Closing the regulatory gap in Africa looks like a daunting adventure for entrepreneurs and regulators alike. Naturally, innovation trumps regulation. How can regulators keep up with this ecosystem to support its growth? There are certain milestones that are essential to realizing tangible impact. This article discusses the current state of regulation and his three milestones needed for crypto regulation efforts in Africa.
Background: the need for regulation
Unfortunately, the prevalence of fraud has caused strong pressure and demands for authorities to regulate cryptocurrencies. Fraud is obvious with a keen eye. This is not the case, however, as some organizations have used the novelty of cryptocurrencies to trick many into buying promises. Expectations led me to let go of my hard-earned money. Guaranteed returns and exclusivity recognition provided an attractive future of financial freedom.
All this was plausible until the first notable crypto market crash in 2018. At this point, many fraudulent organizations and organizations were shut down, leaving investors in the cold. The infamous price crash has exposed underlying weaknesses and a lack of understanding of what the cryptocurrency market is all about. Unsurprisingly, the outspoken, flashy recruiter has mostly gone missing. Additionally, websites, online communities, and helplines have gone underground.
In the midst of this chaos, perhaps the worst cryptocurrency market winter since the industry’s inception, good projects were bundled together with bad projects. They came to seek redress, only to meet with authorities who were largely unprepared to address their concerns.
Aside from warnings and bans, regulators have found little precedent for responding appropriately to cryptocurrency complaints. As a result, relying on the financial crime reporting framework was the closest proxy for responding to incidents at the time. What was it that enabled the authorities to respond better at the time, and thus what will help them in the future in their efforts to make the use of cryptocurrencies safer or more sustainable? ?
Education and capacity building are great starting points. Open information sharing and agency-specific training are one component of his analysis of agency-supervised subject matter. For example, a central bank can ease general cryptocurrency usage restrictions by delegating oversight of various financial institutions over their various cryptocurrency functions. Insurance-related crypto projects may fall under the jurisdiction of insurance regulators. Similarly, utility-based cryptocurrencies could come under fintech and payments scrutiny. Different types of cryptocurrencies serve different functions and thus have different use cases. Cryptocurrencies have similar and diverse functions, and it is difficult to comprehensively understand them.
There are various players in the cryptocurrency ecosystem. These include investors, entrepreneurs, virtual asset service providers, gig workers and speculators. Therefore, each category falls into different functions in the market. Each player has a risk profile and stake they want to protect. For example, crypto asset service providers tend to have a higher risk profile than retail investors. Virtual asset service providers therefore hold valuable information about the opportunities, risks, challenges and recommendations for cryptocurrency use in a particular region. Make customers aware of best practices and safeguards for use.
In terms of wit, crypto service providers have an important perspective on how cryptocurrencies are used. This is of interest to regulators to understand local demand, associated services and scope of use. Furthermore, it is imperative to understand what and how people are actually using cryptocurrencies before authorities can formulate viable regulations. One of his ways of facilitating this regulator education is by supporting consistent engagement with virtual asset service providers.
A sandbox provides an ideal room for trial and error to prove different concepts and businesses. Relaxing restrictions will allow companies to test their models, proofs of concept, and market viability. Kenya, Ghana, Nigeria, Mauritius and Rwanda have opened their regulatory sandboxes to foster innovation, facilitate regulatory learning, foster growth and build partnerships with incumbent financial institutions. Pilot testing allows sandbox participants to record lessons and milestones over an estimated 12-month observation period.
In sandboxes, regulatory gaps are made sufficiently clear to both participants and supervisors. Areas of support, further funding and development are also identified. Demystifying the cryptocurrency ecosystem is essential to any regulatory effort. Some operations of crypto-related projects can be placed under large financial institutions that scale their functions to be viable in the wider market. Some business models may not pass sandbox milestone checks. The truth is, over time, sandboxes show what works and what doesn’t at the product, business model, and technology level.
Clarity is essential as countries and companies seek to explore the value of blockchain technology. Moreover, the complexity has made it impossible to understand the difficult technical terms associated with the cryptocurrency ecosystem. Therefore, collaborating on a platform such as a sandbox to demonstrate that it is actually working in the industry is beneficial for all stakeholders.
Small but important short-term wins
It’s unfortunate that you’re throwing out the bath water with your baby because of the crypto ban, but there are lessons to be learned. Fitting crypto regulations expand over time. It will require meaningful, patient, targeted and sustainable engagement among various stakeholders. If the vision is to create a sustainable framework that supports ecosystem players towards economic growth, it is achievable. Just as corporate governance principles guide organizational structure and growth, these principles can extend to cryptocurrency regulation.
A vision statement, or mission statement, is essential to define the specific efforts you are committed to. Therefore, it is easier to make progress by supporting specific agendas rather than sticking to overall crypto regulation. Certain agendas can be multi-year efforts to work towards secondary goals. Trying to deal with everything at once has so far proven frustrating for authorities.
For example, authorities can focus on one consumer protection obligation. Open collaboration with cryptocurrency service providers on this common goal is enough to streamline education and risk mitigation efforts. Instead of keeping them out, it’s more profitable to bring them to the table. Access to banking and financial crime reporting services is another example. Defeating protective obligations provides benefits such as understanding and consequent reduction of risk exposure. Sure, it’s a long shot. But it’s certainly worth the work.
Disclaimer: I own Bitcoin and other cryptocurrencies.