Tough stance on cryptocurrency despite fast rising popularity

Regional central banks say digital currency is risky and difficult to regulate.

Given that cryptocurrencies are growing in popularity as the new technologies become widely used, the lack of regulatory oversight may exacerbate the risks cryptocurrencies pose to financial stability. PHOTO | JENS KALAENE 

IN SUMMARY

  • Kenya, Tanzania and Uganda said trading in cryptocurrencies like Bitcoin is illegal, for reasons ranging from whether they are commodities or money to being pyramid schemes that could plunge investors into losses.
  • The Bank of Tanzania said dealing in cryptocurrencies is tricky because they are not regulated and it was not clear who controls the market.
  • Central Bank of Kenya Governor Patrick Njoroge, said cryptocurrencies remained prone to theft, fraud, and other forms of crime that expose users to potential losses due to lack of backing by central banks or any physical assets.

East African Community members have taken a common stance against digital currencies even as their appeal grows across the world.

Kenya, Tanzania and Uganda said trading in cryptocurrencies like Bitcoin is illegal, for reasons ranging from whether they are commodities or money to being pyramid schemes that could plunge investors into losses.

“Trading in cryptocurrencies is illegal in Uganda, and we have discouraged people from buying them. It is not clear if these financial products are currencies or commodities.

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“But we are working on a policy paper that will inform our decision-making on this subject. This document will be finalised before the end of January 2018,” said Andrew Wabulya, Bank of Uganda’s executive director for operations.

Money laundering

The Bank of Tanzania said dealing in cryptocurrencies is tricky because they are not regulated and it was not clear who controls the market.

“A collapse of the cryptocurrency markets may lead to substantial losses for investors,” said BoT Governor Florens Luoga, adding that their amorphous nature could see them used to launder money or fund terrorism.

Prof Luoga however said the BoT was working to minimise the risks by developing a co-ordinated approach to regulation of the cryptocurrencies market and restricting the scope of investments and transactions.

Central Bank of Kenya Governor Patrick Njoroge, said cryptocurrencies remained prone to theft, fraud, and other forms of crime that expose users to potential losses due to lack of backing by central banks or any physical assets.

“Our point is that there is risk, and it is important that everybody knows that those risks can come back to haunt us and could have financial stability concerns,” Dr Njoroge said.

In December 2015, the CBK issued a notice linking the virtual currencies to terrorism and money laundering due to the untraceable nature of their transactions.

Rising popularity

Meanwhile, digital currencies continue to gain more traction in the region. Currently, it is estimated that more than 1,000 Kenyans are actively trading in digital currencies with some confessing to have quit their jobs to take up trading in cryptocurrencies as a full-time job.

Annerose Muhindi, a cryptocurrency trader, says she first heard of the digital currencies in late 2016 but started trading in them in March this year when one bitcoin was worth $1,200.

“After three weeks of trading in Litecoin, the returns had tripled and that’s when I ventured into Bitcoin,” Ms Muhindi told The EastAfrican.

But it is not all smooth sailing. Tanzanian Bitcoin trader Raymond Mulegi said some Tanzanians had stopped using one of the platforms because of fraud.

“I usually wire money to Xapo, and I have a solid experience with that platform. There are others who used Bitpesa in the past, but they recently stopped trading in Tanzania because many people were involved in scams,” said Mr Mulegi.

Rwanda is yet to take an official position on cryptocurrency as Governor of the National Bank of Rwanda (BNR) John Rwangombwa declined to comment on the matter.

However, an article in Global Insights, authored by Samuel Baker and Nyirakanani Regine, senior economists at BNR, indicates that Rwanda is well aware of the growing interest in cryptocurrency and is positioning itself to embrace the Bitcoin craze.

The two economists argue that as Rwanda’s tech sector continues to grow, the country will likely see the evolution of cryptocurrencies.
“Cryptocurrencies may come as an alien terminology to most Rwandans, but we believe that this wave is about to hit, not long from today. BNR should therefore brace for when it hits,” the authors say.
BNR recognises that cryptocurrencies have implications for the global economy, although they are still traded on a relatively small-scale.
Rwanda remains cautious about the risks involved.
“Despite the benefits, the risks posed by cryptocurrencies seem to be greater. First, this area is less understood around the world and this makes it alien to regulators.
“Given that cryptocurrencies are growing in popularity as the new technologies become widely used, the lack of regulatory oversight may exacerbate the risks cryptocurrencies pose to financial stability,” the economists say.

The anonymity of cryptocurrencies means they are not subject to any government or Central Bank interference, which may make them safe havens for money laundering, terrorist financing, tax evasion and fraud.

“Although cryptocurrencies have mostly been a phenomenon of advanced economies, they are spreading and evolving in developing countries including in Africa. In East Africa, Bitpesa, a Kenyan-based blockhain payments platform, is operating across Uganda, Kenya and Tanzania.

“The company launched in November 2013, and continues to expand across the region. Cryptocurrencies are also becoming popular in South Africa, Nigeria and Zimbabwe. This trend is likely to continue,” the economists add.

Regulation

Some regulators around the world are experimenting with their own cryptocurrencies, with China already testing its new version.

“In Kenya, the Central Bank has been struggling with how to regulate BitPesa given the complexity of the platform and its implications for policy,” the economists say.

The total market value of cryptocurrencies went past the $300 billion mark in market capitalisation last week, according to data by Coin Market Cap.

Bitcoin — the best-known cryptocurrency — crossed the $10,000 mark in valuation last week, bringing its year-to-date performance to more than 900 per cent; Ethereum crossed the $500 mark.

Dr Njoroge acknowledged the potential of block chain — the technology that enables digital currencies.

“There may be a future for block chain. We are working with our peers around the world on things that could lead to using this technology in specific ways,” he said.

Kenya Bankers Association CEO Habil Olaka said while block chain is a powerful technology that can be used to facilitate many processes in different sectors, investing in cryptocurrencies is just as risky as any other asset.

“We need to separate cryptocurrencies from block chain, which is a very safe technology. The fact that cryptocurrencies are not backed by the Central Bank means its value could fall from $10,000 today to $2000 tomorrow,” Mr Olaka said.

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