DECODING THE DILEMMA OF CRYPTOCURRENCY REGULATION IN KENYA UNIVERSITY OF NAIROBI JACQUELINE WANJIKU WAIHENYA G62/8613/2017 TO BE SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF LAWS - SCHOOL OF LAW, UNIVERSITY OF NAIROBI [PUBLIC FINANCE AND FINANCIAL SERVICES LAW] NOVEMBER 2020 Declaration by the Student I JACQUELINE WANJIKU WAIHENYA declare that this is my original work and that the same has not been presented to any institution of higher learning for the award of a diploma, degree or post-graduate qualification or for consideration of any certification. It has been complemented by referenced sources duly acknowledged. Where text, data (including spoken words), graphics, pictures or tables have been borrowed from other sources, including the internet, these are specifically accredited and references cited using current OSCOLA systems and in accordance with anti-plagiarism regulations. Signed by:- NAME: REGISTRATION SIGNATURE: NUMBER JACQUELINE WANJIKU WAIHENYA G62/8613/2017 Date: Thursday, November 19, 2020 Supervisor: This Project has been submitted for been submitted for examination with my authority as University Supervisor. Approved Signed:……………………………………………….. Date:……………………… PROF. PATRICIA KAMERI MBOTE GRADUATE SCHOOL OF LAW UNIVERISTY OF NAIROBI ii DEDICATION: -dedicated to- Alexis, Nicolette, Lilian, William, Maureen, Remy, Ryley & Dave -My Family- You don’t choose your Family, They are God’s gift to you, as you are to them. -DESMOND TUTU iii ACKNOWLEDGEMENTS In the first instance I thank the Almighty God for establishing me to lengthen my cords and strengthen my stakes. I wish to express my most sincere appreciation and heartfelt thanks to my Supervisor, Prof. Patricia Kameri Mbote for challenging me to expand my vision, sharing her expertise and above all her patience at my academic endeavours. I place on record sincere gratitude to Dr. Sarah Kinyanjui her unstinting support and constant encouragement. I thank Dr. Njaramba Gichuki, Dr. Nkatha Kabira, Dr. Wamuti Ndegwa for their expert, sincere and valuable guidance and encouragement extended to me. And Dr. Mercy Deche for her friendship and wise counsel always interspersed with a generous dose of wit and humour. I also wish to record my sincere thanks to all the faculty members of the School of Law – University of Nairobi both at Mombasa and Parklands Campus as well as my classmates in the pioneer Mombasa LLM Class. I place on record my sense of gratitude to one and all who directly or indirectly have lent a helping hand in this exciting academic venture. iv LIST OF ABBREVIATIONS & ACRONYMS AML - Anti-Money Laundering ATM - Automated Teller Machine ₿ - Bitcoin BATM - Bitcoin Automated Teller Machine BCBS - Basel Committee on Banking Supervision BTC/btc - Currency abbreviation for Bitcoin CA - Communications Authority CAP - Chapter, Laws of Kenya CBDC - Central Bank Digital Currency CBK - Central Bank of Kenya CEA - Commodities Exchange Act (United States of America) CFTC - United States Commodity Futures Trading Commission CMA - Capital Markets Authority CPMI - Committee on Payments & Market Infrastructures CoK - Constitution of the Republic of Kenya CAESP - Crypto Asset Exchange Service Providers CS - Cabinet Secretary DAF - Digital Asset Framework DAO - Decentralized Autonomous Organization dApps/DAPP - Decentralized Applications v DATA - Digital Asset Transfer Authority DFC - Digital Fiat Currency DLT - Distributed Ledger Technology € - Euro EA - East Africa EAC - East African Community EEA - European Economic Area E-money - Electronic Money ETF - Bitcoin Exchange Traded Funds e-RMB - Digitalized Renmimbi (China’s sovereign backed cryptocurrency) FATF - Financial Action Task Force FSB - Financial Stability Board GDP - Gross Domestic Product GSC Global Stable Coin ICO - Initial Coin Offering IOSCO - International Organization of Securities Commissions KLR - Kenya Law Reports Kshs. - Kenya Shillings KYC - Know Your Customer P2P - Peer – to – Peer PBOS - Peoples Bank of China PoA - Proof of Asset PoW - Proof of Work vi PoS - Proof of Stake QBD - Queens Bench Division RBA - Retirement Benefit Authority SEC - United States Securities Exchange Commission SME - Small and Medium Sized Enterprises SRO - Security Token Offerings STO - Security Regulatory Organizations UKJT - UK Jurisdiction Taskforce UNSC - United Nations Security Council XBT - Exchange currency abbreviation for Bitcoin vii LIST OF TABLES/FIGURES (1) Fig 1: Key cryptocurrency sectors and their functions (adapted from Hileman & Rauchs, 2017) (2) Fig 2: Map 1 – Legal Status of Cryptocurrencies (adapted from the Library of Congress Report, 2018) (3) Fig 3: Map2 – Legal Map of Bitcoin and Other Cryptocurrencies (adapted from Coin.dance 2019) (4) Fig 4: Map 3 – Regulatory Framework for Cryptocurrencies (adapted from the Library of Congress Report, 2018) (5) Fig 5: Map 4 – Countries that Have or Are Issuing National Regional Cryptocurrencies (adapted from the Library of Congress Report, 2018) viii ABSTRACT Although Kenyans have quickly and enthusiastically adopted cryptocurrency nevertheless the government has not provided an adequate regulatory framework to safeguard their interests. This has created substantial risk which requires to be addressed as it could lead to substantial and negative effect on the Kenyan economy. Cryptocurrency and its underlying blockchain technology are a relatively new phenomenon around the world which have evolved dramatically and are now considered to be a disruptive technology. They have developed to such a point as to become impossible to ignore. Their proponents champion anonymity and security in the transfer of value in digital format with minimal government involvement thereby allowing the community to transact through a spontaneous order dubbed by economists as catallaxy. Though the cost of transaction particularly across borders has been significantly reduced cryptocurrencies have not been without challenges particularly as regards theft, illegal and criminal activities. The pace at which cryptocurrencies are developing has therefore created substantial challenges for regulators around the globe especially in their definition and/or classification (taxonomy) as well as in the manner in which various regulators have chosen to respond to this new phenomenon. The study reveals that Kenya too is grappling with how to deal with cryptocurrencies and the Central Bank of Kenya (CBK) being the mandated regulator for monetary policy and fiscal management of the country in tandem with the Capital Markets Authority (CMA) have advised the public, financial institutions and investors that Bitcoin and by extension all cryptoassets do not fall within the ambit of central bank regulated activities as they are not backed by any government and are indeed not issued or otherwise licensed by any centralised authority thus providing no protection to them in the event such cryptoassets collapse, disappears or otherwise becomes an unsustainable business venture and fails. ix The study therefore highlights that there exist substantial gaps in the law and regulatory environment in the country and seeks to glean lessons from other jurisdictions around the world which have succeeded in reigning in the benefits of cryptocurrency while mitigating the risks and challenges it creates including but not limited to terrorism, insurgent and criminal activities. The study concludes that some measure of regulation ought to be considered for adoption geared towards ensuring that the benefits of cryptocurrency are harnessed whilst concurrently ensuring that the illegitimate use and application of cryptocurrencies is less attractive and preferably downright painful for any perpetrators and/or offenders in Kenya. KEY WORDS: Bitcoin; blockchain; cryptoassets; cryptocurrency; currency; digital; innovation; legal tender; minting; mining; money; public interest; regulation; sovereign fiat; tax; technology; Kenya x TABLE OF CONTENTS: DEDICATION: ................................................................................................................................. iii ACKNOWLEDGEMENTS ............................................................................................................. iv LIST OF ABBREVIATIONS & ACRONYMS ............................................................................... v LIST OF TABLES/FIGURES ....................................................................................................... viii ABSTRACT ....................................................................................................................................... ix KEY WORDS: ................................................................................................................................... x CHAPTER ONE - INTRODUCTION ............................................................................................. 4 1.1 CRYPTOCURRENCY/VIRTUAL CURRENCIES: .......................................................... 4 1.2 BACKGROUND: ................................................................................................................... 6 1.3 STATEMENT OF PROBLEM: .......................................................................................... 10 1.4 JUSTIFICATION OF STUDY: .......................................................................................... 11 1.5 STATEMENT OF OBJECTIVES: ..................................................................................... 14 1.6 HYPOTHESIS: ...................................................................................................................