The innovators’ dilemma and State adoption of a digital currency

By Victor MUJIDU

Institutional investors and financial institutions have been hesitant to fully embrace cryptocurrencies and blockchain technology due to concerns about regulatory compliance. Government regulations that provide a legal framework for these entities to participate can encourage their involvement in the space, potentially leading to greater adoption.

The Digital Assets Policy Safari (DAPS) wants the Kenyan Government to have specific crypto regulations in place within the shortest time possible.

Advocates argue that government regulations can help protect consumers from fraudulent activities, scams, and unscrupulous actors in the crypto space.

By implementing rules and regulations, Kenya can create a safer environment for individuals to engage with cryptocurrencies and blockchain technology.

DAPS – a platform that brings together the government, public, and private sector to shape the national digital asset policy for Kenya, such as the digital asset tax (DAT), further wants a laid out plan to regulate the cryptocurrency industry.

Also read: CA advancing digital securities sandbox

Its submissions include strengthening rules on crypto lending or the adoption of regulatory sandboxes – a move that could potentially see stablecoins recognized as a valid form of payment.

“The reasons why they specifically never onboarded at digital assets or crypto platform into the sandbox program was that number one, the results and complexity of the technology in the sense that the CMA argues that the technology was complex and novel to the extent that it doesn’t have sufficient resources and knowledge around it for them to comfortably on board the digital assets,” offers Allan Kakai, Director, Legal and Policy Affairs – the Blockchain Association of Kenya (BAK).

Adding that an internal capacity and knowledge was also lacking from the regulatory point of view, and whose existence would comfortably manage and see the take- off of the digital assets through a sandbox program.

“The final thing which has been the most constant thing is that the speculative and volatile nature of these assets is what now creates very big regulatory skepticism…, and actually not only from regulators, but from conventional, financial institutions, like banks, and telcos from interacting with this,” says Kakai.

Kenya is East Africa’s largest economy and has cemented its place as a Silicon Savannah – which is the technology ecosystem in the country.

The term is a play on Silicon Valley and the grassland savanna ecosystem that is a dominant feature of Kenya’s ecology. It is known for producing social enterprises like M-pesa and M-kopa among other ground-breaking innovations.

But despite the notable reputation, the country is yet to fully embrace innovations around crypto owing to stringent regulations blamed on stifling innovations.

“In the height of being one of the most remarkable fintech innovations of the century…, Kenya still ends up backing out a little,” Kaikai added.

BAK also says that the proposed tax (in the Finance Act 2023) could push potential clients to lowly taxed jurisdictions that perceive bitcoin.

“Tax is very harmful and it will end up stifling and killing the industry rather than enable growth. So, from how the tax is structured, our tax on the growth value of the asset means if I’m disposing of an asset whether or not I’m making a profit, I’m still being taxed as opposed to others,” noted Kaikai.

This month, BAK moved to court to challenge the legality and constitutionality of the Digital Asset Tax (DAT) introduced by Finance Act 2023.

DAT, introduced and passed as part of the Finance Bill 2023, imposes a three percent tax on digital asset trades with effect from 1st September 2023.

The association argued that the tax also imposes heavy compliance requirements.

The filing comes after the BAK, on the 25th of May 2023, submitted its views on the proposed tax under the Finance Bill 2023 to the National Assembly’s Departmental Committee on Finance and National Planning.

In its submission before the High Court, the BAK highlights unclear classification of digital assets, ambiguity surrounding transfers of digital assets, impractical five-day remittance timeframe, and a failure to consider loss-making transactions among others.

The matter will be mentioned on September 28, 2023.

Cryptocurrency transactions can be challenging to track and tax. Advocates for government involvement argue that clear tax guidelines and reporting requirements can help ensure that individuals and businesses comply with tax laws while engaging with cryptocurrencies.

These developments raised during BAK’s recent digital asset stakeholder’s forum for the annual Digital Assets Policy Safari (DAPS) on September 19 to shape Kenya’s national digital asset policy, is part of wider plans by the ICT sector regulator – the Communications Authority of Kenya (CA) to make Kenya a regional hub for crypto asset technology and investment.

Stablecoins are cryptocurrencies whose value is pegged to that of another currency, commodity, or financial instrument.

An existing legally-defined supervisory set-up is believed to offer the best way to oversee complexities arising from new and emerging innovations in Kenya.

CA’s mooted plan is also part of a package of measures by the country to ensure the local market’s financial services sector remains at the cutting edge of technology, attracting investment and jobs and widening consumer choice.

This comes even as a growing number of African countries continue to experience rapidly evolving financial ecosystems thanks to the opportunities that new technologies enable. But numerous challenges still exist for regulating bodies given that their primary objective is to keep up with the market and regulate accordingly.

Read: CA Board suspends DG Ezra Chiloba, appoints Christopher Wambua in an acting capacity 

Appearing before a special committee of the national assembly, the ousted CA’s Director General Ezra Chiloba recommended the use of sandboxes to test market-ready solutions against existing regulations.

This is after the parliamentary special committee was set up to inquire into the legal and regulatory compliance of Worldcoin and its subsidiary partners in Kenya and beyond.

“There is a need to develop an appropriate overarching legal framework for regulation on new and emerging technologies, including digital platforms, social-media and Over-the-Top services,” Chiloba said at the time.

He added that the lack of a fully operationalized digital currency framework poses a risk of money laundering and consumer protection.

The Worldcoin saga has highlighted several regulatory flaws, including the absence of a fully operationalized framework for digital currencies, the blurring of the lines between the responsibilities of various regulatory bodies as a result of ICT’s facilitative role in many sectors, and the limitations of the current ICT consumer protection laws with regard to digital currency assets.

Chiloba noted that finding the right balance between regulation, facilitating innovations and creating an enabling environment was key in contributing towards the envisaged Digital Economy.

To enhance a universal way of crypto trading and further adoption of blockchain in the country, a lot needs to be done, according to Nadeem Anjarwalla, the Binance Director, East and West Africa.

“We need to create education, awareness and trust within the ecosystem and the kto adoption is to create an enabling environment. We believe that the right regulation helps foster industry and the development of the space but also of innovation”, he said.

Many members of the crypto and blockchain community have called for clear and consistent regulations from governments. Regulatory uncertainty can deter businesses and investors from entering the space.

Clarity can provide a level of comfort for traditional financial institutions and companies looking to adopt blockchain technology.

The relationship between the crypto industry and government is a complex and evolving one, and it will continue to be a subject of debate and discussion as the technology matures and its impact on society and the economy becomes more pronounced.