Cryptocurrencies,also known as virtual currencies, are a digital medium of exchange, which is unlike our normal fiat currency that exists in the form of physical bank notes or coins, or commodity money, backed by gold or other precious stones. The blockchain digital technology is as vital to cryptocurrencies as the central nervous system is to humans. Blockchain uses cryptography to create (mine) and store units, secure transactions, transfer tokens and effect payments. These processes metamorphose a crypto from being a mere digital token into a digitised asset with an economic value. That is to say, users can earn it, store it, trade it, transfer it, and sell it.
African central banks by and large do not recognise cryptocurrencies as money, mediums of exchange or legal tender. But this is not only unique to Africa as similar patterns are being experienced in other parts of the world, especially developing countries. In Europe and the US, central banks have generally cautioned, but not banned, the use of or trading in cryptocurrencies. Although trading in cryptocurrencies in Africa has not spread widely to people at the bottom of the pyramid, their use is spiralling upward like a whirlwind in tandem with ICT technological advancements, high mobile penetration, growth in literacy, and financial inclusion and consumer sophistication.
African central banks link cryptocurrencies to price volatility, fraud, money laundering, tax evasion, exchange control circumventions, terrorism financing and other criminal activities fuelling illicit financial transactions. While some of these concerns are genuine, others tend to be rhetorical and hyperbolic, as traditional financial systems are also fraught with similar risks.
Gripped by crypto-phobia, African central banks have convulsed, issuing a plethora of warnings against the use of cryptocurrencies while others have gone to extremes, outright banning trading in them – an easier way out of what they perceive as the ‘crypto-quagmire’. According to a 31 March 2018 public notice issued by Adikwu Igoche, Manager, Research Development at Nigeria Deposit Insurance Corporation (NDIC), cryptocurrencies are not recognised as currency in Nigeria as they do not belong to the category of currencies or coins issued by the Central Bank of Nigeria (CBN).
Similar notices were issued by the Kenyan Central Bank (KCB) as far back as December, 2015. Other African countries such as Morocco (2017) and Algeria (2018) have promulgated laws banning the usage and ownership of virtual currencies. The Reserve Bank of Zimbabwe (RBZ) on 11 May 2018 issued a notice warning the public against the use of cryptocurrencies and directing all banking institutions in the country not to provide banking services to facilitate any person or entity in dealing with or setting up cryptocurrencies.
RBZ announced in the same notice that Bitfinance (trading as Golix) and Styx24, leading local cryptocurrency exchanges, were not licensed by it and any person buying, selling or otherwise transacting in cryptocurrencies, did so at their own risk and will not have recourse to the central bank. On 15 May 2018, Golix was directed by RBZ to cease all cryptocurrency exchange operations in Zimbabwe. Golix was in the process of rolling out its initial coin offering (ICO) which sought to raise $32m through a token sale. Golix was stopped right in its tracks by the RBZ, but didn’t take this threat lying down.
Golix filed an urgent chamber application with the High Court in Zimbabwe challenging the legality of RBZ’s ban on the basis that the central bank acted illegally, irrationally and unconstitutionally and outside the ambits of administrative law in closing its virtual currency exchange. The High Court, on 24 May 2018 issued a default judgement against RBZ and ruled, inter alia, that “The ban issued by the respondents [RBZ] through letter dated May 15, 2018 against the applicant [Golix], directing it to cease its operations, shut down its cryptocurrencies exchange business and ordering the closure of its bank accounts with its bankers, be and is hereby suspended…”
It seems central bank challenges in dealing with virtual currencies are not only restricted to Africa. India seems to be faced with similar challenges on how to deal with virtual currencies, just as Africa is. The Reserve Bank of India (RBI) on 5 April 2018 issued an official statement banning financial institutions and consumers from the use of virtual currencies. The RBI notice read as follows: “Reserve Bank of India has repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, it has been decided that, with immediate effect, entities regulated by RBI shall not deal or provide services to any individual or business entities dealing with or settling virtual currencies… ”
The legal position
The legal challenge for African central banks is that their cases may not hold water in courts as there is limited legal precedence and in many countries there are no laws that address issues of virtual currencies. Legal cases, triggered by central bank prohibitions involving virtual currencies, have only now started to appear before the courts. The banning of trading in cryptocurrencies from mainstream financial systems does not seem to be practical and effective. Such prohibitions force consumers to use black market trading avenues or simply resort to peer-to-peer (P2P) digital trading platforms.
More stable alternative
Africans are becoming attracted to cryptocurrencies not only as speculative investments, but as alternative and cheaper payment and settlement methods, conduits for capital investments and options for savings and storing value as most African fiat currencies are very volatile and unstable and do not hold value against major currencies such as the US dollar. Technological innovations underlying cryptocurrencies such as blockchain should be embraced by central banks as they have the potential to improve efficiency in financial services.
Instead of throwing tantrums at technological innovations, African central banks should be pragmatic and set up specialised units dedicated to researching cryptocurrencies and emerging blockchain and other digital and artificial intelligence technologies to enable them to come up with informed and guided practical policy and regulatory interventions that work for Africa.