Wave of Crypto Regulation Comes to Africa
A look at what the changing regulatory landscape in African cryptocurrency markets could mean for the rest of the world.
by Menna Shanab, media writer and Thomas Thang, senior investment associate
Introduction
Kenya, Nigeria, and South Africa have the highest crypto adoption rates in the region, especially via peer-to-peer exchanges. Crypto’s legal status is widely variable across the continent, ranging from countries that recognize Bitcoin and other cryptocurrencies as viable payment instruments, to wholesale bans in others. There is a general upward trend of countries that have started exploring the use of central bank digital currencies (CBDCs) to promote financial inclusion and support a cash-lite economy, and increased participation by others have piloted or plan to pilot their own CBDCs.
Regulating a dynamic and decentralized system continues to be a challenge for most countries, requiring a balance between minimizing risk and maximizing innovation. Regulation is on the way, and as is the case in many aspects of the crypto industry, Africa is taking the lead. December of 2022 alone saw three major moves towards stronger crypto regulation in Africa, as governments begin to come to terms with shifting macro-economic trends:
Kenya’s Joint Financial Sector Regulators Forum softened its stance on cryptocurrency and recommended the formation of a technical committee that will create laws to regulate digital assets and businesses in the sector.
The Nigerian government will start taxing cryptocurrencies and other digital assets by 2023 if the proposed Finance Bill 2022 is approved. The proposed bill outlines the taxation of these assets as part of the government's efforts to enhance international taxation of e-commerce in emerging markets.
Last month the Bank of Ghana announced it will begin developing a comprehensive digital asset regulation framework.
1. Kenya
Crypto Adoption Fast Facts
Kenya has the highest percentage of cryptocurrency ownership in Africa, according to the data in the latest UNCTAD policy brief.
Around 8.5% of the Kenyan population, or approximately 4.25 million people, own cryptocurrencies.
The country ranks 19th globally in the 2022 crypto adoption index compiled by Chainalysis.
Regulation Developments
In December 2015, the Central Bank of Kenya (CBK) issued a public notice warning that bitcoin and other cryptocurrencies are unregulated and not backed by any government or central bank. According to the notice, no entity is licensed to provide money remittance services or products using virtual currencies.
In 2018, the Capital Markets Authority (CMA) warned against initial coin offerings (ICOs), stating that they were unregulated and speculative.
In February 2022, the CBK published a discussion paper on the feasibility of a CBDC. While the CBK noted that a CBDC would not necessarily increase access to financial services in Kenya, where mobile money is already widely used, it could potentially reduce the cost of transactions and improve cross-border payments.
The Kenya Revenue Authority (KRA) would be able to tax more than four million Kenyans who own cryptocurrencies if lawmakers approve a bill that seeks to introduce taxation of the crypto exchanges and digital wallets and imposes transaction taxes akin to excise duty charged on bank transactions.
In December 2022, Kenya’s Joint Financial Sector Regulators Forum softened their stance on cryptocurrency and recommended the formation of a technical committee that will create laws to regulate digital assets and businesses in the sector.
2. Nigeria
Crypto Adoption Fast Facts
The use of bitcoin has significantly increased in Nigeria in recent years, particularly among small businesses, as the weakening naira currency makes it harder to purchase US dollars.
According to a KuCoin report, 33.4 million Nigerians, or 35% of the population aged 18 to 60, own or have traded cryptocurrencies in 2022.
ChainAnalysis ranked Nigeria 11th overall in their 2022 global crypto adoption index.
Regulation Developments
The Central Bank of Nigeria (CBN) and the country’s Securities and Exchange Commission (SEC) assert overlapping jurisdictions over governing cryptocurrencies and digital assets.
In a letter to all financial institutions in February 2021, the CBN prohibited all regulated institutions from dealing with cryptocurrencies, and also directed the closure of all crypto accounts and exchanges in Nigeria. The central bank has argued that cryptocurrencies are risky for users because they are unregulated and not legal tender. The CBN Circular and Letter do not outright prohibit the use of virtual currencies. However, the CBN's directives have the effect of prohibiting persons or entities in Nigeria from facilitating the trade or transmission of virtual currencies through the Nigerian financial system.
In April 2022, the CBN fined four Nigerian banks for allowing crypto transactions. Stanbic IBTC Bank was fined $500,000 for allegedly using two accounts for crypto transactions while Access Bank Plc, the country’s largest lender by assets, was fined 500 million naira ($1.1 million) for failure to close customers’ crypto accounts.
The CBN has also experimented with a CBDC by releasing the e-Naira in October 2021. However, due to a lack of awareness and acceptance, e-Naira adoption remains slow. The eNaira digital wallet has been downloaded 840,000 times since its launch, with only about a third of these users actively using the wallet who have completed 200,000 transactions worth four billion nairas ($9.7 million). This equates to approximately one transaction per active wallet, demonstrating that Nigerians do not use their digital wallets for day-to-day transactions.
In September 2020, the Nigerian SEC stated that crypto assets are securities that fall within the SEC’s regulatory purview, and that security token offerings or ICOs are subject to regulation by the SEC.
In May 2022, the SEC approved the new rules to regulate digital assets and virtual asset service providers. They offer guidelines for digital asset offering platforms (DAOP), custodians (DAC), service providers (VASP) and exchanges (DAX). These entities are now required to register with the SEC and are considered capital market operators, meaning they must comply with KYC/AML requirements and other reporting policies for capital market operators.
In November 2022, Director-General Lamido Yuguda said the SEC will promote investment in “sensible digital assets,” with a focus on protecting investors and exploring the use of blockchain technology to advance virtual and traditional investment products. However, he stated that cryptocurrencies will not be included in these plans until regulators can agree on standards to protect investors.
Looking Forward
Unified Legal Framework for Virtual Currencies
Ongoing efforts by the Central Bank of Nigeria, the SEC and other regulators have been establishing a unified regulatory framework for virtual currencies in Nigeria after the CBN ban in 2021.
In November 2022, the Chairman of the House of Representatives Committee on Capital Market and Institutions, Babangida Ibrahim, disclosed that they will soon pass a law that would allow the SEC to recognise cryptocurrency and other digital funds as capital for investment. The proposed legislation would also define the regulatory roles of the CBN and SEC regarding digital currency.
Taxing of Cryptocurrencies
According to Zainab Ahmed, Nigeria's Minister of Finance, the government will start taxing cryptocurrencies and other digital assets by 2023 if the proposed Finance Bill 2022 is approved.
The proposed bill outlines the taxation of these assets as part of the government's efforts to enhance international taxation of e-commerce in emerging markets.
Virtual Free-Zone Partnership with Binance
In September 2022, Nigeria Export Processing Zones Authority (NEPZA) announced that they were seeking partnership with Binance and Talent City for Nigeria - a technology hub based in Lagos - to harbor the first Virtual Free Zone in West Africa.
3. Ghana
A History of Cautionary Warnings
There is currently no cryptocurrency legislation or regulation in Ghana. However, since 2019, Ghana’s central bank – the Bank of Ghana (BoG) – has issued a number of notices stating that cryptocurrencies are not officially recognized as legal tender and that those who trade in these currencies do so at their own risk.
In one of its most recent notices in 2022, the BoG reiterated that cryptocurrencies are not regulated under any legislation in Ghana, and are not protected by any guarantees or safeguards.
Recent Developments
Introduction of the eCedi
In a move construed as offering an alternative to cryptocurrencies, the BoG announced the introduction of its own CBDC – the eCedi – now in its pilot stage.
Pegged to the value of the Cedi, Ghana’s national currency, the eCedi will be tested in remote Ghanean villages with little digital connectivity to test the use of contactless smartcards and a digital wallet application. If successful, the pilot will be expanded in hopes that eCedi will enable payment for goods and services using the retail CBDC and offline digital transactions.
Ghana is not alone in this move. According to the Central Bank Digital Currency Tracker, 17 African countries have experimented with CBDCs to various degrees of interest and implementation thus far.
A Comprehensive Framework for the Regulation of Digital Assets
Last month the BoG announced it will begin developing a comprehensive digital asset regulation framework. Dr. Ernest Addison, governor of the country’s central bank, stated that the greatest takeaway is that “cryptocurrencies are digital assets and not currency”, and that “an outright ban of cryptocurrency has proven ineffective, mainly due to its decentralized and borderless nature.” Despite the decision to develop a regulatory framework for cryptocurrency, the BoG still stood firm by its caution statements made to the public on the dangers associated with digital currencies.
4. South Africa
Existing Legislation
South Africa has long been the sub-Saharan jurisdiction considered most receptive to cryptocurrencies. However, the country’s initial national policy toward crypto was characterized by wariness and a considered policy of noninterference.
In 2014, the National Treasury issued a statement along with the South African Reserve Bank (SARB), the country’s financial regulator, financial intelligence and tax agencies. It took a cautionary but non-intrusive tone, informing the public that it could trade crypto at its own risk but would be offered no legal protection. The SARB affirmed it was the only authority with the right to issue legal tender and that decentralized virtual currencies are not officially recognized in South Africa.
This was confirmed again by the SARB in 2017 as it reasserted that it does not recognize cryptocurrency as legal tender. A number of factors, including the country’s crypto market’s surge to over two billion rands ($147 million) in daily traded value, have rendered this policy unsustainable.
Continuing this pattern of inconsistency, however, the Minister of Finance distributed authority over crypto beyond the SARB, with Parliament noting in mid-2017 that “the National Treasury together with the SARB, [Financial Intelligence Centre], and [Financial Services Board] also established an Intergovernmental Fintech Working Group in December 2016, to develop an approach and revised policy stance towards FinTech, including crypto-currencies.”
In November 2020, a South African draft declaration was published on crypto assets as a financial product under the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act). It was noted that the intention behind the declaration was to capture intermediaries that advise on or sell crypto assets to consumers, so as to provide protection for consumers who are advised to purchase these products. In June 2021, a national working group created a roadmap for a regulatory framework to help the country conform to AML/KYC standards and protect investors. In February 2022, South Africa’s National Treasury confirmed the intention of declaring cryptocurrency a financial product and of enhancing the monitoring and compliance of transactions.
Recent Developments
South Africa’s financial regulators are currently laying the groundwork for the phased and structured regulation of cryptocurrencies. The move represents a departure from the hands-off approach taken for the past seven years.
In October 2022, the Financial Sector Conduct Authority (FSCA), South Africa’s financial regulator, updated the country’s 2002 Financial Advisory and Financial Intermediary Services Act to declare crypto as a financial product subject to financial services law. This decision was expected for several months, and it brings crypto assets under regulation in South Africa for the first time, producing benefits such as consumer protection and AML/KYC compliance.
The FSCA notice states that a crypto asset is “a digital representation of value” that can be electronically traded, transferred and stored but is not issued by a central bank. Additionally, it “applies cryptographic techniques” and uses distributed ledger technology.
Looking Ahead
Regulation could prove to be a healthy development for the crypto and blockchain industry across Africa with the level of interest from its citizens continuing to grow. Enhanced regulatory guidance could decrease the speculative stigma around cryptocurrencies. Reduced speculation also increases the confidence of investors, attracting those of them who have avoided digital assets due to a volatile crypto market.
Beyond the impetus to own digital currencies for speculative reasons, markets in Africa appear to have a great need for and desire to implement promising cryptocurrency use cases. This increasing demand will play a pivotal role in accelerating regulation in Africa. With Nigeria, Africa’s most populous country, newly re-engaged in the space, and other players like Ghana dipping their toes in regulation for the first time, we are witnessing the birth of a gradual cascade of promising regulation from all corners of sub-Saharan Africa.