Bitcoin has in the past been lauded as one of the biggest inventions of the century. Recently, there has been a flurry of news reports on Bitcoin with Safaricom being tussled in a court case against two companies linked to Bitcoin and the Central Bank of Kenya (CBK) refusing to recognize Bitcoin as legal tender.
But what is Bitcoin? Bitcoin has been described as “a new kind of money”. Other sources define it as “digital currency”. A visitor to Bitcoin’s web page is met with the following statement “Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of Bitcoins is carried out collectively by the network”. The website further states that Bitcoin is open-source; that its design is public, that nobody owns or controls Bitcoin and that everyone can take part in Bitcoin. It can, therefore, be argued that Bitcoin is both a digital asset and payment system. As stated in Bitcoin’s website, Bitcoin users can undertake transactions directly without an intermediary. This in essence means that in the case of Kenya, there is no involvement of the CBK, Kenya’s banking industry regulator.
The virtual currency sector has seen many start ups in Kenya centered around Bitcoin including Bitpesa which is a Bitcoin trading platform existing in various African countries including Nigeria, Kenya, Uganda and Tanzania.
CBKs reaction to Bitcoin
A notice published in December, 2015 by the CBK described Bitcoin as a “virtual currency”;the CBK, in its public notice, warned the public that virtual currencies such as Bitcoin were not legal tender in Kenya. The regulator went on to add that no protection existed to users in the event that the platform that exchanged or held the virtual currency failed or went out of business. Consequently, the public was advised to desist from transacting in Bitcoin and similar products.
Industry players have argued that the regulator was probably more concerned with protecting existing markets and ensuring adherence to the anti-money laundering laws in Kenya.
What is legal tender?
The question which then arises is whether Bitcoin fits the definition of “legal tender” in Kenya’s context.
In October 2012 the European Central Bank published a report titled “Virtual Currency Schemes” which was recently followed up by another report in 2015 titled “Virtual Currency Schemes – a further analysis”. In its first report, the European Central Bank defines a virtual currency as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”.
The financial sector in Kenya is mainly regulated by the Central Bank of Kenya Act, the Banking Act and the Capital Markets Act.
The Act provides key definitions that could shed some light as to whether Bitcoin could be deemed to be “legal tender” or “currency”. Firstly, the word “currency” has been defined by the Central Bank of Kenya Act to mean the currency of Kenya or foreign currency. Secondly, “currency of Kenya” has been defined as bank notes and coins issued by the CBK and any right to receive such bank notes or coins in respect of any credit or balance at a bank or financial institution located within or outside Kenya. Thirdly, “foreign currency” has been defined as bank notes or coins which are or have at any time been legal tender in any territory outside Kenya and any right to receive such bank notes or coins in respect of any credit or balance at a bank either within or outside Kenya.
Section 22 of the Central Bank of Kenya Act empowers the CBK with the sole right to issue notes and coins in Kenya which said notes and coins shall be legal tender in Kenya. Though the phrase “legal tender” has been used repeatedly throughout the Central Bank of Kenya Act, it has not been defined by the said statute.
The Banking Act on the other hand only seeks to define the phrase “convertible currency” by providing that it is currency which is freely negotiable and transferable in the international exchange markets at exchange rate margins consistent with the Articles of Agreement of the International Monetary Fund.
Legal proceedings in Kenya related to Bitcoin
Bitcoin has created some excitement along the Kenyan court corridors; the High Court recently ruled in a case between Safaricom, Kenya’s leading telecom company and two companies, Lipisha Consortium and Bitpesa, which were involved in facilitating Bitcoin transactions. Safaricom had reportedly been accused by Lipisha Consortium and Bitpesa of suspending an agreement that allowed Bitpesa to be used as a payment method. The High Court in this case has since ruled in favour of Safaricom.
Another Bitcoin trading platform linked to Safaricom’s M-Pesa known as Kipochi reportedly recently shut down its operations after Safaricom terminated its mobile money connection. In this case, Safaricom is said to have relied on the CBK’s non-recognition of Bitcoin as a basis for terminating Kipochi’s mobile money connection.
Other challenges faced by Bitcoin in Kenya
Among the hurdles that Bitcoin has encountered other than being shunned by the CBK include the fact that (1) there were very few merchants that were accepting Bitcoin as a mode of payment; and (2) the Bitcoin exchange rate was very volatile seeing as its exchange rate with conventional currency is determined by supply and demand. This ends up making the cost of exchanging Bitcoin into a currency like Kenya Shillings very high.
The future of Bitcoin the world over
Reportedly, various countries have either banned, restricted or warned against the use of Bitcoin within their borders including Vietnam, India, China, Bangladesh, Iceland, Bolivia, Ecuador, Russia, Sweden and Thailand.
Despite Kenya’s stand with regard to the legality of the use of Bitcoin, Bitcoin still continues to gain popularity in Kenya and all over the world. Consequently, it is reported that there have been fears among the Bitcoin community that Bitcoin’s system would be unable to sustain transactions due to the rapid increase in the number of Bitcoin transactions. Proposals have subsequently been made to have the Bitcoin system make key and strategic changes to its software code to avert any potential dangers that come with an overwhelmed system.
In its public notice, the CBK highlighted the fact that domestic and international money transfer services in Kenya are regulated by the Central Bank of Kenya Act and other legislation. In this regard, the CBK stated that no entity is currently licensed to offer money remittance services and products in Kenya using virtual currency such as Bitcoin. The CBK seems to have carefully picked its words by simply stating that Bitcoin was unregulated. This, one would note, does not necessarily mean it is “illegal” in Kenya.
Perhaps both the regulator and the citizens at large will in due time warm up to Bitcoin as they warmed up to M-Pesa which had also been faced with a lot of skepticism during its early days and technically was not regulated either. If Kenya is to remain the technology hub in these parts of the world then lawmakers will need to act fast by making laws in a bid to keep up with the every-day changing face of technology.