Recently, Kenya was in shock after news of a 21-year old lady having 102 million Kenyan Shillings (Approximately $900, 000) deposited in her bank account hit social media.
It was later divulged that the lady had received the money as a gift from her partner, Marc De Mesel, a cryptonaire. The cryptonaire, through his YouTube channel, stated that the money was part of the profits he had made trading and he had sent it in different transactions to her account, taking note of the laws and regulations involved.
However, the Asset Recovery Agency proceeded to file an application in the High Court (Anti-corruption and Economic Crimes Division) seeking Preservation Orders of the money in the aforementioned bank account under the provisions of the Proceeds of Crime and Anti-Money Laundering Act, 2009 (POCLAMA).
The order was granted and is meant to last for a period of 90 days in order to facilitate the Agency to conduct its investigations and identify the source of the money.
This scenario highlights various issues in the blockchain and crypto space:
The case for bitcoin as laid out in the Whitepaper by Satoshi
Laws that regulate transmission of money
Claims that bitcoin facilitates crime with the aim of discouraging any form of investments
Satoshi proposed a system that allows online payments between parties without the need of having to involve financial institutions.
In the traditional system, these institutions are regarded as the trusted parties in transactions and they operate within various confines of the laws stipulated by governments.
For instance, in Kenya, banks are required to:
Conduct customer due diligence on their clients
Keep a record of all business transactions and parties involved with their clients as per the POCLAMA
Other stipulations include:
Stating the source of funds when depositing or transferring a certain amount
Disclosing particulars of the transacting parties when required
In some circumstances, obtaining approvals to make certain money transmissions
Without a doubt, if the parties would have used crypto exchanges and wallets to make the transfer and store the money, they probably wouldn’t be in this mess dealing with agents and police officers ransacking their home, arresting them, and exposing their identities.
Bitcoin has been referred to as a permissionless system and one that ensures privacy in transactions because it keeps the public keys anonymous. Most importantly, Crypto exchanges are not explicitly recognized as reporting institutions hence they are not bound to monitor and report their clients activities to regulators.
On the other hand, regulators are concerned with the possibilities that the system creates, especially since the transactions are anonymous. There have been unsettling speculations that the anonymity offers criminals a platform to launder money, transfer gains from an act of crime, and finance criminal activities such as terrorism.
Some exchanges have taken note of that and set up a number of guidelines relating to the Know Your Customer (KYC) processes in order to identify and verify their clients, and Anti-Money Laundering rules spanning through various countries in order to create a system for compliance with the Financial Action Task Force.
It is now expected that such cases will be common among the crypto community, and therefore, members need to understand how preservation orders, commonly known as freezing orders or freezing of assets, are issued and reviewed.
Once the agency applies to Court for the orders to be granted, and the Court grants them, the orders are gazetted. Upon gazettement, they are applicable for 90 days unless the Agency applies for confiscation orders in respect of the property that was frozen. Nevertheless, the other party can file an application to have the orders revised or varied on grounds that he/she has been deprived of a means to provide for his/her living expenses and that the undue hardship caused as a result, outweighs the risk that the property may be looted, destroyed, or transferred.
They can also prove that the preservation order is malicious, amounts to an abuse of power or court processes, and is founded on bad faith.
Confiscation orders can only be granted when the Court determines the property is a proceed of crime or money laundering after the Agency presents evidence before it.
Blockchain technology and cryptocurrencies have provided millions of people a means to have legitimate sources of income and they should be recognized as such. The role of ensuring that public money is protected falls on regulators and they should do so without forgetting the assumption in law that one is innocent until proven guilty.