This is the second article in a 3-part series on Fintechs. In this article we will talk about cryptocurrency and Initial Coin Offerings (ICOss), a variant of cryptocurrency and the regulation of cryptocurrency in Africa and some countries around the world.
At its most basic definition, cryptocurrency is a medium of exchange. It is a means of carrying out transactions digitally. Cryptocurrency is free from any government or central control. Several questions arise from this definition or any definition of cryptocurrency. How does it work without central authority? How is it run? How are transactions verified? How is it valuable? Where does the supply come from?
Using Bitcoin, the most popular cryptocurrency yet, we will break down the meaning and validity of cryptocurrency.
It is imperative to understand Distributed Ledger Technologies (DLT) like blockchain in order to understand cryptocurrency. A distributed ledger uses independent computers called nodes to record transactions. It is a database spread across several computing devices. It is worth noting that it is not controlled by a central authority.
A prominent distributed ledger is Blockchain. Blockchain powers Bitcoin. It is a log that contains metadata about when and how each transaction occurred. Every single transaction that has ever occurred is logged on the ledger. Blockchain can be public or private. The Bitcoin blockchain is publicly accessible. It is universally available and permission is not needed to become a node. To prevent tampering, it is end to end encrypted. The encryption allows developers to trust the transaction history. Miners (Bitcoin miners) keep track of ledgers. The mining of bitcoin is analogous to mining for valuable minerals.
But why is Bitcoin so intrinsically valuable. Simple, supply and demand. Bitcoin is scarcer than traditional fiat currency. Scarcity drives value higher and this can be seen with precious minerals like gold. The value of bitcoin is driven up also because of its durability and the fact that it is almost impossible to counterfeit, thanks to its complicated, decentralized blockchain system. Perhaps a more sinister reason is because of its pseudo-anonymous nature. Cryptocurrency, particularly Bitcoin, remains the currency of choice for hackers and criminals because of its anonymity and ability to convert into cash or wash in the dark net.
Perhaps the most important reason for the intrinsic value of cryptocurrency is human psychology; the hype surrounding it drives up its demand. Stories of people cashing in on their bitcoins and getting millions of dollars has driven up more people to try to purchase it. This has led many people to call the cryptocurrency market a massive bubble that will soon pop. In fact, the cryptocurrency market, particularly Bitcoin, did cool off after reaching peak hysteria in December of 2017. On December 16th, 2017, the price of one bitcoin reached an all-time high of $19,343. As of mid-April 2018, the price was close to $8,000, and volatility in the Bitcoin market had come down substantially from levels seen in 2017. Regardless of what happens to their price, cryptocurrencies are here to stay.
Bitcoin is different from traditional fiat in a variety of ways. The first, it is decentralized, there is no central authority controlling its issuance. Second, it is easily accessible because of how widespread the internet is. Anyone with a computer can become a node on a bitcoin network and begin sending transactions through it.
Bitcoin is unique because it is completely transparent. Every transaction in the history of Bitcoin is available to all nodes on the network.
Initial Coin Offering (ICO) is a variant of cryptocurrency. It rose to prominence in 2017 and continues to be a prominent source of fundraising for tech startups that have yet to launch their product or service, although it can be issued post release of their products. It allows startups raise money by creating and selling tokens online for traditional fiat or mainstream cryptocurrency like Bitcoin or Ethereum. Usually startups create their own virtual currency (usually but not always, naming them Appcoins; the name of their app followed by coin), sell them online to raise money. Companies wishing to bypass the hustle of getting investors and VCs issue ICOs. Companies publish a detailed white paper providing clear and compelling reasons for the digital tokens to exist. They also use clear, logical and fair pricing for the sale of the tokens.
Why issue an ICO?
ICOs provide the biggest benefit for startups to get their networks off the ground, with very little traditional fundraising. ICOs also give users of the software tokens that work on the network, incentivizing them to using the software from the beginning, giving it a higher chance of succeeding with a lot less capital needed.
Governments around the world have taken cautionary measures with regards to cryptocurrency, fearing the lack of central control and its effects on financial security. Regulators have had to play catchup with a sector majority of them dismissed in the beginning.
Cryptocurrency, perhaps one of the most innovative, transformative and outstanding fintech of the past decade holds the power for allowing countries and governments to restructure their economies or be left behind.
But perhaps, governments are cautious to dip their toes in the virtual currency world because imposing strict regulations may burst the bubble and see individuals lose money invested.
Regulating cryptocurrency in Ghana.
In Ghana, cryptocurrency is not alien. People have invested in cryptocurrency, particularly Bitcoin. The internet makes it easy to do so.
Policy wise, there has been none concerning cryptocurrency. It is an unregulated area. In January 2018, the Bank of Ghana issued a brief notice to banks and the general public advising against the use of virtual or digital currencies, also known as cryptocurrencies, mainly because such currencies and the entities that facilitate their transactions are not sanctioned by the government. The notice stated that “the Bank of Ghana wishes to notify the general public that these activities in digital currency are currently not licensed under the (then) Payments System Act 2003 (Act 662)”.
However, a Ghanaian start-up, Bitland is using block chain technology to mirror official title deeds to land, boosting the integrity of the land records with the lands commission. Due to the issues plaguing the sale of lands.
Bitsika, another blockchain start-up launched in 2018, enables users deposit and remit money across borders in digital currencies at low or zero cost.
But perhaps more impressive is Mazzuma, an online payment system launched in 2015, becoming the first African start-up to issue an initial exchange offering with an in-house token called MAZ Token.
Even more exciting, Ghana is exploring the benefits of issuing a central bank digital currency (CBDC). In a keynote address within the 23rd National Banking Conference on Nov. 26, 2019, Ernest Addison, the governor of Ghana’s central bank, Bank of Ghana, stated that the CBDC project would be carried out in a sandbox “with the possibility of issuing an e-cedi in the near future.”
The idea that digital currencies are being explored by the bank of Ghana is indicative of the disruptive nature of fintech and the willingness of Ghana to embrace technology. This is a step in the right direction and an innovative disruption in the way technology is viewed on the continent. Hopefully in the near future, Ghana will embrace virtual currency
Regulating cryptocurrency in other African Countries.
In Africa, the revolutionary way of money transfers has seen a race to capture the African cryptocurrency market. Twitter CEO Jack Dorsey has remarked that he would be moving to Africa to explore the opportunities in crypto. Nicolo Stoehr, host of the prestigious Crypto Finance Conference (CFC) held this January in St Moritz, has said the potential on the continent is enormous.
In some ways, Africa is better prepared for a move to crypto than other continents. Mobile Money has already been a key driver in reducing the numbers of unbanked adults, and the World Bank says the continent is home to all eight countries where more than 1 in 5 adults solely rely on a mobile-only account. Given how many consumers are already open to using this technology, crypto exchanges and wallets that offer fully functional apps for mobile users are set to benefit immensely.
Some African countries are embracing cryptocurrencies and blockchain technologies. Countries like
Botswana has no regulations on cryptocurrency and blockchain technology yet, but there has been at least 3 blockchain start-ups, signalling future regulations may be in the pipelines
Kenya has no regulatory framework, but the government of Kenya welcomes the use of blockchains by agencies like the Lands Commission to increase transparency in land ownership, the health sector where nurses in rural areas can treat patients based on a doctor’s advice obtained elsewhere. Even though there have been no regulations, the has been legal action involving cryptocurrency. In Lipisha Consortium Ltd and Bitpesa Ltd v Safaricom Petition  eKLR (the Lipisha Judgment), the court ruled that Bitcoin represented monetary value and that Safaricom was justified in suspending the services of Lipisha Consortium Ltd and Bitpesa Ltd, after Bitpesa Ltd dealt in money remittance services using bitcoin without first receiving the approval of the Central Bank of Kenya.
This is a huge step for law and technology and mirrors the inevitability of law in technology. It further cements the need for regulations to guide the courts in making decisions such as these.
Mauritius in 2017, issued an open call to innovators to take advantage of its new regulatory sandbox. The government is seeking to attract start-ups and strives to be known as the Ethereum island.
South Africa has been somewhat of a bright spot on the continent, where regulators have expressed enthusiasm about crypto’s potential. Official bodies have actually been working in concert with crypto companies and financial institutions to find the best way forward.
Uganda determined that cryptocurrency did not fall under the definition of fiat currency in the terms of the Bank of Uganda Act, 2000. Despite lack of regulation, some government bodies are reportedly actively monitoring cryptocurrencies in Uganda in an effort to learn more and to consider how to potentially regulate it in the future.
Tunisia in 2015 launched its national currency Edina on a blockchain.
Senegal in 2016 launched a national digital currency the eCFA which will have the same value as the CFA AND can be stored on mobile money or e-wallets.
The president of Sierra Leone in 2017, announced his intentions to make it a smart country. It utilised blockchain technology in its national elections, the first country to do so.
DRC has piloted a blockchain based supply chain tracking system for cobalt and coltan mined from three mines in DRC.
Ethiopia and Madagascar have also embraced blockchain technology.
A handful of African countries have banned crypto altogether, including Morocco, Algeria, Libya, Zambia and Namibia.
Others have created substantial amounts of uncertainty by failing to offer a clear stance, leaving consumers in a gray area. For instance, in 2017, the central bank of Nigeria warned financial institutions not to use, hold or trade virtual currencies pending substantive regulations. Regardless of this warning, Nigeria is a hotspot for fintech start-ups. Nigeria overtook South Africa and Ghana to be the country with most interest relative to Bitcoin searches. Start-ups like Bundle launched in the country as a social payment app for fiat or crypto.
Regulating cryptocurrency Outside Africa.
Moving away from Africa, In the US, there is no single agency with exclusive jurisdiction over cryptocurrency.
Multiple agencies have made efforts to regulate it depending on how they define it. Financial Crimes Enforcement Network (FinCEN) is a bureau of the USA department of treasury that collects and analyses information about financial transactions, to combat money laundering, terrorist financing and other financial crimes. FinCEN enforces the Bank Secrecy Act in the US. In 2011 and 2013, FinCEN issued guidance clarifying the applicability of bank secrecy act regulations to cryptocurrency. FinCEN guidelines makes it clear that real currency is equal to virtual currency.
It is worth noting that the status cryptocurrency varies from State to State. According to certain federal agencies like FinCEN it is regarded as money.
Commodity Futures Trading Commission or CFTC, is the agency responsible for overseeing US commodities markets. In 2015, the CFTC classified bitcoin and by extension other virtual currencies as a commodity. As a result, virtual currencies are now considered an exempt commodity which is the same category at the CFTC places metals and energies commodities including gold, silver, oil, and natural gas.
The Internal Revenue Service in the US regards cryptocurrency as property. In 2014, the IRS announced they would treat virtual currencies as property, rather than currency under federal tax law.
On October 22, 2015, the European Court of Justice (ECJ) held in its decision Hedqvist that transactions to exchange a traditional currency for bitcoin or other virtual currencies and vice versa constitute the supply of services for consideration, but fall under the exemption from value-added-tax (VAT). Buying or selling bitcoin is therefore exempt from VAT in all EU Member States.
Furthermore, on March 8, 2018, the European Commission presented an Action Plan on how to take advantage of the opportunities presented by technology-enabled innovation in financial services (Fintech), like blockchain, artificial intelligence, and cloud services. The FinTech Action Plan includes the recently launched EU Blockchain Observatory and Forum, which will report on the challenges and opportunities of crypto assets later in 2018 and is working on a comprehensive strategy on distributed ledger technology and blockchain addressing all sectors of the economy
The United Kingdom does not have laws that specifically regulate cryptocurrencies. The governor of the Bank of England reportedly stated that regulation of cryptocurrencies is necessary, stating:
“A better path would be to regulate elements of the crypto-asset ecosystem to combat illicit activities, promote market integrity, and protect the safety and soundness of the financial system”.
Section 2A of the Bank of England Act 1998 specifies that the Bank of England has responsibility to both protect and enhance the stability of the financial system of the UK. Pursuant to this objective, the Bank has considered the risk cryptocurrencies pose to the stability of the UK’s financial markets and determined that the size of the cryptocurrency market is currently not large enough to pose a material risk to monetary or financial stability in the UK.
With regards to taxation, the United Kingdom corporations pay corporate tax, unincorporated businesses pay income tax, individuals pay capital gains tax with respect to virtual currency.
Virtual currency is taxed in Israel as an asset, in Bulgaria, as a financial asset, in Switzerland, taxed as foreign currency, Argentina and Spain, it is subject to income tax.
At the start of its life cycle, most people viewed cryptocurrency as a millennial fad that would eventually die out. But Bitcoin and blockchain made their impact worldwide, and are still popular after over 10 years since their launch by Satoshi Nakamoto.
Bitcoin and blockchain technology are making waves and changing how we think of money. A change that in my view is necessary and essential. Using virtual currency and DLT, cross border money transfers will not cost the metaphorical arm and leg in charges. The transparency of blockchain technology makes it almost impossible for counterfeiting and internet thefts and frauds as compared to traditional fiat.
It is also becoming apparent in the geopolitical tumult of the US-China trade war and Brexit, and alongside government failures such as those in Venezuela and Zimbabwe, that crypto is an important hedge against political risk, in providing a means to diversify assets externally and protect against a failing currency.
The biggest issue governments have with cryptocurrency is its pseudo-anonymous nature. But it is not fully anonymous because every transaction is stored forever in the blockchain. If an address is linked to an identity, every transaction can be traced.
Some governments have decided to distance themselves from virtual currency warning their citizens of their use. But with most countries shifting towards recognizing and regulating them, with the view that due to the widespread use of the internet, virtual currencies are here to stay. It’s safe to say the entire world will embrace cryptocurrency in the not so distant future.
Lee Reiners, CFA , Executive Director, Global Financial Markets Center
Duke University School of Law
Fintech Law and Policy: The Critical Legal and Regulatory Challenges Confronting Fintech Firms and The Policy Debates That Are Occurring Across The Country, Lee Reiners.