Patricia, Crypto and Dark Magic II
The question most people want an answer to is whether anything can be done by the customers affected in Nigeria. The truth is that there are options open in law, and you should speak to a lawyer.
Part 2: Patricia Converts Users’ Balances
Patricia, a crypto exchange platform, started off in Nigeria and was quite popular. However, with the CBN’s stance in February 2021 banning crypto (opens as PDF), Patricia announced that it had moved its operations to Estonia sometime in July 2021. It however continued to offer its services to Nigerians. It was a sponsor of the Big Brother Naija Season 6 reality TV game show which began that same July 2021 after Patricia had announced it was relocating to Estonia. To date, Patricia still addresses the Nigerian market in its communications and interviews.
Recently, Patricia has been in the news for very unsightly reasons. Patricia announced on May 26, 2023 that it had suffered a security breach, stating that this happened “not long ago”. This breach, it explained, affected only BTC and Naira balances, while every other crypto asset remained unaffected. It further added that it was undergoing internal restructuring and stopping all customer withdrawals.
However, on May 27, 2023, Techcabal reported that Patricia lost $2m in the hack and that the hack had, in fact, happened in January 2022, well over a year before the announcement that it had been hacked “not long ago”. Curiously, the exchange had managed to operate for over a year after the hack before deciding to shut down withdrawals. This discrepancy was the first hint that Patricia was being economical with the truth.
Then in August 2023, Patricia made an announcement supposedly setting out details of its eagerly anticipated restructuring, and it is very ugly. It announced that it would convert all outstanding customer balances in BTC and Naira to a token it manufactured out of thin air, christened “Patricia Token”.
The Patricia announcement has been viewed by over 1.3 million people on X (previously Twitter), and a lot of people have called it an exit scam. Patricia can claim that this is not the case, but then they would have to explain why customer balances have been compulsorily converted to a token announced by a social media post. In any case, users can still not withdraw, so it is hard to sell a story that nothing is wrong. The announcement has triggered a well-deserved backlash, and it has had everyone scratching their heads and questioning what the true story might be.
There are so many questions;
Patricia claims only BTC and Naira balances were affected, but it has stopped customers from withdrawing any of their money or assets that are not BTC or Naira, why?1
Was ALL the BTC and Naira held by Patricia stolen in the hack? This is important because if the hack was partial, then users should be able to immediately access whatever is left, no matter how little.
If the hack happened over a year ago, and Patricia was able to operate regardless, is it possible that something else might have happened more recently that triggered the decision to shut operations?
What else do we not know?
To be clear, it is not the fact that a token was pulled out of thin air that is the problem. Most, if not all, crypto tokens are pulled out of thin air, so players in the space are familiar with tokens created from nothing.2 We will come back to this shortly.
What people are unfamiliar with is a financial service unilaterally exchanging your money and token for another token without your permission, especially one it manufactured after announcing it lost users’ money. There are specific details about the conversion that we will discuss later in this series, but for now, the focus is on the act of converting users' balances.
You see, converting a person's property to any other form without their express instruction or permission is obviously wrong. However, the more pertinent question is whether this is, you know, a substantive crime. On the one hand, if you are Patricia or any crypto exchange at all, a lot of rules don't exist that clearly address you and your technology, and you can instead describe such a brazen act as a “grey area” or an “unethical act but not a crime”. If you feel generous, you could concede that it is a breach of contract. Unfortunately, all of those opinions are only smart by half. The truth is that while rules on cryptocurrency are in their infancy, the law is not new to rules about the custody of property.
So, if you are a customer or regulator, what Patricia has done arguably presents all the necessary elements to pursue trial for a substantive crime. The fact that there is no specific law on crypto outside the process laws, does not mean there are no laws that generally address what Patricia has done. When you start to phrase it from the lens of property as opposed to crypto, it becomes clearer. There is no need to play the jurisdiction game as well, Patricia continues to offer its services to Nigerians and is very vocal about targeting Nigerians, in contravention of Nigerian law.
The question most people want an answer to is whether anything can be done by the customers affected in Nigeria. The truth is that there are options open in law, and you should speak to a lawyer if you are affected. That said, it is going to be reasonably expensive to pursue. Firstly, because Patricia is not exactly based in Nigeria, you may need to arrange to sue abroad where Patricia is based. As a Nigerian customer, it is uncertain how affordable this would be. Secondly, while Patricia is preventing access to a large sum in total, the individual amount held by each customer is probably way smaller than the cost of legal fees. It makes no sense for a customer who is being owed $10k to try to sue and incur fees of $7k, for example. Well, what if the majority of the users come together to sue by class action? Well, that could work. If any of you pleasant readers have information about such efforts, please let me know.
The more realistic option would be for the Nigerian regulators such as the CBN or the SEC to bring an action against Patricia for breaching Nigerian law. Under this option, the regulator would possibly sue Patricia in Nigeria if the Nigerian company was not closed when it moved to Estonia. If Patricia in Nigeria has been closed up, then the regulators would have to sue in the courts abroad or request the government abroad to extradite key personnel of Patricia to Nigeria to be tried in Nigeria for breaking Nigerian law, especially if it believes there is fraud. However, it is not clear that the Nigerian regulators would want to expend such efforts and resources. It is way more difficult than it sounds on paper.
We have also discussed how the regulators have warned against engaging with crypto, so citizens who continued to do that did so at their own risk. In fact, in August 2023, the major financial regulators such as the CBN, SEC, National Pension Commission, and the Federal Inland Revenue Service (FIRS), amongst others, released a joint Advisory on Illegal Financial Operators (opens as PDF) warning citizens against dealing with unlicensed financial operators. This body of all financial regulators in Nigeria is known as the Financial Services Regulation Coordinating Committee (FSRCC). You know it is pretty serious stuff when all regulators come together to release a joint statement. Whether we would see the regulators pursue legal action against Patricia or any other unlicensed player at all remains to be seen.
There is more to discuss about Patricia's situation. Unfortunate as it might be, situations like this have been proven to be a very valuable medium for lessons. And boy, there is a lot to learn about law and finance, which is what I try to educate my readers about.
If you feel like it, you can also buy me a coffee.
Thank you for reading.
We attempt to answer this in the next part of this series.