Crypto Regulation in Africa: What Good Regulation Looks Like

Millions of investors have been lured into cryptocurrency by the prospect of rising prices. To that end, a growing number of young global investors see cryptocurrency as a viable alternative to gold, the world’s oldest safe-haven asset. A recent CNBC Millionaire Survey indicates that 83% of millennial millionaires held cryptocurrency.

Currently, there are approximately 20,000 cryptocurrencies offered with more 300 million users worldwide. 48 million of these users are from the African continent. Crypto’s potential to bridge the economic divide, meeting personal and entrepreneurial demands such as remittances, e-commerce, payments, wealth preservation and social good, is a significant reason for its growing popularity. in Africa.

Despite this, African countries have taken a very different stance towards cryptocurrency than most other governments around the world. Nigeria and Kenya are two countries in this region that have decided to ban the use of cryptocurrencies or have issued warnings, and in some cases outright bans, to their banking systems about the risks associated with their use. .

Yet, Nigeria’s enthusiasm knows no bounds, and it is predicted that the country could reach a 100% adoption rate by 2030. Other countries, such as South Africa, simultaneously support the exchange of digital assets.

Cryptocurrency regulation has grown in popularity over the years. Globally, 33 countries regulated cryptocurrency in 2018. By 2021, that number had grown significantly to 103 countries.

Luno’s Head of Compliance for Africa, Johan Hetzel

LunaAfrica Compliance Officer Johan Hetzel discusses three crucial steps authorities should consider before implementing stricter or general industry legislation.

Assessment of the regulatory framework

Through Virtual Assets (VA) and Virtual Asset Service Providers (VASP), we have seen an influx of $105.6 billion in Africa, the world’s smallest crypto-economy, from 2020 to 2021. This suggests that VASPs could prove beneficial for economies that allow them. When we look at how countries regulate AVs and VASPs globally, the trends show five factors that are considered in this process. These include:

  1. The legal status and environment of AVs and VASPs in a country. In other words, are there any legal restrictions that apply to the use and operation of AVs and VASPs?
  2. The regulatory framework in a country. In other words, what are the rules that apply to the VA and VASP industry and how is this regulated;
  3. Registration and licensing requirements in a country;
  4. Market surveillance and anti-market manipulation frameworks in place; and
  5. Anti-Money Laundering, Counter-Terrorist Financing and Anti-Proliferation Financing (AML, CTF and CPF) requirements that apply to the industry as well as the emphasis on protection consumers. That is, customer due diligence (CDD/KYC) requirements, monitoring of customer transactions and behavior, screening, marketing and advertising requirements and associated controls.

Regulatory frameworks developed based on these factors prove more beneficial to the local market and encourage partnerships between VASPs, financial institutions and regulators, while promoting the innovation that the VA and VASP industry exhibits.

Reassess risk management

Currently, VASPs face significant hurdles in establishing and managing their business activities with existing mainstream banking providers. Currently, major African banks are hesitant to do business with VASPs, due to common misconceptions about the crypto industry and due to bad actors in the industry as well as the continuous scams that consumers fall victim to. This is similar to the experiences of fintech companies in Europe 7-9 years ago.

This risk reduction (effectively debanking) by the banking sector indicates a lack of awareness or understanding of the controls used by VASPs to detect and prevent financial crimes. Banks may be concerned about an entity’s management of AML, CTF and CPF risks or its ability to meet regulatory expectations and requirements.

This could include a lack of awareness about how VASPs will meet regulatory requirements, or the assumption that VASPs may not have sufficient controls or processes in place to identify and verify who their customers are, screen customers, and monitor transactions and customer behavior, effectively the ability to apply risk-based controls to identify, manage, mitigate and respond to money laundering, terrorist financing and proliferation financing risks. Greater effort and education on the part of banks to engage and understand this type of technology is essential for banks to better target crypto-related financial crime risks rather than adopting a blanket ban-all approach. crypto firms in an effort to avoid risk altogether.

A clear understanding of use cases

The crypto market has coins other than Bitcoin. In fact, more than 20,000 cryptocurrencies are offered and this number keeps growing every day. While many compete for the same role, it should be noted that many VAs offer unique solutions and use cases for various financial and non-financial issues.

Cryptocurrencies address a wide variety of challenges that are prevalent in virtually every industry. Initially, crypto-assets were developed to store value and facilitate payments. However, years of growth have resulted in a significant increase in the number of use cases available, including remittances, payments, arbitration, wallet and exchange services, investing, intellectual property, trading, tokenization, etc.

Each use case must therefore be well understood in order to develop an appropriate regulatory framework to optimize regulatory effectiveness in the sector, while supporting innovation that has significant benefits for consumers. Simply put, to regulate crypto, you need to understand crypto. To understand cryptography, you must understand the applicable use case.

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