A legal battle pitting telecoms operator Safaricom and a company owned by President Uhuru Kenyatta’s Cabinet nominee for the ICT docket, Joe Mucheru is behind the Central Bank of Kenya’s (CBK) latest warning against dealing in digital currencies such as bitcoin, the Business Daily has learned.
The CBK advisory, which was published in the local newspapers Tuesday, effectively throws a spanner into the works for BitPesa Limited — a Nairobi-based bitcoin trading platform that is linked to Safaricom’s mobile money service, M-Pesa.
“The CBK reiterates that bitcoin and similar products are not legal tender nor are they regulated in Kenya. The public should therefore desist from transacting in bitcoin and similar products,” CBK governor Patrick Njoroge said in the notice.
The CBK’s quest to slam the brakes on use of bitcoin in Kenya comes at a time when BitPesa is locked in an acrimonious court battle with Safaricom over the telecom operator’s decision to terminate M-Pesa payments to the platform’s gateway dubbed Lipisha Consortium.
Mr Mucheru, the ICT minister-designate, is both a director and shareholder in the firm, making his appointment to the docket significant.
Through the BitPesa platform, users can convert bitcoin into Kenya shillings and use it to make retail payments or remittances via M-Pesa.
The use of bitcoin, a virtual currency that was founded in 2009 by Australin techie Satoshi Nakamoto, has grown exponentially but its existence outside the world’s regulated financial markets has caused concern, forcing some countries to impose a ban on its use.
“Virtual currencies are traded in exchange platforms that tend to be unregulated all over the world and consumers may therefore lose their money without having any avenue for legal redress in the event these exchanges collapse or close business,” warned Dr Njoroge.
Unlike traditional currencies that partly derive their value from the faith that users put in the issuing governments, bitcoin is not created, regulated or backed by any central bank.
Instead of being minted or printed, bitcoin is digitally created through a process named “mining” and its exchange rate with conventional bills is determined by supply and demand.
Dealers on Tuesday evening quoted the Kenya shilling at 48,675/45,223 against bitcoin while the rate against the greenback was $476.04 to a bitcoin, according to data from BitPesa.
Kipochi and TagPesa are the two other platforms in Kenya that link M-Pesa accounts to the volatile world of bitcoin.
The increased activity of virtual currency exchanges playing out on Kenyan soil once again cements Nairobi’s position as Africa’s Silicon savannah, even in grey markets of digital currency.
Mr Mucheru, who was vetted on Friday last week, said the CBK and lawmakers should move to develop regulations for crypto-currencies likening it to the advent of pioneer mobile money platform M-Pesa which was viewed with suspicion at its birth in March 2007.
“We need to change regulations to take into account innovations such as virtual currency as this is currently outside CBK’s mandate,” said Mr Mucheru.
“It will be a sad day if we fail to embrace this because we are afraid. Kenya cannot be the tech hub of Africa if our own regulations stifle innovation,” he said in an interview with the Business Daily.
The long-serving Google executive is a serial entrepreneur. In 1999, he co-founded Wananchi Online. He was also an early stage investor in local IT firm Weza Tele – which was in May acquired by Mauritian financial services firm AFB for $1.7 million.
Mr Mucheru, an angel investor at BitPesa, described his shareholding in the bitcoin exchange platform as a ‘significant minority stake.’
There are no transfer fees for use of BitPesa, and the company charges a three per cent margin on the bitcoin to Kenya shillings exchange rate, according to information from the platform.
Mr Mucheru said that once sworn in as Cabinet secretary, he will relinquish his directorship position and divest from BitPesa to avoid any conflict of interest.
BitPesa in February raised $1.1 million in fresh funding from American investors, including San Francisco-based investment firm Pantera Capital, Bitcoin Opportunity Corp, Crypto Currency Partners, Future/Perfect Ventures and Stephens Investment Management.
This brought the total capital raised by the Kenyan bitcoin startup platform to $1.7 million.
The two-year-old BitPesa has expanded its operations to Uganda, Tanzania, and Nigeria —where it has interlinked the bitcoin platform to bank accounts and mobile money providers, including Airtel, MTN Uganda and M-Pesa.
BitPesa has also plugged into the network of Interswitch Limited, which owns the Pesa Point network of ATMs in Kenya.
Safaricom has defended its decision to cancel M-Pesa services for BitPesa and Lipisha, saying the firms failed to adhere to Kenya’s strict anti-money laundering laws.
“Safaricom has stringent reporting obligations under the Proceeds of Crime and Anti-Money Laundering Act, which it could not fulfil in view of Lipisha’s relationship with BitPesa,” the telecoms operator says in court documents.
But the two firms countered this argument, saying bitcoin transactions in Kenya remain unregulated.
“The CBK would have taken action because it is the regulator. It is the CBK, which told BitPesa that use bitcoins is not regulated in Kenya but Safaricom insists that it produces a licence to that effect,” said lawyer Kiragu Kimani.
Mr Mucheru reckons that digital currencies such as bitcoin can play a big role in lowering the cost of diaspora remittances.
“The speed and cost of remittance using bitcoin is untold and the cost is almost nothing,” said Mr Mucheru.
The Consultative Group to Assist the Poorest (CGAP) — a think-tank housed at the World Bank — says that digital currencies can play a big role in fostering financial inclusion and has hailed BitPesa as one of the world’s most successful platforms.
“There are many compelling reasons why digital currencies could significantly impact financial inclusion. Practically, despite the promising early beginning of BitPesa, there are many challenges to overcome before digital currencies reach the unbanked at scale in a significant way,” says a research note by CGAP.
Kenya’s increased uptake of digital currencies such as bitcoin in diaspora remittances, making online payments and forex trading comes at a time when investors and regulators are warming to the concept of virtual cash.