Bridging the regulatory gap in Africa seems to be a daunting venture for entrepreneurs and regulators alike. Understandably, innovation beats regulation. How can regulators play catch up with this ecosystem to support its growth? There are certain milestones essential for tangible impact to materialize. This piece will cover the current context of regulation and three milestones necessary for the crypto regulation efforts in Africa.
Context: The Need For Regulation
The proliferation of scams, unfortunately, sparked high pressure and demand for authorities to regulate cryptocurrencies. Scams would seem obvious to a keen eye. This is, however, not the case since some organizations leveraged the novelty of cryptocurrencies to hoodwink many into buying into their promises. Success stories prompted new investors into parting with their hard-earned money in a hope of profiting from new technology. Guaranteed returns and the perceived exclusivity offered an enticing future of financial freedom.
All this was plausible until the first notable cryptocurrency market crash in 2018. Many fraudulent organizations and outfits shut down at this time, leaving investors out in the cold. The infamous price crash exposed weak foundations and an insufficient understanding of what the cryptocurrency market was. Unsurprisingly, outspoken and flamboyant recruiters all but went missing. Furthermore, websites, online communities, and helplines went underground.
In the midst of this chaos, good projects were bundled with fraudulent ones in what was perhaps, the worst cryptocurrency market winter since the industry’s inception. Despair and desperation to recover funds pushed people to seek legal redress, only to meet authorities that were mostly unprepared to handle their concerns.
Aside from cautionary notices and bans, regulators found little precedent to respond adequately to cryptocurrency complaints. Consequently, relying on financial crimes reporting frameworks served to be the nearest proxy to respond to cases at the time. What could have empowered authorities to respond better at the time? By extension, what can serve authorities going forward in the efforts to make usage of cryptocurrencies safer or more sustainable?
Education and capacity building are great starting points. Open information sharing and authority-specific training is one part of breaking down what an authority will oversee. For example, Central Banks can ease off general cryptocurrency use restrictions by delegating different financial institutions’ oversight for different cryptocurrency functions. Insurance-related crypto projects can come under insurance regulatory authorities. Similarly, utility-based cryptocurrencies can come under fintech and payments oversight. The different types of cryptocurrencies serve various functions, which makes their use cases varied. Cryptocurrencies have similar and diverse functions, which are difficult to lump into a blanket understanding.
In the cryptocurrency ecosystem, there are different players. Some of these include investors, entrepreneurs, virtual asset service providers, gig workers, and speculators. Accordingly, each category falls under a different function in the market. Each player has a risk profile, and a stake they are keen to protect. For instance, virtual asset service providers tend to carry a higher risk profile than individual investors. Virtual asset service providers, therefore, hold valuable information about the opportunities, risks, challenges, and recommendations of cryptocurrency use in a given region. They often hold educative forums to make their customers aware of best practices and protective measures to take while using their platforms.
In terms of resourcefulness, virtual asset service providers hold a significant viewpoint of how cryptocurrencies are used. This is of interest to regulators to understand the demand, relevant services, and extent of use in their regions. Moreover, before authorities can formulate viable regulations, it would be vital to appreciate what and how people are actually using cryptocurrency. One way to facilitate this regulator education is to support consistent engagement with virtual asset service providers.
Sandboxes offer the ideal room for trial and error to prove various concepts and businesses. By offering reduced restrictions, businesses can test their models, proof of concept, and market viability. Kenya, Ghana, Nigeria, Mauritius, and Rwanda have opened up regulatory sandboxes to foster innovation, encourage regulatory learning, facilitate growth, and create partnerships with existing financial institutions. Pilot tests enable sandbox participants to go through an estimated 12-month observation period, where they document their lessons and milestones.
In a sandbox, the regulatory gaps get clear enough for both the participant and overseeing authority. Areas of support, further funding, and development are also clarified. Demystifying the cryptocurrency ecosystem is vital to all regulatory efforts. Some operations of crypto-related projects can come under larger financial institutions with the scale to make their functions viable to a wider market. Some business models may not pass the sandboxes’ milestone checks. The truth is that sandboxes will over time tell what is and isn’t working at the level of product, business model, and technology.
In a stage where nations and corporates are keen to explore the value of blockchain technology, clarity is vital. Besides, complexity has already kept many from seeing past the difficult technical terms related to the cryptocurrency ecosystem. It is, therefore, beneficial to stakeholders across the board to collaborate on platforms such as sandboxes to demonstrate what’s practically working in the industry.
Small But Significant Short-Term Wins
While it is unfortunate that crypto bans throw away the proverbial bath water with the baby, there are lessons to draw. Fitting crypto regulation will grow over time. It will require meaningful, patient, targeted, and sustainable engagement among different stakeholders. If the vision is to create a sustainable framework to support ecosystem players toward economic growth, that can be realized. In the same ways that corporate governance principles guide organizational structure and growth, these principles can extend toward crypto regulation.
In a vision statement, and consequently a mission statement, the imperative is to define a specific effort to commit toward. Therefore, instead of being stuck on overall cryptocurrency regulation, it’s easier to realize progress by supporting a specific agenda. The specific agenda can be a multi-year effort to work toward a secondary goal. Trying to address it all at once has only proven so far frustrating for authorities.
For instance, authorities can narrow one mandate of consumer protection. Open collaboration with cryptocurrency service providers on this shared goal is enough to streamline efforts toward education and risk mitigation. Instead of shutting them out, it’s more beneficial to bring them to the table. Access to banking services and financial crime reporting services is another example. Breaking down the protection mandate will yield wins such as being able to understand and consequently mitigate risk exposure. Agreeably, it is a long shot; but it certainly will be worth the work.
Disclaimer: I hold bitcoin and other cryptocurrencies.