Capital Markets Authority of Kenya Highlights the Challenges of Sandboxing Crypto and Blockchain Solutions in Kenya

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The Capital Markets Authority of Kenya (CMA Kenya) has released the regulatory sandbox 2021 milestone report.

The report highlights the achievements of the regulatory sandbox as well as the challenges and lessons learned over the 2-year period since it was launched in March 2019.

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SEE ALSO[WATCH] Belrium Kenya Becomes the First Blockchain Solution to Be Admitted into the Capital Markets of Kenya Regulatory Sandbox

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Part of the report recommendations is the need for ‘greater collaboration and co-ordination among financial sector regulators and policy actors at national, regional, and global level’ in order to have a successful and impactful Kenyan fintech landscape.”

The regulator has disclosed that out of 24 applications submitted to the sandbox since March 2019, at least 9 have been related to blockchain technology and tokenization of real estate.

In addition, out of the 7 firms admitted into the sandbox, 2 are blockchain-based:

  • Pyypl – Testing a blockchain-based platform for the issuance of debentures (unsecured bonds)
  • Belrium Kenya – Testing a blockchain-based and shareable know-your-customer (KYC) solution for capital markets intermediaries and investors

The report also lists some key challenges faced by the regulator during the sandboxing process:

  • Sandboxing is largely seen as a western concept – Many local stakeholders assume it is a physical space rather than a regulatory flexibility to conduct live tests of innovative products and business models
  • Divergent views or positions take by fellow regulators – This has made the process of reviewing some applications tasking as different regulators are at different levels of embracing fintech ideas. A concerted effort towards convergence has been necessary resulting in the formation of th eJoin Financial Sector Regulators Forum (JFSRF) working group
  • The technical nature of the applications – The complexity and novelty of the solutions and products require the committee to go out of its way to undertand these products and solutions which requires constant consultation and capacity building
  • A lack of a comparable market / jurisdiction to benchmark from – Sandboxes are still a novel regulatory tool and the challenges of early adoption and a lack of uncertainty on expected outcomes remains a challenge. Many predecessors are at the same level as Kenya in peer regulators from which to benchmark and compare notes on the fintech soltuions under review

Among the key challenges highlighted by the regulator that are specific to:

Decentralized finance (DeFi), blockchain, cryptocurrencies and its derivates:

  • Novelty and complexity of the concept
  • Insufficient information regarding the risk universe in this area
  • Lack of internal capacity to review these types of applications
  • Objections by Central Banks to issue cryptocurrencies
  • Fears around volatility affecting local currency
  • Concerns around cyber security and data safety
  • The challenge of multiple fintech firms providing a solution to solve the same common problem like e-KYC using blockchain

Tokenization:

  • Delinking tokenization from cryptocurrency
  • Grappling with the idea of stablecoins and other regulators’ opinon on the same
  • Lack of clarity on custodial arrangements of the assets
  • Verification and valuation of the assets
  • How to handle market bifurcation, where there may exist two markets for the same asset (on-chain and off-chain)
  • Concerns around cyber security and data safety

CMA Kenya has however admitted that it has ‘benefited a great deal from interactions with innovators’ and has obtained ‘new knowledge from the market and a better understanding of the products.’

Some of these lessons include:

  • Regulators must work closely with applicants
  • In multi-peak jurisdictions, regulators must coordinate and cooperate on fintech regulation
  • Create goodwill with the fintech firms
  • Learn, keep learning, and learn more
  • Never dismiss any idea before doing a proper assessment of it
  • Use internal resources and expertise

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RECOMMENDED READING: 3 Out of 4 Products in the South African Regulatory Sandbox Inaugural Cohort are Blockchain and Crypto-based

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