Category Archives: Bitcoin

Kenya CMA drafts Sandbox Rules to test Bitcoin and other Fintech

Kenya’s Capital Markets Authority (CMA) has proposed rules to create a regulatory fintech sandbox for innovations which do not fit within the country’s current financial regulatory framework.

The proposed draft rules to enable the introduction and testing of financial technology (fintech) products such as peer to peer finance (crowd funding), cryptocurrencies, distributed ledger technology (blockchain technology), artificial (e.g. algorithmic trading), big-data, RegTech credit rating, online lenders, and online banks. 

They give a safe legal status and safe space to investors and developers to confidently test and unlock these unique financial innovations tailored for Kenyan consumers. The draft rules were drawn after consultation and in lines with rules in  Australia, Singapore, Abu Dhabi, Malaysia and UK as guides.

The fintech tools must be ready for testing in a live environment; this will allow them to be tested for defined periods of time and for them to be reviewed by peer groups who work with the CMA. Once companies apply to the CMA, they are to get decisions within 21 days, and at the conclusion, they are to give the CMA a report of their outcomes.

Also
• The CMA will have an annual fintech day that will feature all the sandbox participants.
• Participation in the sandbox can be revoked if a company does not do what it says it intended to, has a security breach, or harms the public, among others violations.

The sandbox rules aim to position Kenya as an investment destination of choice. CMA has in the past drafted rules on REIT’s, bonds and venture capital. Will these new fintech sandbox rules lead to more M-Pesa-like innovations? Will they enable the legal use of bitcoin in Kenya?  Review the rules (download)  and give the CMA feedback by July 26.

Make Innovation the Centre of your Business and Job or Face Disruption

These were the words of Brett King, a futurist and bestselling Author spoke about disruptive innovation to guests at a business forum at the Capital Club, Nairobi. He had been invited by KCB Group, Kenya’s largest bank, which he is advising on a digital finance strategy.

He said that companies that are based on innovation and technology ( E.g Google, Facebook, Alibaba, Baidu, have ten times more profit (~$500,000 per employee) than traditional companies of ($30,000 per employee) or banks ($50,000 per employee)  as they are more efficient at converting production to profits

Other comments:

  • Historically technology that is cool but disruptive ,is resisted and he compared Luddites who smashed factory machinery in England in 1812, to taxi drivers smashing Uber cars in France 200 years later.
  • He expected more contextualization of financial service a based on location and behaviour: e.g. walk into an Apple Shop and you get a finance offer on your phone about a new device you have been longing to buy.
  • Bitcoin’s ability to be a currency is hampered because owners of the coins are hoarding them like gold so they appreciate in price (which is now $1,000). They are not using the bitcoins to make payments which are what currencies are meant to do.
  • There’s a bright future for peer to peer (P-2-P) insurance (more than P-2-P lending).
  • The service jobs there today will be replaced by automation/robotics. But this creates even newer service jobs (every job lost to technology create 2.6 others), and students considering careers should ask themselves how they will compete with Artifical Intelligence (AI) or work in jobs that enable the future e.g. solar adapters.
  • Entrepreneurs should create businesses that take advantage of AI. The mid-2030’s will be an exciting time as there will be more energy from renewable sources than fossil fuels and more robots than humans.
  • On Kenya’s revolutionary M-pesa, which had facilitated the fastest financial inclusion shift in history, he said it was clunky as it was designed for feature phones.

Kenya Community Currencies

This morning at a session on currencies and value I got re-introduced to community currencies. Two years ago there was a mini storm about the legality of  a currency called Bangla-pesa that has since quieten down.

There are five Kenyan community currencies that circulate mainly in slum areas of Nairobi and Mombasa.

Community currencies in Kenya

Community currencies in Kenya

Community currencies in Kenya

Community currencies in Kenya

Nairobi:

  • Gatina
  • Kangemi
  • Lindi

 

Mombasa:

  • Bangladesh
  • Mikindani

The papers notes are by the Grassroots Economic Foundation.  They are not backed by local currency but have the same value as Kenya shilling notes. Member of groups which have constitutions and rules before they join, each gets currency worth 400. They actually only get 200, and 200 from each member goes to a community fund – to carry out community projects such as trash cleaning and hosting sports events.

The lesson today showed how hawala, bitcoin, mpesa had different applications in communities, with a focus on uses away from the formal sector. Also that 10 years after formal  financial inclusion, there is still a lot of money being handled through informal sectors.

Understanding Bitcoin and the Blockchain Opportunity

A guest post by @KaranjaJohn

Bitcoin in Kenya has generated a lot of controversy with the Central Bank of Kenya issuing a public notice warning against the use of bitcoin as a currency within the country. While currency regulation and monetary policy is within the purview of the Central Bank, it is important to dig deeper into what could be the most revolutionary technology of our age and how best we can we move forward with ensuring Kenya and indeed the African continent exploits fully the opportunity that is now within our grasp.

Make no mistake, bitcoin and its underlying blockchain technology will disrupt the current financial order that currently has banking institutions sitting at the top of the food chain. Incumbents who fail to understand and implement strategies risk becoming irrelevant akin to the manner in which Kodak became irrelevant by the advent of Digital Cameras. Indeed Kenyan Banks have already had a taste of this with the arrival of M-Pesa, the mobile money platform, that revolutionized the way Kenyans transfer money and pay for services within the country – amounting to approximately 40% of Kenya’s GDP.

Once again banks and other financial institutions will need to evolve. Bitcoin the world’s first decentralized digital currency is quickly positioning itself as the internet of money; a platform that will allow for instantaneous, immutable and secure exchange of value almost for free and at any given time.

It is important to note that bitcoin the currency is the first successful application of bitcoin the platform. Indeed, the world over, speculators have been the early adopters of this technology, with cases of millions of dollars’ worth of the crypto-currency lost to hacked exchanges across the globe. African Regulators should take time to assess the potential of blockchain technology to reduce costs and enhance transparency within multiple sectors of the economy. For example blockchain technology could eventually provide mechanisms to seal corruption loopholes and track illegal activity such as money laundering at very low costs. Indeed The Central Bank has a constitutional role to manage the country’s fiscal and monetary policy and as such regulating entities such as exchanges that utilize bitcoin the currency is well within their role. This is important to enhance safeguards that ensure consumer protection, prevents money laundering, and monitor transactions for any terrorist activity. This can be done without stifling the technological potential of bitcoin the protocol that is already self-regulating and trust-less.

Blockchain technology has in the recent past become quite popular with banks and financial institutions seeking a way to decentralize storage of information away from traditional databases like the dominant SQL technology. Indeed a number of banks in the United States have formed a Consortium called R3 CEV that intends to develop its own intra-bank blockchain protocol for secure settlement of money transfers between themselves. The World Economic Forum in Davos recently hailed blockchain technology as a revolutionary platform that will dis-intermediate costs associated with middlemen in the remittance space, saving the consumer billions in transfer and other associated costs.

Furthermore blockchain technology will also be critical in addressing corruption in the land sector. Issues such as duplication of title deeds as well as unlawful transfer of land properties will become difficult if not impossible should a public distributed ledger be used to permanently record these transactions. Existing centralized systems allow intermediaries to tamper with records as their databases can be corrupted quite easily.

In conclusion, bitcoin and its underlying blockchain technology offer huge promise in solving many problems across Africa by creating trustless systems that remove the power from centralized intermediaries that could otherwise be corrupted or influenced by power. These technologies can be deployed across many sectors to reduce costs and enhance efficiency. People should not look at bitcoin as a currency alone as that is really only its first application similar to the manner in which email was the first pervasive application of the Internet, which has since developed to include other applications such as web, mobile and even social media applications. Bitcoin and other blockchain applications are creating an Internet of Value where individuals will become even more empowered. Prudent regulation that protects consumers by ensuring third parties that build solutions on top of this technology do not act unfairly is needed. Kenya and Africa, once again have the opportunity to lead World in utilizing innovative and disruptive blockchain technologies such as bitcoin.

John Karanja is the Founder of BitHub Africa a Blockchain Accelerator providing Consultancy and Incubation services for individuals and firms interested in Bitcoin and Blockchain Technology. 

Why Kenya’s Central Bank Notice on Bitcoin was Misinformed

 A guest post by Michael Kimani (@pesa_africa)

On Tuesday, December 15th , the Central Bank of Kenya issued a public notice on bitcoin in the Daily Nation: CAUTION TO THE PUBLIC ON VIRTUAL CURRENCIES SUCH AS BITCOIN – it read. Naturally, as an analyst keen on this space, I had been expecting this. As part of the Bitcoin community here in Kenya, I am a vocal advocate of digital currencies, writing extensively on the subject over the past 2 years. Suffice to say, I have a firm grasp of Bitcoin in whole. CBK assertions were wide off the mark, and I cannot help but question the competency of their research. With this Op Ed, I shall clarify the downright falsehoods in its notice.

Right of the bat, the headline ‘caution on Virtual currencies such as Bitcoin’ is not well thought out. Virtual currencies is a broad term encompassing reward schemes we use in Kenya today – Bonga, Nakumatt, Uchumi points and Kenya Airways (KQ frequent flyer) points. According to the European Central bank, they are ‘digital representations of value not issued by government that can be used for payments.’ Evidently, Bitcoin and bonga points fall in the same category. As such, they should be treated in the same manner, as there is no explicit regulation for virtual currencies in Kenya.

Bitcoin has a unique design, that confounds regulators and monetary authorities attempting to pigeonhole it. It is by no means legal tender in Kenya, nor anywhere else, consequently, its legal status varies substantially from country to country.

For example, US tax authority IRS classifies it as an asset, with tax payable on capital gains. Across the European Union, bitcoin is treated as a means of payment, after a top court ruling in October exempted it from VAT, just like regular cash. On the contrary, a ruling by US Commodities Futures Trading Commission (CFTC) in September, officially defined it as a commodity, just like wheat and crude oil. The UK, considers it as private money and sales of goods and service in exchange for bitcoin are subject to VAT.

Under the hood, bitcoin is an artificially scarce economic incentive for securing a decentralized ‘internet like’ network – the first of its kind. One popular application for it right now, is an open source global payment network but, that is just the tip of the iceberg. You see, the network, referred to as the blockchain in tech circles, is also a platform for building all sorts of fascinating applications never before possible. All are joined at the hip. No wonder, governments and legal experts have trouble confining it. Meanwhile, Silicon Valley hails it as the greatest innovation in the past 100 years – the internet of money.

 Reading on, CBK highlights three risks associated with bitcoin –

  • bitcoin transactions are largely untraceable and anonymous making them susceptible to abuse. . .’ All too often, I come across this fallacy, regurgitated by uninitiated commentators. For the record, Bitcoin transactions are visible on a public ledger that holds a permanent record of all transactions since inception. Transactions are traceable and pseudonymous, so much so, that the UK treasury, deemed it low risk for money laundering and terrorism financing in a National Risk Assessment report released in October, 2015. Notably, the UK has taken measures to embrace bitcoin and digital currencies as a strategic competitive advantage; Kenya would do well to take a leaf out of their book.
  • “Virtual currencies are traded in exchange platforms that tend to be unregulated all over the world” While this may have been true 2 years ago, it is no longer the case. Regulation around the world has caught up, bridging the gap between mainstream investors and bitcoin. Bitcoin Investment Trust is a US bitcoin investment vehicle trading on OTCQX, the most heavily regulated of over-the-counter exchanges. In Sweden, investors can buy Bitcoin via an exchange-traded note (ETN) listed on Nasdaq Stockholm stock exchange. Coinbase and itBit are regulated bitcoin exchanges in the United States. Gone are the sloppy days of Mt. Gox, exchange platforms today are run by professionals. Additionally, in Kenya, purchased bitcoins remain in full control of their owners, at all times. As a digital bearer asset, holders have the keys to their coins, therefore, if BitPesa ‘collapsed or close business’ today, no single user would lose access to their bitcoins.
  • Finally, bitcoin is indeed volatile, as its value fluctuates based on free market forces. There is no Central Bank to step in with monetary policy, because it is not issued by a central authority. In fact, this design was intended from the beginning. Uniquely, its monetary base supply is capped at 21 million bitcoins, a fact that drives speculative interest, expecting its deflationary nature to ramp up its price up over time. In 2009, 1 bitcoin was trading at $ 0.001, by November 2013, price was up to $ 1,173; as of writing this, it is just above $450.  I would not recommend it to anyone who was not fully aware of the risk reward ratio.

There is a lot more to bitcoin than could fit this post. My advice is to conduct your own research and due diligence, you will find it fascinating at the very the least. I am confident bitcoin and the blockchain will come out on top as the greatest innovation of our time. Four years from now, we will look back and laugh at how ridiculous this notice was.