So who are the people bringing these gift cards to Paxful to sell?

This is one of the most difficult questions I’ve tried to answer in the course of my research. The reasons for trading a gift card are many and include the selling of unwanted spare gift cards [Appendix 1], online freelancers cashing in their earned gift cards [Appendix 2], and yes, even fraud and/or money laundering activity [Appendix 3]. Based on what I’ve learned up to now, I am not confident that any one of these use cases accounts for the majority of volume. Rather, I would guess that each may account for some minority portion of the volume.

Of the gift card sellers that I spoke with (as well as those who are buying gift cards from the sellers), the cited reason for a large amount of the trades is actually remittance. That is, immigrants in the USA are using gift cards and Bitcoin to transfer value back to their home country. For the next few paragraphs I will explore how this “gift card remittance” process works and then evaluate the data and price points to determine whether or not it could plausibly account for a sizable amount of the volume on Paxful.

Gift Card Remittance on Paxful

“The entire remittance process can be completed in 20–30 minutes with the end result of local Nigerian currency arriving to the family member’s bank account.”

When you go to Paxful and see advertisements looking to purchase gift cards, gift card buyer advertisements show all sorts of requirements and restrictions on the types of cards they are willing to buy. A large chunk of these advertisements demand the gift card be:

A Physical Gift Card, Accompanied by Receipt, Shows that the card was paid in cash on the receipt, Purchased in the last 24–48 hours

For Amazon gift cards, these advertisements match the 63–83 cent price range constituting the right side of the bell curve on the Amazon gift card distribution above. What this means is that a large amount of the cards being sold on Paxful are purchased with the specific intent to bring them there to be sold at a substantial discount.

In speaking with the traders who act as counterparty to those who bring these cash-bought gift cards and receipts, they tell me that the majority of the cards are coming from Nigerians or other West Africans and that their IP address according to Paxful’s trading dashboard confirms this. The interesting twist however is that the receipts of these cards show that they were purchased at various convenience stores and gas stations in the USA, often times mere hours before they were uploaded to Paxful.

So what is happening here then? What I discovered is that (mostly Nigerian) immigrants in the USA are purchasing gift cards in the USA, taking a picture of the card and receipt, and then immediately sending those pictures to their family and friends in Nigeria using Whatsapp. Those on the receiving end of the gift card pictures in Nigeria are the ones who then upload the pictures to Paxful. These Nigerians in Nigeria use the gift cards to trade for Bitcoin, and they then turn around and complete a second trade which sells that recently acquired Bitcoin for Nigerian currency through a bank transfer. The whole process is described in the diagram below:

While this process may seem complicated, Nigerians who engage in these trades tell me that the entire process can be completed in 20–30 minutes with the end result being that local Nigerian currency arrives to the family member’s Nigerian bank account.

Additionally, neither the person sending the money nor the person receiving money needs to stand in line at a remittance counter in either country and the person who sends the money does not even need to know what Bitcoin is or what Paxful is. They just need to know to purchase a gift card, take a picture of it, and send it to their family or friend in Nigeria.

So why is it mostly Nigerian immigrants then? Again, the issue is perplexing, but here is my best attempt at reasoning:

Nigeria’s currency, the Naira, has been subject to varying degrees of manipulation and capital controls in recent years and has had a parallel black market rate for some time. In circumstances like these, standard remittance companies like Western Union have to play by the rules of the local government and honor whatever exchange rate is deemed appropriate there (instead of the black market rate). When going outside of official channels to remit (using gift cards and Bitcoin for example), remitters are able to sell for the more favorable black market rate instead of the official rate and thus receive more Nairas per dollar sent in comparison to Western Union. Another factor at play here is that during the bull run of 2017, Bitcoin buying options across Africa were very limited and caused a premium on the price of Bitcoin there, again creating favorable circumstances for people who hold Bitcoin (those who are selling gift cards). Together, these factors may have conflated to create an environment in 2017–18 such that Nigerian immigrants in the US could actually take a 30% loss on the value of their gift card while still achieving more Nairas delivered to their families than any other traditional remittance channels offered.

If you look at the chart below, you can see how Nigerians were able to sell Bitcoin for tens of percent above the official exchange rate during much of 2017–2018 as Nigeria imposed various sweeping measures in an attempt to control the value of its currency.