Bitcoin and cryptocurrencies are a puzzle especially for regulators. Over the last 4 years our dear Central Bank Governor, Dr. Patrick Njoroge has consistently been opposed to the idea of cryptocurrencies. He issued 2 damning public notices warning the public to stay away and another circular expressly requesting banks to choke any value transfer activity related to cryptocurrencies.
As per the Central Bank of Kenya Act, he is well within his right. A bank is a regulated private business. You cannot compel a bank to take you as a customer or take your business. Thus, every once in a while, the governor pulls out his trump card to remind us who is boss.
But mounting pressure has pinned the old man against the wall, forcing him to revisit his dogmatism. An article from the Standard dated May 23rd titled “CBK Warms Up to Cryptocurrencies” read
“CBK Governor Patrick Njoroge said the regulator was open to introducing cryptocurrencies such as bitcoin as alternative payment vehicles with the opportunity to reduce fraud.”
While in the past, all the the financial instruments that intermediary companies use for fund transfers were based on fiat currencies, in the forms of cash, bank deposits and electronic money – it is no longer the case with the advent of Bitcoin.
Rather than fight change, the Central Bank of Kenya now seems to be reconsidering its stance on cryptocurrencies as a radically new way of high-speed, low-cost value transfer independent of traditional financial intermediaries.
In Kenya, we have what is called the National Payment Systems Act 2011 that birthed the National Payment Systems Regulations 2014. Both Act and regulations fall under the mandate of the Central Bank, demarcating what counts as an act of payment or circulation of money, who is authorized to move money within and out of the country and all the prerequisites to become a regulated payment service provider.
A “payment instrument” means any instrument, whether tangible or intangible, that enables a person to obtain money, goods or services, or to otherwise make payment
A “payment system” means a system or arrangement that enables payments to be effected between a payer and a beneficiary, or facilitates the circulation of money, and includes any instruments and procedures that relate to the system;
A “payment service provider” means:—
(i) a person, company or organisation acting as provider in relation to sending, receiving, storing or processing of payments or the provision of other services in relation to payment services through any electronic system;
(ii) a person, company or organisation which owns, possesses, operates, manages or controls a public switched network for the provision of payment services; or
(iii) any other person, company or organization that processes or stores data on behalf of such payment service providers or users of such payment services; or
(iii) any other person, company or organization that processes or stores data on behalf of such payment service providers or users of such payment services;
To become one of these providers, one must apply to the Central Bank of Kenya.
The Bone of Contention
The emergence of Bitcoin and cryptocurrencies set the cat amongst the pigeons by creating platforms that replace the role of institutional actors with a distributed public accounting service and a native financial instrument – virtual currency. Virtual currencies act as a medium of exchange, enabling applications such as:
- International payments and remittances (alternative to correspondent banking)
- Online payments
- Settlements between financial service institutions
- Domestic and Cross border payments
- Machine to machine payments
- Foreign exchange
So on the one hand, Central Bankers feel threatened by a super efficient payment network over which they have no control nor oversight.
On the other hand, Bitcoiners are caught in a bind every time they need to exchange in and out of traditional fiat currency via bank deposits or mobile money. It’s doubly worse for startups like Bitpesa who see an opportunity to leverage cryptocurrency payment networks to help diaspora send money into Kenya, or Kenyan merchants pay their suppliers in China or Nigerian parents pay school fees for their kids studying in Kenya or young Kenya freelancers get paid for online work or young Africans make payments online with ease – at a fraction of the cost of traditional payment channels.
There is a long list of use cases that are not possible because, to complete these transactions, a bank or mobile money account is required on either or both ends. And, the Central Bank of Kenya has a final say on who can use the banking system for moving money.
A circular to Kenyan banks by the Central Bank of Kenya in December 2015, dashed hopes of building out formal cryptocurrency payment services.
“The purpose of this circular therefore is to caution all financial institutions against dealing in virtual currencies or transacting with entities that are engaged in virtual currencies. Financial institutions are expressly advised not to open accounts for any person dealing in virtual currencies such as Bitcoin. Failure to comply with this directive will lead to appropriate remedial action from the Central Bank.”
In the same year, Safaricom, the largest provider of mobile money gateway services Mpesa, denied services to any payment company dealing in virtual currencies. A subsequent High court case brought against Safaricom for suspending Mpesa access to Bitpesa was upheld by a High Court Judge Onguto.
So, till today, while informal workaround exists, there are no formal gateways for cryptocurrency payment services via mobile money and bank.
A Middle Ground
But perhaps there is a middle ground that satisfies both the Central Bank of Kenya and Bitcoin startups.
This report by Consult Hyperion for FSD Africa titled Blockchains, Distributed Ledgers and Funds Transfer: An African Overview sheds light on how a public cryptocurrency blockchain like Bitcoin, or Bitcoin cash or others could exist as financial instrument and as a platform for cross-border, high-speed, low-cost value transfers for consumers, businesses and international agencies. The image above is an example of a third-party enabled Bitcoin based remittance model.
The National Payments Systems Act presents a window of opportunity for a compromise under Part II that states
“The Central Bank may, by notice in the Gazette, designate a payment system for the purposes of this Act”
It is this section that the Central Bank Governor Dr. Patrick Njoroge alludes to when he proposes cryptocurrency alternative payments systems. As the regulating authority, the bank can use or modify the existing framework it or craft a new framework to allow third-party companies that use cryptocurrency blockchains to be authorized as payment service providers.
How it Would This Work?
Say you are a merchant in Kenya who wants to pay a supplier in Nigeria but feel that the banking payment network is too slow for your liking. In the near future, you could walk up to a company like Bitpesa, sign up as a customer and make a request to wire 100 million KES to your Oga supplier.
Under this new regime, Bitpesa would be a regulated digital payment service providers using Bitcoin as an alternative payment network. Thus, they could use a Kenyan bank account to accept funds and a bank account in Nigeria to cash out these funds.
Inter-mediating these two bank accounts, Bitpesa would convert your Kenya shillings to Bitcoin or Ethereum or Bitcoin Cash or whatever cryptocurrency payment rails they saw fit to transmit value on a super fast network to Kenya. Under 30 minutes.
For this service, Bitpesa would charge a flat 4% fee for the service with no hidden forex fees and an assurance your suppliers bank account in Nigeria will be credited within hours.
On the Nigerian end, Bitpesa would use their pool of funds in a Naira bank account, or from a banking partner and immediately pay out an equivalent amount less 4% into your supplier’s account; thus completing an end to end payment transaction where the parties on both end are KYCd and known.
At least half of this new type of virtual currency payment service – what was previously a fiat settlement network – is now made possible by Bitcoin as a settlement network. The merchant and supplier never have to know what happened or how it happened. All they care about is
- A transparent flat fee is charged for the service
- A faster money service than traditional banking wire transfer mechanism
- No volatility risk ( it is all absorbed and taken care of by BitPesa)
- Bitpesa is a regulated entity
- They got paid!
Mainstreaming Cryptocurrency Payment Systems for East Africa
I am confident about this model as a way to mainstream cryptocurrencies like Bitcoin for real world use cases in the financial industry.
I do not need to reiterate the high cost of sending money within the continent, even between neighbors like Ghana and Nigeria. Much has been written about the cost in fees, time and lack of transparency in cross border payments in the form of B2B payments, online payment and remittances.
I suspect this is how the Central Bank of Kenya and Governor Njoroge plan to rein in cryptocurrencies under their oversight.