Last week Financial Sector regulators convened an in-person forum for the first time since 2019 due to the covid-19 pandemic disruption.
The forum is important because it is an opportunity for financial regulators across the board to take stock of the financial market dynamics as well as share notes on emerging issues in the sector that require their attention.
This year’s theme was “Fostering financial stability in the face of frontier risks, policy, and regulatory challenges.”
Now, at the forum, the regulators came up with a number of resolutions, and I will delve into two of them only.
First, the regulators resolved to consider the recommendation of the National Treasury and Economic Planning for the formation of a Technical Working Group of concerned regulators to make recommendations to the Cabinet Secretary on the establishment of a comprehensive oversight framework on crypto assets activities and players in Kenya.
It is in the public domain that the Central Bank of Kenya has been very dismissive of cryptos for some time now, so are we seeing a change of heart?
Though this isn’t new, many central bankers have been dismissive of digital assets saying they pose no systemic risk to the financial system because they were too small and separate from the rest of the financial system.
For regulators, there is an awakening that incorporating digital assets into the fabric of the financial regulatory system places them in a better position to protect investors, promote capital formation and stabilize the financial system.
Recent bankruptcies of crypto lenders Voyager and Celsius then the collapse of FTX has raised major concerns about the crypto sector (considered worth more than a trillion dollar) posing a broader risk to the banking sector and regulators are now paying more attention to the instability that emerging non-bank like cryptos can pose to the financial system.
Coming to the main question about regulating cryptocurrencies, is a balance between encouraging innovation without compromising consumer safety and market integrity.
If a regulator is to put up an appropriate level of surveillance and enforcement to check on consumer safety and market integrity, that is largely construed as stifling innovation by market players.
So, to what extent should regulators go to protect consumer safety and market integrity?
What is not in dispute is that regulators have to put a comprehensive oversight structure around digital identity and governance that ensures the rewards of digital assets outweigh the dangers.
Second is the resolution tasking each regulator with the completion of the Islamic Finance initiatives within established timeless based on the guidance from the National Treasury and Economic planning.
I expected this concern would be the top priority of regulators looking at how the Central Bank of Kenya has been struggling with regulating the Islamic banking structure.
Central Bank of Kenya has found itself in a difficult position when licensed Islamic banks face liquidity challenges.
These banks do not hold government bonds which they can exchange with the regulator to open up a liquidity pipeline, therefore pose a great risk to the financial system because of the lack of proper regulation.
The writer is an economist.
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