Emerging Regulatory Issues on Digital Currencies in Kenya

Digital currencies

A couple of days ago I perused the Kenyan NATIONAL PAYMENT SYSTEM ACT (No. 39 of 2011)THE NATIONAL PAYMENT SYSTEM REGULATIONS, 2014 (pdf). My interest was the legal stance on issuance of P2P exchangeable assets, such as loyalty reward points in Kenya, on the bitcoin blockchain – a decentralized network. At Umati Blockchain Ltd, we are exploring using the coloured coins protocol (for now)  for issuing freely exchangeable loyalty points, with all the ease, nifty features and security of the bitcoin blockchain.

It seems, to me, digital currencies such as bonga points, and cryptocurrencies such as bitcoin, fall in a gray area. They do not fit the strict definition of E-money under Kenyan law. Perhaps why, late last year, the Central bank of Kenya admitted via a public notice ‘Virtual currencies such as Bitcoin are forms of un-regulated digital currency not issued or guaranteed by any government or central bank.’ I subsequently wrote a rebuttal to this notice.

What is E-money according to Kenyan Law?

“E- money” means monetary value as represented by a claim on its issuer, which is –

a) electronically or magnetically stored

b) issued against receipt of currency of Kenya or any other currency authorised by the Bank; and

c) accepted as a means of payments by persons other than the issuer

Bitcoin for example is not a claim on an issuer. It is decentralized, has no central issuance and its possession confers ownership, it is property. So if you buy and hold your bitcoins, it is not issued money.

Platform based currencies are earned as reward for customer loyalty, they are neither a claim on assets nor issued against receipt of Kenyan or foreign currency. Typically, they are redeemable for discounts, goods or services. Think of Bonga points in Kenya which are only redeemable by the issuer, Safaricom, for airtime, talk time, SMSs and goods at Safaricom stores, but never redeemable for cash.


What is the business of Issuing Money?

Reading on, the Act defines  “the business of an e-money issuer” and “the business of an electronic retail provider”

Both definitions begin with means an issuance of e-money against currency of Kenya received

I am no lawyer, but use of “e-money” here, to me, invalidates this definition for the business of loyalty points, bonga points, electricity tokens and bitcoin (assuming no customer funds are held). I could be wrong.


Emerging Regulatory and Policy Concerns on Digital Currencies

So what would happen if Safaricom bonga points gained traction as a payment method outside Safaricom’s walls? Imagine they went on to discover a free market price of their own, and traded for goods and service just like regular money? Does it become e-money?

Understanding Platform Currencies – by the Bank of Canada Review, is a great summary of the emerging issues regarding platform based digital currencies and decentralized currencies such as bitcoin. It distinguishes

the digitization of national currencies such as the [Kenyan Shilling] Canadian dollar or the U.S. dollar, which involves the electronic transfer of a national currency between two accounts (e.g., using debit or credit cards).


Digital currencies, have no physical counterpart and do not represent a claim on assets. They are usually not denominated in the national currency and thus provide their own unit of account.

Think of bonga points, KPLC tokens, Uchumi points, Amazon credits, Facebook credit, virtual gaming currencies such as World of Warcraft coins and Tencent Q-coins with their different attributes – acquirability, transferability, redeemability

Platform digital currencies

platform-based digital currency have the potential to become widely accepted means of payment outside of its platform if it is transferable among its users

Central banks therefore, study and monitor them for

  • their potential impact on demand of bank notes
  • Their innovation in retail payments – efficient, cheap, fast and convenient
  • Their impact on public policy and regulatory issues if they became a widely used


The Case of Q-coins in China

Q-coin, a virtual currency issued by Tencent, a leading Internet community operator, is either earned by using mobile services or bought for 1 Yuan per coin. It was intended for online purchases, but,  gained traction as a means of exchange for real world goods and services from other websites besides Tencent. It grew so much, the People’s Bank of China got concerned and issued a warning.


Kenya to craft virtual currency regulation

On April 29th, the Kenyan Principal Secretary of  Information Communication Technology, Sammy Imetere made public comments on the need for virtual currency regulation. In his words

Soon the country will have to bow to pressure and accept the use of virtual currencies. Kenya cannot lag behind when in some of the innovations taking place globally yet the country is very receptive to new technologies

When this happens, it would open doors to Bitcoin and digital currencies in the retail and payments too. For now, there’s room to play around in the grey area.



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