Although regulators around the world remain skeptical about recognising virtual currencies as legal tender, cryptocurrencies are already an established phenomenon and are here to stay. With the exception of El Salvador, most countries have taken a cautious approach in allowing the use of these currencies and require disclaimers warning the public of the risks.
In Africa, the acceptance of these currencies has varied from jurisdiction to jurisdiction, but there is a general trend towards supporting their use. Of recent, there have been positive signs in countries such Kenya, Mauritius, Tanzania, and Uganda. Mauritius, for example, has issued a number of regulatory statements that will likely accelerate the acceptance of cryptocurrencies as legal tender in the country.
This commentary highlights developments in Kenya, Tanzania and Uganda and is reproduced courtesy of Bowmans.
Regulatory position on cryptocurrencies
The adoption and use of cryptocurrencies has gained significant traction in Kenya with about 4.5 million people currently owning cryptocurrencies as per the Triple A Crypto ownership report. Chainalysis, Chainalysis, Global Crypto Adoption Index 2021 has ranked Kenya first globally for peer-to-peer cryptocurrency trading volume and fifth worldwide for total cryptocurrency activity. This goes to show that there has been a substantial uptake of cryptocurrencies in Kenya.
The financial sector regulators in Kenya – the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA) – have generally adopted a restrictive approach towards the use of virtual currencies. For instance, in 2015, the CBK issued a cautionary notice to financial institutions against dealing in virtual currencies or transacting with entities engaged in virtual currencies, stating that virtual currencies such as bitcoin are not legal tender in Kenya and therefore no protection exists in the event that bitcoin exchange platforms fail or go out of business.
The CBK issued a subsequent notice warning financial institutions against dealing with or transacting with institutions that deal with virtual currencies. In its 2020 Banking Supervisions Report the CBK noted that ‘there is no clear evidence that cryptocurrencies present material risks to financial stability and monetary policy at this stage. However, continuous monitoring of the size and growth of cryptocurrencies is prudent to ensure that their material risks are identified as well as their transmission channels to financial stability risk. The CBK, in tandem with other financial sector regulators, will continue to sensitize the public on the potential risks posed by cryptocurrencies”. In our view, this statement indicates that the CBK may be softening its stance towards the regulation of cryptocurrencies.
Similarly, the CMA issued a public notice on 21st February 2018 warning Kenyans against participating in Initial Coin Offerings (ICOs) stating that it had not approved any ICOs, that they were unregulated and that speculative investments posed considerable risks to investors.
The CMA issued this notice in response to a complaint raised by a member of the public about an ICO that had been offered by Wiseman Talent Ventures Ltd, which sought to raise funds through an ICO using KeniCoin, a virtual currency.
In past comments, the CBK and the CMA have highlighted the risks of cryptocurrency trade which include the facts that it is:
- unregulated and therefore no protection can be guaranteed if the platform falls;
- volatile – the price of bitcoin and other cryptocurrencies tends to rise and fall quite frequently and unpredictably; and
- anonymous in nature and can therefore circumvent disclosure requirements such as Know Your Customer and anti-money laundering requirements.
Despite these cautionary warnings, there has been a steady rise in the number of peer-to-peer crypto exchanges in Kenya. Given the statistics on transactional volume, it is clear that Kenyans remain undeterred by the notices.
What does future look like for cryptocurrencies in Kenya?
In general, the CMA and the CBK have demonstrated an active approach towards regulation. Kenyan laws and regulations are usually drafted in a broad manner to allow regulators such as the CMA and CBK to stretch their regulatory purview to cover any new advancements in a particular sector including technological advancements. However, in February 2022, the CBK recognising the growing interest in cryptocurrencies, issued its Discussion Paper on Central Bank Digital Currency (CBDC Paper) in which it proposes to issue a digital currency in Kenya inviting comments from the public on its use case.
Furthermore, the Government through the Ministry of Information Communication and Technology, Innovation and Youth Affairs (Ministry of ICT) expressed interest in developing the fintech space in Kenya. This is evidenced by the establishment of a Distributed Ledgers and Artificial Intelligence Taskforce (Taskforce) in March 2018, tasked with developing a road map for emerging technologies such as blockchain and artificial intelligence.
The Taskforce issued a Report in July 2019 (Report). It stated, among other things, that the provisions of the National Payment Systems Act that mandate the CBK to designate a payment system for purposes of the Act, may be relied on to license and regulate cryptocurrencies and other alternative payment systems. It also proposed the leveraging of the current CMA legal framework, which could be a game changer for small and medium size players.
The Report also looked into enabling cryptocurrency and other alternative currencies in Kenya. One of the key recommendations in the Report is the creation of a Central Bank Digital Currency (CBDC) which would allow for a costless medium of exchange, a secure store of value and a stable unit of account. The offering of the CBDC would be different from that of private entities offering virtual currencies whose prices tend to be more volatile. The Report also noted that a passive approach to digital currency is not advisable given the current advancements in technology.
The Ministry of ICT is yet to action the recommendations in the Report.
Further, as part of its plan to leverage technology across the capital markets value chain, the CMA has established a regulatory sandbox and issued a Regulatory Sandbox Policy Guideline Note, which was approved in 2019. So far, the CMA has admitted over seven firms active in the fintech space. This is a critical and welcome move designed to foster and embrace the growth of fintech and innovation within the country’s capital markets.
However, according to the CMA Milestones Report issued in April 2021, the CMA has been facing challenges when considering applications by entities providing cryptocurrency services to be admitted to the regulatory sandbox, including:
- novelty and complexity of the concept;
- insufficient information regarding the risk universe in this area;
- lack of Internal capacity to review these types of applications;
- objections by banks to the issue of cryptocurrencies; and
- fears around volatility affecting local currency.
Kenya has seen an increase in the trade in cryptocurrencies over the years and while trading in cryptocurrencies is neither expressly regulated nor prohibited in Kenya, transactional volumes through peer-to-peer platforms continue to be on the rise.
We appreciate that the Government of Kenya has recognized the huge role played by new technologies and has taken steps to embrace these technologies and foster their development as evidenced by the establishment of the Taskforce and the CMA regulatory sandbox. We also understand that a Joint Financial Sector Regulators Forum established a working group aimed at promoting the adoption of technology and innovations in the financial services sector. Ultimately, we hope to see some progress and a more tangible way forward permitting the adoption and use of cryptocurrencies beyond the existent P2P model. We would encourage the introduction of the digital asset use cases within the CMA Regulatory Sandbox as this would enable all actual use cases and concerns to be tested within the safety of the sandbox and allay fears that the regulators may have. Overall, we look forward to a potential increase in regulatory and sector coordination and cooperation.
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Regulatory position on cryptocurrencies
In recent years there have been significant steps by the Government towards embracing the digital era as well as digital and electronic transactions. Various interesting reforms have been made to this end, although there has been a reluctance to legalise cryptocurrencies. A substantial basic legal framework to form the foundation for the operation of cryptocurrencies is already in place. For example, important key legislation has been enacted including: the National Payment Systems Act, 2015; the National Payment Systems (Electronic Money) Regulations, 2015, and its supporting regulations; the National Payment Systems (Licensing and Approval) Regulations, 2015 and the Electronic Transactions Act, 2015; and the e-Government Act, 2019.
National Payment Systems Act, 2015
The National Payment Systems Act, which is administered by the Bank of Tanzania (BoT), was enacted principally to regulate mobile money transactions. The NPSA and its supporting regulations have established the framework for the registration and operation of payment systems and the dealing in electronic money transactions, within certain limitations. A payment system is required to be licensed and may be a bank or a non-bank entity. The instruments that execute instructions for ordering the transmission or payment of money must also be licensed. The Act and its regulations require that the value of the electronic money in circulation is backed by a corresponding amount in bank notes or coins that are deposited in a special account at the inception of a transaction.
Electronic Transactions Act, 2015
The Electronic Transactions Act was enacted to provide legal recognition and enforcement of electronic transactions of all kinds. Such transactions may be entered into or executed by the Government or private individuals and entities. As such, all the important concepts that would be fundamental to the operation of and dealing with virtual currencies are covered under this law. Matters related to cryptography, electronic signature, data messages, computer systems, electronic contracts, recognition and admission of electronic evidence in court, etc. are also adequately provided for. This law also formally gives legal recognition to interactions and dealings with the Government electronically in all aspects (see more below).
e-Government Act, 2019
The e-Government Act provides for e-Government services as well as the establishment of an e-Government Authority and its administration, management and operation of e-Government services. The e-Government Authority coordinates, oversees and promotes e-Government related policies, laws, regulations, standards and guidelines in public institutions.
What does future look like for cryptocurrencies in Tanzania?
In spite of all these laws the BoT, in its 2019 Public Notice on Cryptocurrencies, declared them to be illegal and in contravention of foreign exchange regulations. The BoT noted that there was a growing trend for Tanzanian to use virtual currencies, and highlighted its concern that the said currencies were being marketed and used as though they are legal tender.
However, an encouraging move of late is a statement by the President of Tanzania, Her Excellency Hon. Samia Suluhu Hassan. In a speech she gave in June of 2021, she made a comment to the effect that cryptocurrency was the future of finance and urged the BoT to take the necessary steps to prepare for it rather than be caught unprepared. However, there is no evidence that the BoT has taken any steps following the President’s comments.
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Regulatory position on cryptocurrencies
In Uganda, cryptocurrencies are not recognised as a payment instrument or payment service by the Government or Central Bank. Cryptocurrencies are not backed by assets or government guarantees, and issuers are not required to exchange them for legal currency or other value. Market participants trade and invest entirely at their own risk. This hard stance is evidenced in the firm aversion expressed in the public statements issued by the Central Bank’s current leadership, recently saying the Government, “does not recognize any crypto-currency as legal tender”. As such, unlike other owners of financial assets who are protected by Government regulation, holders of cryptocurrencies in Uganda do not enjoy any consumer protection if they lose the value assigned to their holdings of cryptocurrencies, or if an organisation facilitating the use, holding or trading of cryptocurrencies fails to deliver the services or value it has promised.
A curious effect of the approach taken by the Central Bank is that cryptocurrencies, although not backed by it, are not illegal. As a result, the Ugandan market has seen a proliferation of cryptocurrency-related activity and innovation by people with an insatiable risk appetite.
Several crypto to fiat currency exchanges have been launched (e.g. BitPesa, CoinPesa and Binanace Uganda). These are all operational with Ugandans consuming their services and products in the absence of any consumer regulation or laws. A proliferation of web and app-based multicurrency wallets have also been developed (Eversend and Yellowcard). These have brought cryptocurrency trading closer to the masses with options of multiple payment methods like mobile money or bank-to-wallet transfers that which have enabled the trading of bitcoin, ethereum and tether amongst other currencies. These wallets also enable trading against the Uganda Shilling. Further, the previous rollout of mobile money services that depend on digital wallets has made digital currencies somewhat acceptable to Ugandans. However, this has recently changed with the central bank instructing all licensed players under the National Payment Systems Act to refrain from facilitating cryptocurrency transactions.
As a result of this increased activity, the Financial Intelligence Authority (FIA) amended the Anti-Money Laundering Act (AML Act) to include Virtual Asset Service Providers (VASPs) among the list of “accountable persons” subject to supervision and monitoring by the FIA. As accountable persons, VSAPs (who in our view include cryptocurrency service providers) have obligations under the AML Act including, registration with the FIA, conducting customer due-diligence and reporting suspicious transactions among others.
A recent report by the FIA states that “only a few VASPs had been registered” and it was noted that “the low uptake exposes market participants to greater risks of money laundering, terrorism financing and invest scams”. Consequently, the FIA is seeking assistance from the country’s Finance Ministry to establish more extensive cryptocurrency regulations, particularly with regards to cryptocurrency service providers.
What does the future look like for cryptocurrencies in Uganda?
The advent of the National Payment Systems Act, (NPS Act) and Regulations (NPS Regulations) in 2020 and 2021 respectively, have brought the regulation of electronic money, payment systems and payment service providers under the Central Bank.
One could argue that the definitions attributed to payment services and payment instruments in the NPS Act could capture cryptocurrencies. However, this has not been recognised by the Bank of Uganda. For example, under the NPS Act, a payment instrument is defined to mean “any device or set of procedures by which a payment instruction is issued for purposes of making payments or transferring money and includes cheques, bills of exchange, promissory notes, electronic money, credit transfers, direct debits, credit cards and debit cards or any other instrument through which a person may make payments with the exception of bank notes and coins”. It could easily be argued that cryptocurrencies in their current form could amount to an instrument under this definition.
Further, under the definition of securities under the Capital Markets Authorities Act, Cap 84, a security could be any other instrument prescribed by the Capital Markets Authority (CMA). However, the CMA has not prescribed cryptocurrency as an instrument.
Be that as it may, it is expected that the Finance Ministry and Central Bank are leaning towards regulation of the payment space, and cryptocurrencies are likely to be regulated soon. According to George Wilson Sonko, a Performance Analyst at the Central Bank of Uganda, the Bank is currently studying the idea of a Central Bank Digital Currency with the aid of case studies developed by peer central banks in Jamaica, Nigeria, Ghana and Kenya among others. This clearly demonstrates that the Central Bank is exploring amendments in financial laws that will facilitate the circulation of digital currency denominations in addition to the already existing framework governing issuance of electronic money.
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