Capital Markets Authority of Kenya Proposes Regulation on Cryptocurrencies and ICOs

Muthaura, CEO, CMA, Speaking during the launch of the Capital Markets Soundness Report.
Muthaura, CEO, CMA, Speaking during the launch of the Capital Markets Soundness Report.

Capital Markets Authority has released a ‘Soundness Report’ that seems to indicate the need to set up a regulatory body for cryptocurrencies and Initial Coin Offerings (ICOs) in the Kenyan market.

According to the Q1, 2018 report, ‘the debate is on as to the ideal regulatory perimeter within which these virtual currencies that use decentralized technology operate.’

The report comes just 2 months after the CBK Governor warned banks to stay clear of cryptocurrencies and after the CS, ICT, Joe Mucheru, set up a Blockchain Taskforce to oversee regulation in the space.

 Volatility – A Major Concern

One of the major concerns highlighted in the report was the volatile nature of cryptocurrencies like Bitcoin.

The report notes that “this volatility in price fluctuation remains a concern, even as regulators seek to strike a balance between managing the risks that accompany innovations and avoiding being an impediment to market led innovation. The debate is on as to the ideal regulatory perimeter within which these virtual currencies that use decentralized technology operate.”

ICO Regulation and Other Concerns

Ombara, Director, Regulatory Policy and Strategy, CMA, speaking at the report launch

The report goes on to say that “the Authority Vide a cautionary notice on 21st
February,2018, warned investors against taking part in Initial Coin Offerings (ICOs), indicating that to date the Authority has not approved any ICO, taking the position that the ongoing offerings are unregulated and speculative investments with considerable risk exposure to the investor.”

The report points to the following as cause for worry:

  • Heightened potential for fraud.
  • Cross-border distribution risks.
  • Information asymmetry.
  • Liquidity risks.
  • Lack of proper definition of product scope.
  • Cryptocurrency do not have an attached security.
  • Lack of transparency given that some of the innovations were invented with the objective of avoiding regulation.

Recommendations

The report goes on to give the following recommendations based on the existing concerns:

  • There is need for regulators to devise a common approach towards handling issues revolving around Cryptocurrencies and Initial Coin Offerings. A joint work group by financial sector regulators could be put in place to tackle issues around cryptocurrencies/ICOs.
  • An alternative approach would be creation a special unit that is an arm of all relevant regulators to deal with all issues aimed at regulating cryptocurrency.
  • Regulators need to communicate their willingness to accommodate FinTechs to the market to remove the perception that regulators are innately hesitant to appreciate new Fintech innovations.
  • There is room to develop international regulatory principles for crypto assets including initial coin offerings (ICOs). The goal should be to harness the potential of the underlying technology, while ensuring financial stability and mitigating the risks from money laundering and terrorism financing. This has been advocated by IMF.