Digital Currency: Moving Towards Legal Recognition


Digital Currency: Moving towards legal recognition

Introduction

Since the 17th Century, governments around the world have issued coins and notes to facilitate trade.  Today, currency is issued, regulated and backed by governments and therefore considered legal tender.

In recent times, electronic forms of currency known as digital currency have been growing in popularity.  If accepted by governments and the financial system, digital currency is set to transform the global economy.

Among the latest additions, is Facebook’s cryptocurrency, Libra. Facebook’s vision is for Libra to become a global currency accessible to billions of people, particularly those in developing countries who have no access to banks or financial services. It is intended to be readily transferable or simply used to trade in goods and services.[1]

Understanding Digital currency

Digital currency is the general term used to refer to all forms of electronic money. It may be in the form of digital fiat currency, virtual currency or cryptocurrency.

In turn, virtual currency is any form of digital currency that is not considered legal tender and is issued and controlled by its developers. It may only be used in the exclusive online community for which the developer intends it to operate.

Cryptocurrency much like virtual currency is not legal tender.  However, once its units have been issued by its developers, it cannot be controlled by them. It is available to anyone who goes online with no restrictions on who can be the user. The most common types of cryptocurrency are bitcoin and ethereum.

With Kenya’s appetite for mobile money, virtual currency technology is expected to increasingly gain popularity.

Kenya’s position on Virtual Currency

In December 2015, the CBK issued a public notice cautioning the public on the use of virtual(sic) currencies such as bitcoin. Particularly, the CBK stressed the fact that virtual currency is not recognised as legal tender and no protection exists if the platform that exchanges or holds the currency fails or goes out of business. It advised the public to desist from transacting in bitcoin and any similar products.[2]

Despite the caution, there is no legal provision prohibiting the use of virtual currency.

On 28 February 2018, the Cabinet Secretary for the Ministry of Information, Communication and Technology created an Artificial Intelligence and Blockchain Taskforce (the Taskforce),[3] to develop a roadmap for how the Kenyan Government can take advantage of emerging digital technologies. Key among the technologies that were evaluated were digital currencies. In its July 2019 report,[4] the Taskforce suggested various strategies for adoption as follows:

Strategy 1 – National Digital Infrastructure

The Taskforce proposed a high-level schematic infrastructure to provide governance and services on demand, which will be seamlessly integrated across the various government departments. The infrastructure would have all government services available in real time from online and mobile platforms. It would include:

  1. A private government cloud that stores, processes and handles all information across the distributed data centres;
  2. A National Digital ID (Huduma Number) with biometric data for all citizens; and
  3. A National Payment Gateway through which payments in the country are to be processed. In particular, the Taskforce proposed the creation of a ‘KePay cardthrough which all digital payments would be made.

The current phase of implementing this infrastructure can be seen in the ongoing exercise of issuing citizens with digital passports and Huduma numbers.

Strategy 2 - Formulation of a Digital Asset Framework providing for cryptocurrency and other alternative currencies in Kenya

The Taskforce has also advocated for the development of a digital asset framework.  The framework is the criteria that must be met by any cryptocurrency before it can be listed on a securities exchange. It is intended to be made public to allow both developers and currency holders to understand how and when an asset may be traded. ‘Currently, the Capital Markets Authority (CMA) has been working in this space in anticipation of requests for an Initial Coin Offering (ICO), which is a type of funding that initialises the use of cryptocurrencies. The ICOs are expected to boost Small and Medium Enterprises (SMEs) that are currently unable to raise funds through an Initial Public Offering at the stock exchange market.[5]

The Taskforce goes ahead to suggest several key assessment points for consideration under this strategy, with the aim of piloting new forms of funding for SMEs and cryptocurrency developers.

Strategy 3 – A regulatory sandbox for Fintech innovations which include digital currencies

Unlike traditional licensing, a regulatory sandbox is a structure set up by a regulator to allow for live testing of innovations under a less onerous regulatory regime.  In March 2019, the Capital Markets Authority (CMA) approved the Regulatory Sandbox Policy Guidance Note and subsequently set up a regulatory sandbox for fintech firms and existing capital markets licensees for the purpose of allowing them to live test the application of technology to financial services.  The move has been welcomed by the Taskforce and three firms have already been admitted to the sandbox.

Strategy 4 – Digital Currency (Digital Fiat Money)

Digital fiat currency which is also referred to as Central Bank Digital Currency (CBDC) is the digital form of government issued money.

CBDC is already being implemented in countries like England, Sweden, Uruguay, and Singapore. In 2015, Tunisia became the first country in the world to issue a blockchain-based national currency named eDinar. A year later, Senegal followed suit issuing eCFA.

The case for CBDC in Kenya is strong considering that most of the transactions relating to money transfer are already in digital form including credit card payments, bank transfers, internet banking and mobile money. A CBDC will therefore serve as a practically ‘costless medium of exchange’, ‘a secure store of value’, and ‘a stable unit of account’. To achieve this, the currency would be account based and capable of earning interest.[6] Given that it would be regulated, the government monetary policy framework would target true price stability.

Strategy 5 – Tokenisation of the economy

The Taskforce also proposed to have all the assets in the economy tokenised. It likened tokens to share certificates which in essence are pieces of paper representing the ownership of an asset. In the token system, all ownership rights will be recorded on a blockchain with trading being undertaken on crypto exchanges.

The Taskforce took the view that tokenisation would also reduce the effects of unemployment on the Kenyan population, particularly through the Ajira platform which was set up to encourage online work.  According to the report the platform would operate through the ethereum cryptocurrency to permit inter-device, inter-person and inter-service settlements and payments.

What next for digital currency in Kenya?

With Kenyans now increasing undertaking online transactions, the Government of Kenya needs to enact detailed regulation to police the use of digital currency.


[1] An introduction to Libra (Whitepaper) – From the Libra Association Members

[2] CBK Public Notice: Caution to the Public on Virtual Currencies such as bitcoin.

[3] Gazette Notice Number 2095 of 2018

[4] Ministry of Information, Communication and Technology Report: Emerging Digital Technologies for Kenya – Exploration and Analysis.

[5] ibid

[6] ibid





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