, the financial industry has been an industry based on the transmission and manipulation of digital information. Today, the ATM is often the only point for most consumers at which finance transitions from a purely digital experience to one that involves a physical commodity that is cash (Douglas et al., 2015).

Financial technology instruments involve ‘digital currency’ that is cryptocurrency like Bitcoin, Ethereum and peer-to-peer mobile payments like PayPal, CashApp, amongst others. According to Brito et al., (2014), while there are many easily regulated intermediaries like banks, hedge funds, amongst others when it comes to the provision of traditional financial services, emerging financial technology instruments like cryptocurrency denominated instruments rely much less on traditional intermediaries. Cryptocurrencies are decentralized currencies based on cryptographic operations (Brito et al., 2014). Cryptography is a publicly accessible log file, with recorded information about every account’s balance at a given time and if funds are transferred, it is broadcasted to and accepted by all the participants of the system (Peck, 2012). The world’s first cryptocurrency is bitcoin (Alex, 2013). According to Timothy (2013), cryptocurrency is a disruptive technology and most capitalist are rushing to make great profits off it. Due to cryptocurrency’s pseudo-anonymity characteristic, banks have struggled to combat financial crimes such as money laundering (Lansky, 2018).

Financial technology instruments include cryptocurrencies like bitcoin, peer-to-peer payment systems like PayPal, Venmo and CashApp. PayPal is an electronic commerce company that facilitates payments between parties through online transfers (Kagan, 2020). The first form of PayPal was launched in the 1990s by Confinity, it merged with X.com which is an online banking company and officially became PayPal in 2001 (Investopedia, 2020). CashApp is also a peer-to-peer money transfer service that allows users to send and receive money (Bessette, 2021). All these payment systems are regarded as peer-to-peer because they are interconnected and work together.

The early 1990s was met with an increase in the number of internet users (Leelien & Hsiang-Hoo, 2001). By 2008, the number of internet users was predicted to have reached 750million globally according to Forest Research Institute (1996). Most internet users are predicted to be online shoppers or are banking and carrying out investments, thus the increase in illegal financial activities. According to Douglas et al., (2017), the continuous introduction of technology to finance has made the industry far more vulnerable to attacks. The Bangladesh Central Bank heist done through the (Society for Worldwide Interbank Financial telecommunication) SWIFT and the recent Yahoo hack shows the vulnerabilities and potential risk of the existing system. It is estimated that trillions of illegal funds are laundered worldwide each year (AUSTRAC, 2011). Money laundering undermines the financial system and raises questions of credibility and transparency.

Illegal financial activities also known as financial crime is defined by Actimize (2019), as a regulatory or monetary act against financial sectors to manipulate and cause threats and instability of the system. The offense leads to distress for individuals, organisations, and financial institutions only benefiting oneself (Jung & Lee, 2017). Financial crime entails cyber criminality (scamming), money laundering, embezzlement, amongst others. According to Massad (2019), the inadequate regulations to address cryptocurrency led to fraud and a weak economy, thus increasing illicit payments resulting in collateral damage to the financial system. With an increase in the use of virtual currencies through peer-to-peer payment systems, there is an increase in financial crimes such as money laundry thereby raising new challenges for banks (Mabunda, 2018).  Money laundering is the process of obtaining illegal funds and allowing criminals to control their money (Kumar, 2012). Cyber criminality is another activity with has led to the growth of illegal financial transactions. Cybercrime is committed through a network device to make money (Brush, 2020). It might be theft of financial data or crypto jacking which is the mining of cryptocurrency with resources they do not own (www.kaspersky.com).

Cryptocurrency is censorship-resistant and regulated traditional intermediaries will not process it thus, the increase in their demand for use in illegal financial transactions (Dourado, 2011). The anonymity, fast transactionary rate of financial technology instruments attracted illegal financial transactions to be carried out through them (Brenig et al., 2015). The FBI recognized the attractiveness of these financial technology instruments for the carrying out of illegal financial transactions who avoid the traditional financial system to conduct monetary transfers globally (Brenig et al., 2015). They backed this up with ‘difficulties detecting suspicious activity, identifying users and obtaining transaction (FBI, 2012).

FinTech has helped in combining the latest technological developments with financial services which in turn has helped businesses though changing the traditional brick-and-mortar banking system and transactionary methods. Financial transactions are no longer confined to bank branches where one had to go personally. The traditional banking system composed of heavy paper work, daily routine, limited service hours, though it encouraged human interaction, trust, amongst others, it had several drawbacks consequently possible solutions where sort for this problem which led to; technological advancement and the introduction of financial technology instruments which was fast adopted by various financial institution in order to ameliorate their situation. Yet, these financial technology instruments are still to prove its worth.

1.2 Statement of the Problem

In recent times the introduction of electronic banking and peer-to-peer electronic cash systems are changing the traditional banking system. Financial Technology (FinTech) companies have brought about most of the latest technological development from payment apps like CashApp, PayPal, Zelle and Venmo to even digital currency also known as cryptocurrency like Bitcoin, NEMcoin, amongst others.

Digital currencies, which according to (ECB 2012) are, “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community. Bitcoin transaction costs are much lower and faster than those of traditional financial networks. While credit card networks charge merchants fees in the range of 3 to 4 percent of the total amount of a transaction, and the average cost of international remittances is 8.5 percent, (World Bank, 2014) a Bitcoin transaction can cost less than 1 percent. Like other disruptive technologies, Bitcoin is first taking holding spaces that are underserved by incumbents (Brito et al., 2014). This includes innovative areas like micropayments (Rizzo, 2014) and crowd funding, (Blattberg, 2014) but also payments related to the online sale of illicit goods, such as drugs and firearms. Because Bitcoin is censorship-resistant, it can be employed for transactions that incumbent intermediaries would not process or are not allowed by law to process. Indeed, it is possible that Bitcoin’s network effects were bootstrapped by demand for use in facilitating illicit transactions (Dourado, 2011). Over the course of 2013, regulators and central banks around the world issued warnings to consumers about the risks associated with Bitcoin (Global legal Research Center, 2014).

The rapid evolution and development of FinTech has led to a demand of a similar evolution and development of “RegTech.” (Brito, 2013). RegTech is a contraction of the terms regulatory and technology, and it comprises the use of technology, particularly information technology (IT), in the context of regulatory monitoring, reporting, and compliance. In the words of Christophe Chazot, HSBC Group Head of Innovation, RegTech can be described as “technological solutions to regulatory processes” (Laurence, 2006). In the near future, the application of technology to monitoring and compliance offers massive cost savings to established financial companies and potentially massive opportunities to emerging FinTech start-ups, IT firms, and advisory firms (Andreessen, 2014). Cybercrime is one of the most significant risks faced by the financial industry, particularly as the digitization and centralization of processes continues (CFTC Regulations, 2011). Likewise, for new FinTech start-ups, cybercrime should be a key concern as these data intensive companies often have a limited comprehension or perceived need of security as they live in a digital world with an abundance of data. On the technological side, blockchain which helps with the anonymity of cryptocurrencies and financial technology instruments, may offer the potential to replace the clearing and settlement methods devised in the nineteenth century (Hajdarbegovic, 2014).  While regulations such as the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) are available to combat cryptocurrency money laundering, there are significant gaps in these existing laws as the cryptocurrency has many advanced features such as decentralization (Nabilou, 2019). The pseudo-anonymity feature of cryptocurrency has also caused the struggle to identify and investigate both the sender and the cost of crime transactions (Dyson et al., 2018). According to Wegberg et al., (2018), since cryptocurrency clients do not have to reveal their identities, it presents reasons why regulation is required to counter terrorist financing as a lack of appropriate monitoring allowed for questionable transactions permitting criminals to utilize cryptocurrencies difficulty to detect any money laundering activities, thus giving rise to cryptocurrency-related money laundering. Anonymity by cryptocurrency is one of the biggest problems (Houben & Snyers, 2018). Making account holder’s information unidentifiable makes it difficult for accounts to be traced (Rueckert, 2019). Despite its potential, the literature on financial technology instruments and their role in illegal financial transactions is still fragmented, with weak empirical insights and limited theoretical explanations. Therefore, financial industry managers lack guidance on how to plan and prepare for the impact of financial technology on the operation of illegal financial transactions.

FinTech has helped in combining the latest technological developments with financial services which in turn has helped businesses though changing the traditional brick-and-mortar banking system. Banking is no longer confined to branches where one had to go personally, that is, customers had to go to the various banks to carry out their transactions such as withdrawal, money transfer, and money deposits, amongst others. The traditional banking system composed of heavy paper work, daily routine, limited service hours, though it encouraged human interaction, trust,  it had several drawbacks like long queues at the bank, paper shuffling, trust based models, transaction cost and relying on financial institutions, thus possible solutions where sort for this problem like electronic cash systems, software which were developed to better provide these services consequentially, technological advancement which led to the introduction of financial technology instruments and was fast adopted by various financial institutions in order to ameliorate their situation.

Financial technology instruments were adopted to aid in reaching out to a wide number of customers, promote swift transfers, unlimited service hours, promote international financial transactions, and make international payments while respecting anonymity and customer’s privacy, these aspects are in order to improve performance like efficiency and wider customer outreach to business and to financial transactions.

Yet, these financial technology instruments are still to prove its worth due to several hindrances like the rise of technological disruption, embezzlement, volatility, cybercrime, fraud, poor internet, amongst others as Mabunda (2018) found out in his study that some cryptocurrencies like bitcoin, have played a significant role in spreading money laundering as it possesses features that attract criminals. Therefore, it is against this backdrop that this study aims at finding out the role of financial technology instruments in the growth of illegal financial transaction and make recommendation based on the outcome of this study.

1.3 Research Questions

The main research question:

To what extent have financial technological instruments affected the growth of illegal financial transactions in the English-speaking regions of Cameroon?

Specifically:

1. To what extent has cryptocurrency affected the growth of illegal financial transactions in the English-speaking regions of Cameroon?
2. How does PayPal affect the growth of illegal financial transactions in the English-speaking regions of Cameroon?
3. To what level has CashApp affected the growth of illegal financial transactions in the English-speaking regions of Cameroon?
4. To what extent has Venmo affected the growth of illegal financial transactions in the English-speaking regions of Cameroon?
5. What are the different ways to combat the growth of FinTech related illegal financial transactions in the English-speaking regions of Cameroon?

1.4 Objectives of Study

The main objective of this study is to investigate the effect of financial technology instruments on the growth of illegal financial transaction in the English-speaking regions of Cameroon.

Specifically, the study aims:

1. To evaluate the effect of cryptocurrency on the growth of illegal financial transactions in the English-speaking regions of Cameroon.
2. To examine the effect of PayPal on the growth of illegal financial transactions in the English-speaking regions of Cameroon.
3. To investigate the effect of CashApp on growth of illegal financial transactions in the English-speaking regions of Cameroon.
4. To assess the effect of Venmo on the growth of illegal financial transactions in the English-speaking regions of Cameroon.
5. To obtain solutions to combat the growth of FinTech related illegal financial transactions in the English-speaking regions of Cameroon.