entry image
entry author
Author : Eric Luhombo Ligami

Cryptocurrency: Towards A Legal Framework In Kenya?

Introduction

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.

Benefits

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 manipulation.

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.

The Downside: The Need for Regulation

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.

What are challenges to regulating Cryptocurrency

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.

What Other Counries Are Doing

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 cryptocurrency.

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

The Time Is Now

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.

title

Previous post

A Comparative Analysis On The Challenges As To The Formation And Formalities Of Online Contracts In Kenya

about the author

author

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.

Background

Click on the button to download a copy of this article