Technology

Unpacking the dynamics of the Crypto quagmire

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As the cryptosphere reels from the recent near-existential disaster that hit one of the world’s biggest exchanges, FTX, players have called for calm among investors insisting that the market remains as stable as ever.

FTX, which enjoyed a whopping $32 billion (Sh4 trillion) valuation at the start of the year and fashioned itself as an industry pacesetter, has since gone down with an $8 billion (Sh978 billion) hole.

The collapse has since seen a massive wave of confidence erosion among cryptocurrency investors amid yet-to-be-substantiated claims that the firm’s founder Sam Fried misused client funds.

But is it all doom and gloom?

Exchange firm Yellow card Chief compliance officer Mandy Naidoo says like any other investment venture, cryptocurrency has not achieved a 100 percent guarantee for safety.

“The original idea for crypto trade was aimed at attaining global financial freedom and inclusion. As trading and a savings scheme, crypto investments like all other ventures need to be effectively regulated to cushion the industry from unforeseeable shocks,” says Ms Naidoo.

At the onset of the trade, Yellow Card, then based in Botswana, became the first ever company in Africa to gain a crypto licence. The exchange has since expanded to 17 countries in the continent.

For beginners, a crypto exchange firm acts as a platform to facilitate the trading of cryptocurrencies for other assets, including digital and fiat.

“It is more or less what you’d call a brokerage firm in normal stock trading,” explains Naidoo.

Despite the globally spread uncertainty in recent weeks, Ms Naidoo affirms that the industry has not witnessed panic withdrawals as would have been expected, with account holders choosing to adopt a wait-and-see approach.

Over the years, myriad attempts to impose regulations in the self-styled liberal industry have been met with little progress, with the operations remaining murky to a larger portion of the global populace.

In smaller jurisdictions such as Kenya, which brands itself as a financial inclusion hub, for example, cryptocurrency remains off the menu.

In a notice published by the Central Bank of Kenya in December 2015 months ahead of the adoption of new generation currency notes, governor Patrick Njoroge cautioned that “Bitcoin and similar products are not legal tender”, reiterating a years-long held position that trading in cryptocurrencies is a risky venture.

Since 2018, however, digital currencies have started to take root. Today several outlets are using them as a medium of exchange.

Among the places you can trade on bitcoin, for example, include a lounge at Kenyatta University, an automated teller machine in Westlands and an electronic shop on Luthuli Avenue in Nairobi as well as a hotel in Nyeri.

There are currently more than 700 cryptocurrencies in the world but Bitcoin is the most widely known.

Having started trading in 2009, the currency was then valued at $0.0007 (Sh0.07) – using the then exchange rates – before attaining parity with the dollar in February 2011.

In November 2013, the value of bitcoin peaked at $1,242 (Sh124,200) and has since risen to $16,473 (Sh2 million) today.

Blockchain analytics firm Chainalysis, which ranks countries on crypto adoption, revealed in June that Kenya has about four million crypto investors who are mainly young and small traders representing the highest share in Africa.

The lack of regulation coupled with clarity deficiency on its legal status means there is no safety net and presents little recourse if funds are lost. It also makes it difficult to establish the value of digital assets held by the mostly tech-savvy Kenyans, but the amount is estimated to be running into billions.

As part of loss remedy measures, Ms Naidoo says exchange firms ought to take up the responsibility of protecting their clients while awaiting proper structural regulation by official bodies.

“At Yellow Card, we have established an academy where we occasionally take our clients through various training on safety practices. We also have a professional finance team that helps in the provision of advisory services to investors trading on our exchange,” she states.

Taking lessons from the collapse of FTX, experts have proposed regulations that should impose segregation of client assets to prevent the kind of lending out of other people’s money that the firm extended to its sister hedge fund.

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