The

Point
Published by Institute of Economic Affairs (IEA) November 2018

INSIDE
1. Introduction 1 5. Cryptocurrencies and the financial sector 4
2. The token utility 2 6. Advantages of Cryptocurrencies 5
3. How the Bitcoin works 3 7. Opportunities for Mining Digital Currencies 5
4. Issues on Cryptocurrencies Vs Money (Fiat) 4 8. Conclusion 6

There exist numerous discussions as pertains to the usage, uptake, and the regulatory framework in place to govern
cryptocurrencies in Kenya. Firstly, the basic information as to what cryptocurrencies are is an issue that needs more
public education. Secondly, how it is used and how it has been embraced by users both in Kenya, across the region and
worldwide should be brought to the fore, and thirdly, what kind of framework the regulator – the Central Bank of Kenya
(CBK), has put in place to govern these types of currencies, and what it portends for its users in the country and beyond.

In this view, the Institute of Economic Affairs held a Public forum on ‘Cryptocurrencies in Kenya’, at which members
from the academic fraternity, members of the public, civil society organization representatives, and practitioners in the
crypto space in Kenya, were in attendance. Mr. John Walubengo, a member of the National Taskforce on Blockchain
& AI made a presentation on the ‘Fundamentals of Cryptos – Opportunities and Risks’, while Mr. Jared Osoro, the
Head of Research & Policy at Kenya Bankers Association presented on ‘Opportunities for the Financial Sector’. Other
presentations were on ‘Digital Identity as an Integral Part of Cryptocurrency Regulation by Djibril Wachiye of Belfrics
Kenya Limited, and ‘Opportunities for Mining Bitcoins in Kenya’ by Joseph Nyagari and Eric Michubu, both Bitcoin
Entreprenuers.

This bulletin covers the key issues presented during the forum, as well as the ensuing plenary session queries and feedback
from the panelists and participants in attendance.

Cryptocurrencies in Kenya
By Stephen Jairo of doing business not only between individuals, but
amongst business organizations at a global level. The
Introduction advent of the online platform has led to the rise of
virtual currencies that is gaining traction as medium of
In the olden days, the exchange of goods and services exchange across the globe, and this is what is referred to
was done through barter trade; exchange of a good for broadly as cryptocurrency.
a good, or a service for a service, or an interchange of
these. However, in recent past, this kind of exchange A cryptocurrency is a subset of digital currencies that uses
has been facilitated by use of money as a medium of cryptography for security making it extremely difficult
exchange. With developments on the technological to counterfeit. A defining feature of cryptocurrencies
front however, new ways of exchange have arisen. Use is the fact they are not issued by any central authority
of credit cards and online money transfers are some of (not controlled by a central bank like fiat currency) – it
the most notable ones. is fully decentralized. It is a medium of exchange like
government issued currencies, developed by Satoshi
Further to the above, a focus on the technological Nakamoto1 in 2009, but one that uses cryptography
platforms have brought to the fore a whole new world to secure the exchange of digital information and to
1
Pseudonymous creator of Bitcoin and initial creator of the Original Bitcoin client https://nakamotoinstitute.org/about/
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control the creation of new currency units. It has been products, while facilitating the distribution and sharing of
touted as a mode that solves the problems that initially rewards and benefits to all of its stakeholders.’
existed in the decentralized system. In a centralized
system, the regulator oversees all the transactions and The Token Utility
can take preventive measures to curb double spending
which was the major impediment on the digital When evaluating a given token-based organization, the
platform. more advantages one can attain as pertains to the role a
particular token can play would yield more advantages.
It is imperative therefore to differentiate between what The role of tokens is like nails – every person requires
‘fiat currency’, and what ‘digital currency’ (electronic more than a one to hold firmly in place and in the
money) is. Fiat Currency refers to government issued same vein also guarantee safety and sustainability both
currency that is designated as legal tender in its country in the medium and in the long run. This is where
of issuance through government decree, regulation, or entrepreneur’s creativity has been shining, as they
law. Digital currency, also known as electronic money, invent and create the many ways that a token can be
refers to a digital representation of Fiat Currency used put to use at the operational level. Notably, if the token
to electronically transfer value denominated in Fiat usage is obscure, not well explained, or not defensible,
Currency. there is weakness in that model. the token utility has
key roles as below;
Cryptocurrency therefore is a digital representation
of value that can be digitally traded and used to As a Right: Owning a token bestows a right that
functions as; 1) a medium of exchange; and/or, (2) a results in product usage, a governance action, a given
unit of account; and/or (3) a store of value, but does contribution, voting, or plain access to the product or
not have legal tender status in any jurisdiction. It is market. In some cases, tokens will grant real ownership
neither issued nor guaranteed by any jurisdiction, and to a given product/service.
fulfils the above functions only by agreement within
the community of users of the Cryptocurrency. As a Value of Exchange: The token is also a small unit of
value exchange within a particular market or application
Other classifications of digital assets are in the following which results in the creation of a transactional economy
categories; Non-security tokens, Security tokens, and between various buyers and sellers. This consists of
Derivatives or funds. features that allow users to earn value and to spend it
on services that are internal to the inherent ecosystem.
Non-Securitized Tokens are also known as “Utility Tokens” They can earn it by doing active work (real work
or “Non-Security Tokens”. They are Virtual tokens that and actions), or passive work (e.g. sharing data). The
do not exhibit the features and characteristics of a creation of such an internal economy is arguably one
regulated investment or traditional asset. They are of the most important outcomes, and one that must be
comparable to Bonga-points, Supermarket Loyalty sustained over time.
Points, Hotel Lunch Vouchers or Frequent Flyer Miles
points award schemes. In effect, they are meant to As a Toll: Just like paying a toll to use a freeway, the
give certain specific benefits to its users within a given token can be the pay-per-use rail for getting on the
business community. block chain infrastructure or for using the product.
This also ensures that users have skin in the game. It can
Securitized Tokens are virtual tokens that have features include running smart contracts to perform a specific
and characteristics of a Security under the traditional function, paying for a security deposit, or plain usage
capital market regulations. They digitally represent a fees in the form of transaction fees or other metered
traditional asset such as Land title, Shares, and Stocks, metric, e.g. Ethereum and Bitcoin.
and are also known as Asset-backed Tokens; the
cryptocurrency version of a traditional asset. As a Function: The token can also be used as a lever to
enrich the user experience, including basic actions like
In the business world, the token can be defined as ‘A joining a network, or connecting with users. It can also
unit of value that an organization creates to self-govern its be used as an incentive, if it is given in return to begin
business model, and empower its users to interact with its usage or for on-boarding.
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A Currency: The token is a very efficient payment cryptocurrencies have been developed using code
method and transaction engine of choice. This is written and shared by Satoshi, with their own
key for enabling frictionless transactions inside these enhancements and additional features.
closed environments. For the first time, companies
can be their own payment processors without the As the name suggest, cryptocurrencies use cryptography
cumbersome or costly aspects of traditional financial to enhance and operationalize the system. It provides
settlement options. Tokens offer a much lower barrier a mechanism for securely encoding the rules of a
for processing end-to-end transactions inside a given cryptocurrency system within the system itself. It can
market. be used to prevent tampering and ambiguousness, as
well as to encode the rules for creation of new units of
As Earnings: An equitable redistribution of the the currency into a mathematical protocol.
resulting increased value is part of what blockchain-
based models can enable. Whether it is profit sharing, Within the Bitcoin blockchain network, bitcoins are
benefits sharing or other benefits (such as from spent to pay for monetary transmission, and to pay
inflation), sharing the upside with all the stakeholders miners or block creators for maintaining the network.
is expected. To convert the digital currency, for instance Bitcoin,
to Fiat currency, one needs to have a Crypto Wallet.
How the Bitcoin Works Various wallets exist for the various cryptocurrencies in
the market.
Being the market leader so far, the how pertaining
to operationalization of cryptocurrencies will heavily Bitcoin uses SHA-256, which is a set of cryptographic
borrow from the Bitcoin platform which has a free hash functions designed by the U.S National Security
and open source code for its functionality. Other Agency, and is based on the proof-of-work system.

Figure 1: How Blockchain works for Bitcoin

Source: Presentation by John Walubengo during the Public Forum on Cryptocurrencies held on September 6th 2018 at The Stanley
Hotel, Nairobi.
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The main problem that made uptake and use of cryptocurrencies can be, and indeed are, very
cryptocurrencies slow in the early years of its rollout volatile. At one point they are highly priced yet at
was the issue of ‘double spend’, which meant that the another, prices dip down.
system was not tamper proof as opposed to use of fiat 3. As an Investment Option: One of the questions
currency. As a consequence, one unit could be used that sets cryptocurrencies apart from fiat currency
by two or more different persons at the same time is the aspect of using them as form of investment.
thereby meaning one party was cheating. However, Clearly, it is not an option that is backed by the
with technological advancements, advanced coding has Central Bank of Kenya thus leaves individuals and
curbed this shortcoming thus ensuring this problem is organizations to bear the risk on their own.¬
non-existent. 4. Usage as a payment system: Notably, technological
advancements have enhanced payment models and
In the Bitcoin scenario, once a purchase is made, or which are much cheaper than many conventional
one individual makes payment via bitcoins, there is a options for remittances or money transfers. They
complex system that is deployed to ensure verification are also convenient for instance for smartphone
of the transaction. This is done by high end computers payments within and across borders.¬
and groups upon groups of miners who ensure the 5. Purchase of the digital currency: There are many
authenticity of the transaction and that only the exchanges that sell and buy cryptocurrency. There
intended end user acquires the bitcoin in the end. are also a growing number of physical automated
The process entails creation of chains of blocks of teller machines, or ATMs, that will convert hard
computerized puzzles and computations that lead to currency into digital currency.¬ In Kenya, the first
a confirmed batch – hence the term blockchain. The Bitcoin machine has been installed in Westlands,
figure above demonstrates this process which leads to Nairobi.
the recipient being the validly selected winner of the 6. As a medium of Storage: Unlike fiat currency, digital
bitcoin, and eliminates the double spend problem too. currencies are stored in digital formats with the
A transaction occurs when data is sent to and from one most known method being use of digital wallets
(bitcoin) address to another. which one can download onto their smartphones
for free, online. It acts lust alike a normal wallet
Just like in a normal financial transaction where one allowing one to make payments for large or small
sends money from one person to another, for bitcoin, amounts, as is necessary. However, one has to take
you do the same thing but by sending data (bitcoins) precautions to protect their funds from hacking;
to each other. Bitcoins have value because it’s based using strong passwords, or even just having an
on the properties of mathematics, rather than relying offline wallet.
on physical properties (like gold and silver) or trust in 7. Uptake and Usage: Acceptance is still limited but is
central authorities, like fiat currencies. In enterprise gradually increasing. In the Kenyan scenario, some
environments, the transactions could be property, land, retailers accept bitcoins for goods and/services that
educational/birth certificates, etc. they offer, with many tech savvy Kenyans joining
the fray for various reasons; to make a kill as
Issues on Cryptocurrencies Vs Money (Fiat) investors, or just to be part of the bitcoin family.

Some of the issues that have come to the fore in so Note: There are many types of cryptocurrencies with
far as uptake and usage of cryptocurrencies all over the various names in the market. Notably, it is Bitcoin that
world has to do with comparison with fiat currency. dominates with the rest slowly picking pace, gaining
Some key issues are below; acceptance and usage with time.

1. Safety of the cryptocurrencies: Episodes of hacking, Cryptocurrencies and the financial sector
stealing of bitcoin, and even bankruptcy of
exchanges and wallet providers have occurred. The question that many people ask as pertains to
However, there is notable decline in such episodes cryptocurrency relates to how it affects the Kenyan
with the evolving technology which continues to financial landscape as it is. Notable however is the fact
make systems that are tamper proof.¬ that the Central bank issued a circular that states their
2. Volatility of cryptocurrencies: As has been noted, displeasure to embrace the digital technology in the
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financial sector. This notwithstanding, there has been 5. Reduction in Transaction Costs: Blockchain can
advantages that relate to usage of the cryptocurrency cut operational costs which banks are targeting,
and which will tilt the landscape as is, and requires giving real benefits while reaching out to the real
some sort of urgent policy direction by the regulator customers and not just those with physical bank
and the financial sector as a whole. accounts.
6. Ensures Secure Transaction-Ledger Database:
One of the issues of concern is the fact that digital Since the system is checked by a community of
technology has reduced the settlement time for connected computers within a distributed network,
transaction of securities. This has made it possible for it has a secure transaction ledger database which has
much faster trading across borders which is beneficial been checked and verified by all as being authentic
to parties involved in a transaction. As a consequence, and true reflection of a given transaction. This is
less money needs to be set aside to cover credit and an advantage that accrues to the users within the
settlement risks—just as collateral is not needed for a community.
cash transaction.
Risks associated with Cryptocurrencies
In case of carrying out a transaction such as property
purchase or sale, a blockchain could provide digital, Digital currencies have gained traction across the globe.
unforgeable proof of ownership along with a complete However, some outstanding issues that have come to
record of the chain of possession. This has endeared it the fore include the following;
to many early adopters, especially tech savvy individuals
and organizations both in the mainstream technology a) Money Laundering/Terrorists taking advantage of
and even many business persons. its anonymity; The use of cryptocurrencies has been
said to be a conduit for money laundering or use by
Advantages of Cryptocurrencies terrorist groups and/or organizations to fund their
illegal activities since a key attribute of the currency is
1. Reduces Transaction Settlement Time: Payments anonymity. However, it is not impossible to trace the
and remittance settlement can happen rapidly origin of a bitcoin, and its ultimate recipient, though it
allowing people to access their capital when they is a tall order.
need it. Time and cost efficiencies could support b) Users getting conned; Instances have occurred where
large amounts of small transactions or micro some unscrupulous individuals or organizations create
transactions within the trusted network fake Crypto Assets/Currencies, Cyrpto-Exchanges
2. “Trusted” Third Party Elimination: Storing & Initial Coin Offers (ICOs) and use these to con
transactions in an automatically shared, unsuspecting persons. In countries where this space is
tamperproof database eliminates the need for not regulated, losses are reported to be huge.
complicated procedures and clearing houses and c) Safety of digital wallets is an issue; Blockchain based
ensure that banks have their records in sync; jut in solution requires and puts more responsibility on users
case the banking fraternity adopts this system. as pertains to the safety of their crypto-assets (Wallet
3. Eliminates Error Handling: Since there is a large Pins and Passwords). Instances of hacking have occurred
pool of independent individuals in the system, where one manages to make through and steal bitcoins
cryptocurrency provides for real-time tracking from individuals or organizations. Notably, it has been
of transactions in a decentralized manner with noted that 51% attacks on Blockchain based systems
no double spending or double-transactions, thus that assume majority of the participants (nodes) are
helping to eliminate errors. honest (mining pools are growing).
4. Support Smart Transactions: Blockchain supports
smart contracts, transactions that include multiple
assets, transactions that include multiple parties Opportunities for Mining Digital Currencies
and two-way transactions. In the long term,
this will allow the unbanked not only access to Mining, or processing, keeps the Bitcoin process secure
paperless bank accounts, but also access to global by chronologically adding new transactions (or blocks)
capital markets as the connections are both local to the chain and keeping them in the queue. Blocks
and global. are chopped off as each transaction is finalized, codes
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decoded, and bitcoins passed or exchanged. In the end,
one individual will be given a reward in terms of tokens.

Conclusion
The digital landscape in the country has, and will
continue to witness growth buoyed by the dynamics
in the technological field. In terms of the effect to the
financial sector, it becomes important that the status
quo be checked so that benefits that may accrue are not
left to chance, but rules and regulations put in place to
govern this going forward.

The regulatory space for cryptocurrencies in Kenya

currently is non-existent with only a warning from the
regulator for individuals and organizations to steer clear
to transact through the digital currencies platform.
However, it is important to note that, and realize the
fact that Tokens/Cryptocurrencies are with us to stay.
Suggestions have been fronted as to how the sector
can be regulated to ensure benefits accrue both to the
user and the government. Noting this fact therefore,
the Kenyan government set up a task force in April
to look into ways of gaining a better understanding
of, and thereby regulating this ecosystem. One of the
approaches proposed is to have a ‘Sandbox’ Regulation
to host emerging technologies in a controlled
environment before rolling out to the general public.
This ensures that there is a balance between embracing
and enhancing new technological advancements while
in the same vein protecting consumer interests.

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 The
Point
The Institute of Economic Affairs (IEA-Kenya is a
Public Policy Think Tank and a civic forum that seeks
to promote pluralism of ideas through open, active and
informed public debates on key policy issues.

The Institute provides research back-up to policy makers,

including members of parliament through research and
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The Point is a publication by the Economic Regulation

and Competition Policy (ERCP) Programme.

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