REGULATIONS GOVERNING CRYPTOCURRENCY IN AFRICA

Why have African governments been slow with the adoption of cryptocurrencies?

Are they protecting their citizens?

Does the current crop of leaders lack imagination and can’t envision a future without paper cash?

Which is it?

From Nigeria to Kenya and South Africa to Egypt, a lot of the younger generation have jumped onto the Bitcoin train, disregarding the skepticism of regulators on the continent. Many African governments don’t know what to do about cryptocurrencies, although recently, there has been some progress. With most countries in the region struggling not to buckle under economic uncertainties and pressures looming over them even as the ripple effects of COVID-19 set in, it would appear that many Africans, especially millennials, aren’t waiting for the government anymore.

Regulation in Africa

Regulation = Regular. It’s the antithesis of the chaos that virtual assets initially thrived in and now seem to be bogged down by. Regulations establish order so that a system can function more consistently, safely with mostly predictable outcomes. This means that in a more controllable environment, cryptocurrencies can be seen as a normal, less volatile risk that can be managed with sophisticated technology and have better protection.

According to Baker McKenzie’s Guide to Blockchain and Cryptocurrency in Africa, African governments have mixed reactions to the use and regulation of blockchain and cryptocurrency in Africa. Some have taken a positive stance, seeking to understand how best to regulate its use, while others have adopted a wait-and-see approach.

Crypto payments have become a common feature in many parts of the continent, allowing businesses and individuals to make fast, cost-efficient transactions, increasing productivity in some of the most underbanked communities. This increasing popularity of crypto has also brought greater regulatory scrutiny — with African lawmakers analysts appearing divided on

how to best respond to the crypto phenomenon.

While some nations have openly declared their support for cryptocurrencies, most countries have either issued complete or partial bans. The most common position, however, is one of caution. Countries such as Kenya, Ghana, Lesotho, Swaziland, Uganda, Zambia, and Zimbabwe have warned their citizens about cryptocurrencies without actively banning crypto trading or use. While also not banning usage, other countries such as Namibia and Burundi have issued bans against trading, citing a lack of consumer protection.

In April 2020, South Africa took its first steps towards creating cryptocurrency laws by publishing a framework proposal. More recently, Nigeria laid out plans to regulate cryptocurrencies through its Securities and Exchange Commission. This marked a turnaround from two years ago when the Nigerian lawmakers asked the central bank to "investigate" bitcoin.

Marius Reitz, Luno's general manager for Africa, told business publication Quartz that hasty, heavy-handed regulation could crush innovation within the sector.

"What we'd like to see is a phased approach. It can be very easy for regulators to regulate the entire industry from the onset, but it could stifle innovation. Once governments regulate better, there's more chance of opening up integration with traditional financial infrastructure, and there would be more mass adoption as well," he said.

Monthly cryptocurrency transfers to and from Africa under $10,000 shot up by 55% over the past year, reaching a peak of $316 million in the first quarter of 2021. Individuals and small businesses in Nigeria, South Africa, and Kenya account for most of this activity. Let’s take a look at cryptocurrency regulations in the above countries.

• Nigeria

In a recent report, the Securities and Exchange Commission of Nigeria officially issued regulatory guidelines for digital currencies and crypto-based companies or startups. According to Nigeria’s capital market and investment regulator, the aim is to protect investors and create standards for ethical practices. The commission also added that it would regulate “all Digital Assets Token Offerings, Initial Coin Offerings, Security Token ICOs, and other Blockchain-based offers of digital assets within Nigeria. Every crypto asset in Nigeria will be treated as securities unless the company or startup can prove otherwise. This development is a far cry from what was obtainable before now. Interest in crypto from its citizens may likely have driven Nigerian regulators to latch on to this budding market.

• South Africa

The South African government has to be the friendliest to the Bitcoin ecosystem in Africa. The South African Revenue Services, the revenue arm of the South African government, has been exploring ways in which cryptocurrency investments can be appropriately taxed. In April 2018, the South African Revenue Service (SARS) said in a statement that citizens must declare income

derived from cryptocurrency investments as part of their capital gains statement.

In 2020, South Africa’s Financial Sector Conduct Authority (FSCA) published “a draft declaration of crypto assets as a financial product under the Financial Advisory and Intermediary Services Act [FAIS].

The draft declaration incorporates some recommendations for regulating cryptocurrency as a financial product under the FAIS Act from a position paper published by the Crypto Assets Regulatory Working Group (CAR WG). The new rules will apply to cryptocurrency service providers, including crypto exchanges, advisors, and brokers. They will have to register with the FSCA as financial services providers (FSPs). To this day, the draft has yet to be passed or implemented.

• Kenya

The appetite for digital currencies remains active in Kenya. Volumes transacted are the third highest in Africa – behind South Africa and Nigeria. The Central Bank of Kenya Governor, Dr. Patrick Njoroge, once compared Bitcoin to a pyramid scheme in 2017.

In 2018, President Uhuru Kenyatta directed that a Blockchain and AI task force be created to explore the use of these technologies within Kenya’s existing economic framework. Also, the Capital Markets Authority, Central Bank of Kenya, Insurance Regulatory Authority, SACCOs Societies Regulatory Authority, and the Retirement Benefits Authority are having ongoing discussions on how to regulate virtual currencies.

In February 2018, the Capital Markets Authority (CMA) issued a cautionary notice warning investors against taking part in Initial Coin Offerings (ICOs), indicating that the CMA had not approved any ICOs and that the offerings

were unregulated and speculative investments. This was in the backdrop of Wiseman Talent Ventures Limited, which sought to raise money from the public by issuing digital tokens.

Kenyan authorities have gone from comparing cryptocurrencies to pyramid schemes to setting up a task force to study the challenges and benefits associated with the underlying blockchain technology. The Central Bank of Kenya and its governor have also made an about-turn and now seem to be exhibiting a relaxed approach towards digital currencies.

“We are already having discussions with other global players, in various ways, around the introduction of Central Bank Digital Currencies. The push comes as a result of the mushrooming of private cryptocurrencies, and we are already feeling left out and need to create our own space,” said Dr. Patrick Njoroge. He made these remarks during an online interview with the US media on the sidelines of Georgetown’s DC Fintech week in 2020.

Africa won’t be able to realize Blockchain’s full potential without a unified regulatory approach. For the most part, the neutral regulatory stance on cryptocurrency in most countries within sub-Saharan Africa is due to a lack of education on the matter. However, it appears that this will not remain so for much longer. The level of interest from its citizens is growing. Beyond the need to hold cryptocurrencies for speculative reasons, Africa seems to be the region with the greatest need for cryptocurrency use cases. This increasing demand will play a key role in hastening regulation across the continent.

"Regulation needs to catch up with innovation."

Henry Paulson - Former United States Secretary of the Treasury