Kenya’s capital markets regulator puts Crypto assets under close watch
Wednesday February 16 2022
The International Monetary Fund says while the rise of crypto assets is inevitable, central bank backed digital currencies can help mitigate some of the difficulties for cross-jurisdiction monitoring by regulators. PHOTO | AFP
Kenya’s Capital Markets Authority will give more attention to crypto assets as technology permeates all facets of the financial markets.
In the Capital Markets Soundness report, the regulator says crypto assets, which are tradeable digital possessions or forms of money that exist only online, have lately been on the rise globally and must now be given adequate attention.
Yet instead of proposing a ban, which the International Monetary Fund (IMF) has warned is impossible, the report suggests playing within the trade rather than controlling it.
Crypto assets capitalisation
Crypto assets reached an all-time high in global market capitalisation of $3 trillion in November last year. The most common assets are the Bitcoin, Stablecoins and Ethereum.
CMA, however, raises caution that crypto assets are not yet entirely safe for investors because they are highly volatile and susceptible to hacking. The regulator has suggested controls to protect investors.
In the wake of the fourth industrial revolution, the supposed season for robots and other technologies for human advancement, IMF has warned that the rise of crypto assets is inevitable.
Yet without proper regulation, they may result in harm for global and national financial markets.
“Increased trading of crypto assets by emerging market users can potentially lead to destabilising capital flows. Emerging market and developing economies faced with these risks are encouraged to prioritise strengthening macro policies and consider the benefits of issuing central bank digital currencies,” CMA said in the report.
Currently, the global market capitalisation for crypto assets stands at $1.7 trillion according to Statista, which is more than 50 times the total market capitalisation for all East African bourses combined, which stood at $30.05 billion in the last quarter.
A recent survey in 154 countries by Chainalysis, a cryptocurrency market research firm based in New York, placed Kenya as the leading country globally with the highest proportion of residents putting a large share of their overall wealth into cryptos.
Mitigating strategy
Tanzania came second in Africa and fourth globally, with Rwanda at 13th and Uganda taking the 34th positions worldwide.
According to Chainalysis, many people who invest in crypto assets in developing countries want to mitigate currency instability, evidenced by a clear trend of rising crypto trading when native currencies lose value. This was observed in Kenya and Nigeria in 2020 and 2021.
“The returns in the stock market are not as much as we have seen in the crypto market in the last few years. Why would I invest in the stock market and get, maybe 20 or 30 percent interest in a year, when I could get 50 percent in the crypto market in a month?” Posed Eric Michubu, a Nairobi-based bitcoin entrepreneur.
But crypto trading also predisposes people to fraudsters.
“There are very many ‘get-rich-quick schemes designed around mysterious crypto assets with the sole intention of swindling unsuspecting ‘investors’,” said John Walubengo, a member of Kenya’s National Taskforce on Distributed Ledgers and Artificial Intelligence.
“Several 'crypto-coins' with no fundamental value continue to be launched in the market, collecting funds from buyers and then the owners disappear with the funds,” he added.
Reduced state control
For countries, crypto assets pose the risk of increasing the unwarranted adoption of a foreign currency, displacing domestic money.
A Central Bank Digital Currency (CBDC), a virtual form of a country’s fiat currency issued and regulated by the nation’s monetary authority, may be a solution.
In October 2021, Nigeria became the first country in Africa to launch a CBDC, and the second in the world after The Bahamas.
Tanzania also made a step closer in November when it announced plans to introduce a CBDC along with crypto regulations.
According to the Atlantic Council, an American think tank, Kenya and Rwanda are among 40 countries globally, including the US and UK, that are already on the research stage towards the implementation of a CBDC. Up to 17 other countries are on the development stage while 11, including China and South Africa, have piloted digital currencies.
Adopting CBDCs will place government regulators at a better position to combat money laundering and the financing of terrorism and it will inspire innovative business solutions and reduce data insecurity associated with cryptos, CMA Kenya said.