When Satoshi Nakamoto, founder of Bitcoin presented a paper titled “Bitcoin: A Peer to Peer
Cashless Money Transfer” in 2008 they introduced the concept of a currency that was to be
decentralized and free from human manipulation. From this paper emerged a new revolution of
digital currency that might quite possibly bring an end to the government currency monopoly and
also provide financial privacy and security. Cryptocurrency has the potential to replace the age of
Central Banking and also holds significant promise for economic growth.
In December 2015, the Central Bank of Kenya through a Public Notice issued a cautionary
statement against the holding, use and trading of digital currency. The Central Bank expressed it
concerns that since the digital currency was not legal tender it enjoyed no protection in case the
platform that exchanges or holds the virtual currency fails or goes out of business.
Despite these warning, Kenyans like many other populations worldwide is aggressively getting
into the world of digital currency. To date more than 1100 cryptocurrency companies have been
reported to be trading al over the world. It is not surprising that this number grows by the day since
cryptocurrency has become a game changer in financial technology. The uses and benefits of
cryptocurrency are numerous and can be seen to be in the incipient stages of strong-arming the
traditional financial institution such as banks.
Apart from offering a decentralized medium of exchange, it has also offered an alternative from
the financial monopoly that state Governments through their Central Banks have wielded.
Cryptocurrency and other Blockchain assets also offer a certain level of privacy and security for
money that traditional banking would not have dreamed of. The most outstanding benefit of
cryptocurrency, however, is that the value of currency is purely determined by an algorithm (based
on market forces of demand and supply) making it free from human and human-related
The over-arching benefits of cryptocurrency and Blockchain technology have since wound their
way into other areas of the economy. For instance startup companies are now employing Initial
Coin Offerings to raise capital. Just recently, regional business newspaper, Business Daily reported
that IBM, a technology powerhouse, was in talks with the Government of Kenya to utilize
Blockchain Technology to store and manage public records in the education and health sector.
This technology however, does not come without risk. While privacy is almost completely
guaranteed in cryptocurrency transactions, the anonymity of the parties to a transaction means that
the platforms could be used to fund illegal activities. There are also tax implications where the
government loses revenue collected from income tax or capital gains as individuals may chose to
employ cryptocurrency platforms as fronts for tax evasion.
The cryptocurrency market in Kenya at the moment is unhinged and unrestricted making it
particularly susceptible to fraudsters. Traditional currency process regulation has arguably been
circumnavigated. There is therefore a compelling need to re-evaluate these traditional methods or
come up with a new regulatory framework.
Besides the scare of a total collapse of cryptocurrency market, there is a shouting want for
legislation. A collapse of the cryptocurrency trade could cause negative investor bias towards
technology based business. Consumer protection rights under Article 46 of the Constitution of
Kenya 2010 guarantees consumers’ health, safety and economic interests be protected. Under
Article 46 Parliament is mandate to enact legislation to provide for consumer protection.
Regulation of cryptocurrency is therefore vital if not in the letter and spirit of the Constitution,
then to protect consumers and investors.
A problem addressed is half solved. Appreciating the need for legislation is a step in the right
director. Nevertheless, regulation of cryptocurrency at least as of now will not be a walk in the
park. It might be difficult to regulate cryptocurrency since its operationalization has not been fully
understood. It is not clear how cryptocurrency can be defined or classified. Whether it is a medium
of exchange or a commodity will go a long way in determining the relevant regulatory authority.
It is not exactly simple to pin point what to regulate. A regulator may decide to regulate the
cryptocurrency systems and protocols or alternatively choose to regulate how the system is used.
Even so where would the focus of regulation be? Would it be the prohibition of criminal activities
or reporting of books kept or addressing possible information asymmetry fraud and/or theft? And
of course there is also the concern that different cryptocurrencies are designed to operate
differently despite the basic technology being similar.
The regulation of cryptocurrency would give it legitimacy. This means that the average Kenyan
investor would be more confident to put their money with a guaranteed government protection.
Consequently, governments might be hesitant from taking steps because legitimizing
cryptocurrency will eventually cause an economic power shift towards decentralized economies.
Government regulation in itself, however, would interfere with the primordial objective of the
cryptocurrency which is to maintain autonomy and freedom from human-manipulation.
Government regulation would prejudice the autonomous nature of the cryptocurrency and subject
it to human manipulation undermining cryptocurrency co-objectives. Therefore an attempt at
regulation has to be extremely surgical and more importantly transparent in order to preserve the
integrity of the cryptocurrency protocol.
Kenya regulators in the finance sector have made headway and are meeting to come up with a
possible regulatory framework. While this is laudable, there is still an immediate need for
regulation. While remote risks like investors’ bias might not require any regulatory intervention,
immediate risks such as possible collapse, fraud and criminal activities should not remain beyond
the reach of legislation.
Japan became the first country to legitimize Cryptocurrency, Bitcoin, in particular in April 2007.
Japan enacted specific legislation to regulate the trading of cryptocurrency alongside anti-money
laundering regulations. It is compulsory to register markets that trade Bitcoin and licenses have to
be given before any Initial Coin Offering is conducted.
The United States on the other hand has not made any specific legislation to regulate the trading
of crypto currency. This does not mean that the trade is unregulated. Different regulators from
different sectors of the economy have picked up the mantle and exercised authority where relevant.
For instance, the Security Exchange Commission (SEC) rationalizing cryptocurrency to be in form
of securities has issued enforcement actions against sponsors of Initial Coin Offerings and exposed
alleged fraud. The Internal Revenue Service has classed cryptocurrency as property for purpose of
tax and should therefore be subject to a tax levy on capital gains. Summarily, it can be observed
that regulators in the United States are working together to regulate different aspects of
Other countries such as Venezuela have created their own cryptocurrency, Petro, in order to serve
as a viable alternative to the country’s rapidly inflating currency. In Bolivia, Ecuador and Morocco
digital currencies have been completely banned. Canada on the other hand has taken a ‘regulate
and embrace’ policy. In one way or another, the world is reacting to the cryptocurrency revolution
It is prudent and pragmatic for the Government of Kenya to make haste and put in place measures
that will quickly address the looming legal grey area in cryptocurrency. A regulatory framework
should be put in place to protect against the risks with a keen interest not to undermine innovation.
The novel uses of Blockchain technology and cryptocurrency are expected to rise and with them
will come more rigorous legal hurdles. The time for regulation is now while cryptocurrency is in
its incipient stages.
Eric Luhombo Ligami has a wide experience in Conveyancing, Commercial, and Corporate law having had an opportunity of representing a wide range of clients, especially banks, financial and mortgage institutions, micro-finance institutions, public corporations and other lending institutions in the practice relating Security documentation and/or perfection, Law of Business Associations.