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.

16 thoughts on “Why Kenya’s Central Bank Notice on Bitcoin was Misinformed

  1. David

    It is not wrong for CBK as the regulatory authority to warn the public about the risk associated with bitcoin. The author misses the entire point of the notice in this blog post.

    1. Michael Kimani

      David, you’re right. warning the public is the right thing to do.

      My problem is factual errots. Its ok to warn the public, but not misleading the public. My intention was to clarify point by point, how where CBK got it wrong. If someone read their notice and had never heard of bitcoin before, they would be misled.

        1. Michael Kimani

          The title reads as it should.

          Misinform means to give (someone) false or inaccurate information. Which is what I show here.

    2. bankelele Post author

      True. The CBK has put up several alerts in the past on things like gold scams and pyramid schemes.

  2. Wilson

    Kenya lacks the regulatory mechanism and laws to support the adoption of virtual currencies. How would someone for example go about reporting the theft of their bitcoins? What would the Kenya Police or the CBK be able to do for you? Bitcoin heists do happen and recovery is next to impossible even in advanced economies. If the regulator cannot protect you, then who will?

    Two cases in point, now picture the same happening in Kenya:

    Victims of the biggest theft in bitcoin history tried to put the much vaunted anonymity of the currency to the test as they attempted to recover their stolen money. But instead, they were left out of pocket and with egg on their face

    1. Michael Kimani

      Bitcoin is property. What that means is that if you own it you hold. That is how it is designed. If a user decides to entrust an institution to hold their BTC for them, then they are taking on an agency risk. I am saddened by the events at Mt. Gox, and would not wish it on anyone. BUT, it is important to remember it is not bitcoin that was at fault, but rather the exchange.

      When you have a 20 KES coin in your pocket and you lose it in a matatu, do you complain to the police?

      Fortunately, in Kenya if you have used bitpesa, you will know that they DO NOT hold users fund. For reasons you have raised above.

      Most bitcoin regulation has emerged in 2013, which means most countries are new into bitcoin. I see this as an opportunity for Kenya to set itself apart as the first African nations to offer guidelines. Remember, we were the first to successfully launch a mobile money system – there was no regulation then, and we ar now recognized for it globally. While you take caution, i see it as a great opportunity for Kenya to build upon its reputation. Bitcoin will happen with or without us, we might as well front run and grab the opportunity.

      Joe Mucheru ICT cabinet secretary agrees and I couldn’t have said it better myself


      Mr Mucheru hit back, asking the CBK and lawmakers to develop regulations to govern the use of cryptocurrencies likening it to the advent of pioneer mobile money platform M-Pesa which was viewed with suspicion at its birth in March 2007.

      “We need to change regulations to take into account innovations such as virtual currency as this is currently outside CBK’s mandate,” retorted Mr Mucheru.

      “It will be a sad day if we fail to embrace this because we are afraid. Kenya cannot be the tech hub of Africa if our own regulations stifle innovation,” he said in an earlier interview before he assumed office.

    2. Josh

      It appears to me that these specific references may not be the best to support the argument being advanced. There has been further development regarding the same than the quoted articles present.

      Mt. Gox: the founder / CEO was recently formally charged with embezzlement. http://exlaundaavigot.ru/2015/12/12/mtgox-bitcoin-chief-mark-karpeles-charged-in-japan/

      Sheepmarket: part of the money was traced and properties seized. http://www.coindesk.com/czech-police-seize-345000-property-linked-to-bitcoin-hack/

      We might want to take the conversation deeper than this.

    3. bankelele Post author

      That was what the CBK notice was advising. That they, or the Kenya Police, or judicial system could not enforce any consumer protection if a transaction went bad

      1. bankelele Post author

        Very Western. And too many assumptions..and may have doomed Kipochi (it’s founder says)

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