Over breakfast on December 15th, readers of the main broadsheet newspapers in Nairobi were greeted with a full-page ad taken out by the Central Bank of Kenya, warning them about dealing in bitcoin. The public notice was also posted online.
— Winter soldier (@Neloversion) diciembre 15, 2015
This is in equal measures surprising, disappointing and encouraging.
The main surprise is in the timing. The day before, the Kenyan justice system decided to postpone a ruling on the lawsuit brought by bitcoin remittance company BitPesa against the mobile payments giant M-Pesa for intimidation and unfair business practices. M-Pesa had blocked access to its platform, citing as the reason BitPesa’s unregulated status. Bitpesa claims that the Central Bank told them that bitcoin fell outside their remit, and therefore they could not offer a license. The decision, which allows M-Pesa to continue to block access to the main mobile money platform in East Africa, not only denies the convenience and economy of bitcoin remittances to a significant portion of the rural population. It also highlights the absurdity of trying to get a license, being told that licenses are not available, and then being punished for not having one.
While in theory the Central Bank does not influence the justice system, and the government does not control the Central Bank, the timing of the announcement in the newspapers can be interpreted as an indication of which way the government would like the courts to rule. For a fairly modern government battling increasing concerns over deepening corruption, this level of public “intervention” is perplexing.
Another perplexing aspect of this public approach is the list of warnings about bitcoin, and the subliminal messages they contain. The first one reads:
“Transactions in virtual currencies such as bitcoin are largely untraceable and anonymous making them susceptible to abuse by criminals in money laundering and financing of terrorism.”
Putting bitcoin’s untraceability and anonymity first and foremost as a help to criminals will surely attract the attention of even more criminals (or at least those that read the newspaper), and could possibly increase rather than decrease bitcoin use. BitPesa does follow KYC/AML guidelines to prevent money laundering and terrorist financing, but other less high-profile exchanges may not be so rigorous.
The second warning claims that bitcoin exchanges “tend to be unregulated”.
“Virtual currencies are traded in exchange platforms that tend to be unregulated all over the world. Consumers may therefore lose their money without having any legal redress in the event these exchanges collapse or close business.”
While not untrue, it is misleading. Some regulated exchanges do exist (Coinbase, Gemini, itBit), many more are in the pipeline, and many others, while not officially regulated, behave as if they are. Often it’s not that they don’t want to be regulated. It’s that they can’t, as there is no regulation in place. Such as in Kenya, for instance. BitPesa complies with KYC/AML regulations, yet is being treated as if it didn’t.
And the third warning, pointing out bitcoin’s vulnerability and volatility because there is “no underlying or backing of assets”, will surely draw attention to the fact that there is no underlying or backing of assets on the Kenyan shilling, either, other than faith in the economy (doing quite well) and the government (not so much).
Political mistrust is a strong motivator in bitcoin use, and the Central Bank’s request that the public “desist from transacting in Bitcoin” could have the opposite effect. With a fragile democratic stability (the current president took power with only 50.07% of the popular vote in the 2013 elections, and is currently under investigation by the International Court of Justice for crimes against humanity), and with increasing political violence and concerns about corruption, many readers of the major newspapers could well take an official call to refrain from using bitcoin as an open invitation to try it out.
The disappointment comes from the closed-minded approach to financial innovation, from a government that has a reputation for encouraging it. In its early days M-Pesa was not required to comply with complicated and expensive regulations, which allowed it to grow rapidly and inexpensively, creating efficiency and opportunity, as well as a near-monopoly on mobile money transfers. Although it has increasing competition, its extensive network and brand mindshare still give it considerable power in the sector, which enables it to maintain the relatively high transfer fees. Lower fees from a more nimble competitor would benefit the recipients and the economy, while technology and scale bring costs down. Lower profits for M-Pesa, perhaps, but greater wealth for Kenya. Bitcoin-based services can complement the established mobile money networks by expanding their reach and broadening their client base to include remittance senders from all over the world. Trying to limit participation to competitors with less potential is short-termist and damages the incumbent’s reputation.
However, it is encouraging that the Central Bank deemed bitcoin important enough to issue a public statement. In so doing, it has called attention to the digital currency: no doubt most of those that saw the ad hadn’t heard of bitcoin. Now they have. And while it is important that those interested in buying bitcoin be aware that it is not government-backed, all who investigate further will start to realise the opportunity that it presents.
This announcement could be a first step towards regulating bitcoin, which would be positive for the sector (although why the Central Bank didn’t just issue a statement about contemplating regulation instead of advising against bitcoin use is a mystery). It would also be in line with an incipient regional trend. In August of this year the Nigerian Central Bank called for bitcoin regulation, and an increasing interest in Bitcoin conferences on the continent indicate that other nations are contemplating doing the same.
Trying to wipe out bitcoin use makes no sense, especially when the economic advantages are so strong. Harnessing the opportunity, establishing regulation to protect users and limit illicit use, and incorporating a global virtual currency into an economy already heavily dependent on mobile-based local virtual currencies would increase economic activity, encourage saving and bring even more of the population into the virtually banked sector. And it would entrench Kenya’s reputation as a regional technology hub with an innovation-friendly government. Kenya has a lot to lose if it tries to stamp out bitcoin, and a lot to gain if it cautiously supports its integration into the already strong virtual economy.