The adoption of cryptocurrency globally has been on a gradual rise and in a little over a decade, the sector has ballooned and is estimated to be worth over USD 3 trillion. This momentum has not escaped Africa which has been reported widely as one of the fastest growing and most promising continents for the adoption of cryptocurrencies.

According to a report published by Chainalysis, a US blockchain analysis firm, Africa’s cryptocurrency market increased by 1,200% in the past year alone, bringing its total crypto assets to USD 105.6 billion. In the recent past, the continent has also witnessed significant growth in the ownership and trade rates of cryptocurrencies. Currently, apart from Bitcoin (the most widely used cryptocurrency globally), other cryptocurrencies such as Dash and Lisk are being traded in Kenya and other African countries including Botswana, Ghana, Nigeria, South Africa and Zimbabwe.

Recent data from the Absa Africa Financial Markets Index 2021 reveal that several African countries are currently looking at adopting digital currencies issued by central banks through secured systems, commonly known as Central Bank Digital Currency (CBDC) – a digital currency issued by the central bank and intended to serve as legal tender. Nigeria recently became the first African country to launch a digital currency backed by its central bank after the launch of the eNaira in October 2021 while Ghana continues to partner with German firm Giesecke+Devrient (G+D) to pilot the e-Cedi. Other countries such as Kenya, Morocco, Rwanda and South Africa are considering the feasibility of using digital currencies for retail purposes while Eswatini and Mauritius are exploring the possibility of using digital currencies for both retail and wholesale purposes.

Growth and Regulation of Cryptocurrency in Africa

Africa has been consistently ranked as the most expensive region in the world for sending money but cryptocurrency platforms such Bitpesa, LocalBitcoin and Paxful have drastically reduced transaction fees in remittance costs by over 90%.

“Like many regulators globally, regulators in Africa have been faced with the daunting task of finding the appropriate instruments to regulate the risks emanating from the increased adoption of cryptocurrency. With increased trading in cryptocurrency, it is clear that cryptocurrencies cannot continue to operate in a vacuum,” observes leading banking and finance lawyer Sonal Sejpal, a partner at ALN Kenya.

African countries have adopted different crypto regulatory frameworks ranging from complete acceptance to total ban of cryptocurrency-related activity. According to a report published by the Law Library of Congress, by the end of 2021, 19 African countries had placed an implicit ban on cryptocurrencies prohibiting banks and other financial institutions from dealing in cryptocurrencies or offering services to people or businesses providing cryptocurrency services and banning cryptocurrency exchanges from operating in their economies. Other countries such as Algeria, Egypt, Morocco, and Tunisia mirrored the recent China approach and unilaterally banned cryptocurrencies in the economies making the use or trade of cryptocurrencies illegal.

On the other hand, South Africa has expedited its cryptocurrency regulations and is looking at unveiling its legal framework for cryptocurrency regulation in early 2022 following a series of cryptocurrency-related scams. According to Unathi Kamlana, the Financial Sector Conduct Authority (FSCA) Commissioner, the FSCA sees cryptocurrency as assets rather than currencies. The cryptocurrency regulations to be tabled by the FSCA will establish rules on cryptocurrency trading, ensure investor protection and govern the interaction of the digital currency and the country’s financial markets.

“As a continent with a vibrant fintech space that has already embraced revolutionary fintech technologies such as mobile money payment services, it is unsurprising that Africa is leading in the value of crypto-based remittances,” comments ALN Kenya Partner and head of innovation Dominic Rebelo.

Exposure of Investors in an Unregulated Cryptocurrency Market

Cryptocurrency has not been without challenges and has experienced headwinds over the last few years. Two years in a row, for instance, South Africa has been in the news for possibly the biggest crypto scams. In 2020, Mirror Trading International, a South African company, swindled hundreds of thousands of victims of Bitcoin worth USD 588 million. In April 2021, South Africa once again fell victim to crypto-related fraud after the founders of Africrypt disappeared with USD 3.6 billion worth of Bitcoin after informing the investors that the company had been hacked.

“The continued growth and popularity of cryptocurrency means more people are investing in the sector and there is, therefore, a need for regulation to ensure adequate protection of investors. The lack of regulation has left investors unprotected and exposed to crypto-related crimes,” comments Sonal.

Other parts of the world have also witnessed similar patterns of increased crypto-related frauds. Amidst these fraud cases, English courts have shown their willingness to flexibly use different legal tools to assist investors who have fallen victims to such fraud. For instance, in the Fetch AI Limited, Fetch AI Foundation PTE v Persons Unknown, Binance Holdings and Binance Markets case, the High Court in London ordered Binance to identify those who had carried out the hack and freeze their accounts.

Lessons and Way Forward for Cryptocurrencies Africa

It is important that regulators examine the existing laws and determine whether such laws are appropriate to tackle issues such as anonymity which enables criminals and terrorists to carry out money laundering and conduct illicit business activities.

African regulators can rely on the different guidelines issued by international bodies to understand variables that are key to establishing a fit for purpose legal framework. According to the International Monetary Fund, the cryptocurrency regulatory framework should have three core elements:

  1. Regulation of crypto-asset service providers: the regulatory framework should regulate and licence crypto-asset service providers that deliver critical functions storage, transfer, settlement and custody of reserves and assets. The regulatory framework should be tailored to the main use of the crypto assets:
  2. The regulatory framework should categorise crypto assets based on their underlying function and determine the best-suited regulator to regulate such products. For example, cryptocurrency products for investment should have similar requirements to those imposed on securities brokers and dealers while crypto products for payment should be overseen by regulators that oversee payment services.
  3. Televant authorities should provide regulated financial institutions concerning their exposure to and engagement with crypto: where, for example, a regulated institution is providing custodial services in relation to crypto assets, the regulatory framework should clarify the requirements needed for such a function to address any risks that may arise from such a function.

    “It is not enough for legal bodies and regulatory frameworks to implement an outright ban on cryptocurrency trading, for example. What Africa’s people need is a true understanding of how to maximise their own personal opportunities in FinTech, whether that’s investing in cryptocurrency, or to earn a living through the use of e-wallets, contactless payments and big data,” comments ALN Kenya Partner and head of innovation Dominic Rebelo.

In addition, such a legal framework should at a minimum also:

  1. a) acknowledge the existence and ubiquity of cryptocurrencies – rather than start on the premise of not owning them.
    b) recognise the fluidity of the sector given the pace at which the technology is being used to rapidly innovate and offer more products and services e.g., Decentralised Autonomous Organisations.
    c) provide mechanisms of protecting consumers and investors.
    d) promote transparency in the sector to enable consumers and investors to know what they are investing in or buying.
    e) balance the need to foster responsible innovation and the need to achieve regulatory objectives such as fighting money laundering; and
    f) providing strong technological and organisational safeguards to ensure secure networks and applications for cryptocurrencies.

While the existing regulatory landscape for cryptocurrencies differs across jurisdictions, there are significant lessons that African regulators can learn from jurisdictions such as Japan, the United Kingdom and Switzerland which have adopted well-designed regulations that have continued to encourage cryptocurrency innovations.