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Central Bank has already warned Kenyans against using Bitcoin

By Dominic Omondi | Published Wed, October 11th 2017 at 08:55, Updated October 11th 2017 at 10:00 GMT +3
Central Bank of Kenya building in Nairobi

NAIROBI, KENYA: Kenyans aren’t the type to get left behind when it comes to global trends. So it doesn’t come as a surprise that Bitcoin, a virtual currency, is taking the country by storm just as its phenomenal rise in value captures the world’s attention.

But what really is Bitcoin? Where do you get it from? And are you really likely to get rich by dealing in Bitcoin?

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1. What is Bitcoin?

Bitcoin is a currency just like the Kenyan shilling or US dollar. You can use it to buy goods and services – though you’d be hard pressed to find a trader in Kenya who’ll accept payment in Bitcoin.

Unlike our normal paper currencies, however, Bitcoin is virtual; it doesn’t exist in notes or coins.

It is believed to have been created in 2009 by an unknown person using the alias Satoshi Nakamoto. Several marketplaces, called Bitcoin exchanges, allow people to buy or sell the currency.

Mt Gox is the largest Bitcoin exchange. It was launched in 2010 in Japan, and within a few years grew to handle more than 70 per cent of the world’s Bitcoin transactions.

As International Monetary Fund (IMF) President Christine Lagarde put it at a Bank of England conference two weeks ago, virtual currency is “not about digital payments in existing currencies .... Virtual currencies are in a different category, because they provide their own unit of account and payment systems.

“These systems allow for peer-to-peer transactions without central clearing houses, without central banks.”

Ms Lagarde spent a third of her speech speaking about the potential of currencies like Bitcoin to overtake traditional cash and become mediums of exchange in decades to come.

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2. How do you get Bitcoin?

A Bitcoin created through a technical process known as mining. People compete to ‘mine’ Bitcoin by using computers to solve complex math puzzles. Currently, a winner is rewarded with 25 Bitcoinroughly every 10 minutes. The winners can then sell these Bitcoin.

The regulation of the generation of Bitcoin, as well as verification of transfers, is done through encryption, rather than through a regulatory authority like a central bank. This encryption is why Bitcoin is called a cryptocurrency.

There are other digital currencies that exist aside from Bitcoin, which is the best known one. They include Litecoin, Ether, Ripple, Monero and Zcash.

The Central Bank of Kenya (CBK), however, has warned the public that cryptocurrencies are “not legal tender in Kenya”.

The CBK, in a past statement, went on to say that because digital currencies aren’t legal tender, “no protection exists” should “the platform that exchanges or holds the virtual currency” fail or go out of business.

“Domestic and international money transfer services in Kenya are regulated by the Central Bank of Kenya Act and other legislation. In this regard, no entity is currently licensed to offer money remittance services and products in Kenya using virtual currency, such as Bitcoin,” said CBK Governor Patrick Njoroge last December.

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3. What tech is Bitcoin based on?

“Bitcoin is not just about money, and that is why people are being conned,” says Wambui Nguru, a cryptocurrency advisor.

“Bitcoin is also about technology, a technology that can disrupt almost everything that we do.”

The technology Wambui is referring to is known as blockchain. The reason central banks are opposed to Bitcoin, according to her, is because blockchain, the technology that underpins cryptocurrency, removes all kinds of human intervention.

“A lot of people think you need a broker in a transaction,” says Wambui. With blockchain, which she describes as a distributed ledger, the field is level.

“It’s not like right now when a bank knows just about itself and everybody’s ledger is independent. If I have Bitcoin, I don’t have to give it the bank. The Bitcoin I have, I own it.”

There are no transaction fees and no need for real names. One’s Bitcoins are stored either in the cloud or on a computer in a digital wallet. From this wallet, users can use their Bitcoin to pay for products, or send and receive more of the currency.

4. How much support is there for Bitcoin?

Bitcoin has found support from rather high places, starting with the IMF, an international organisation that was created for the purpose of standardising global financial relations and exchange rates.

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To be clear, CBK has not banned the use of Bitcoin – so don’t fret; no one will arrest you for having the virtual currency somewhere in your computer.

The regulator, in pursuit of its functions, has only warned people against using these assets, saying if anything goes wrong, please don’t blame them.

Lagarde’s sentiments at the Bank of England conference tipped virtual currencies to be effective for peer-to-peer transactions, especially online, where users have to pay transaction fees to make payments by card.

“Citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash – no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities,” she said.

“Why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. Virtual currencies could actually become more stable.”

However, she noted that cryptocurrencies as they’re currently constituted are risky and volatile.

5. Who accepts Bitcoin then?

There are a few traders, mostly tech multinationals and online shops, that accept Bitcoin, which makes the ferocious uptake of the virtual currency by a section of Kenyans somewhat suspect. Some of the big players that accept Bitcoin include Microsoft.

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“Since December 2014, Microsoft users have been able to use their Bitcoin to purchase content in the Windows and Xbox stores,” notes business news platform, Business Insider.

Other traders that accept Bitcoin include Intuit, PayPal and DISH Network.

6. Will investing in Bitcoin give you value for your money?

People are divided on whether buying Bitcoin for sale at a later date will translate into value for money.

The value of the cryptocurrency has risen by nearly 900 per cent over the last two years.

“What once cost a consumer or investor around $255 (Sh26,300) per Bitcoin will now set you back around $2,500 (Sh258,000),” notes Business Insider in an article published on July 2017.

As of October 9, the value of a Bitcoin had gone up to $4,571 (Sh472,000). On September 2, the cryptocurrency hit a record high of $5,013 (Sh518,000) before falling sharply to below $3,000 (Sh310,000) over the next two weeks.

In general, since 2013, Bitcoin is up about 17,000 per cent since 2013, so on the surface of it, the currency appears to make sense.

Further, the cryptocurrency is finite, meaning there are only a given number of Bitcoin in circulation. Forbes magazine estimates there are currently about 16.5 million Bitcoin in circulation, representing $71 billion (Sh7.3 trillion).

“(However) it is estimated that some 25 per cent of all Bitcoin mined are lost forever, either because of improperly generated wallets, lost keys, discarded hard drives or carelessness,” noted the Forbes article.

“So what does this scarcity mean, really? For starters, it limits the total possible supply of Bitcoin that can be owned. This means that if the demand continues to increase, the price must go up.”

Business Insider added that: “The fact that the dollar’s monetary base can be expanded infinitely and Bitcoin is limited provides the belief to some investors that Bitcoin could be a better means to preserve and grow wealth over time.”

But the currency is very volatile, and the fact that few people know why this is the case may be reason enough for caution.

7. Have there been cases of fraud with Bitcoin? 

When Hustle called Erick, who calls himself a dealer in Bitcoin, telling him we wanted to buy the cryptocurrency, he asked how many we wanted.

Erick, who said he’s a resident of South C in Nairobi, was selling one Bitcoin at Sh340,000 – certainly lower than the going price at the time, which was Sh400,000.

“If you trust me, you could simply send me the money and I will send you the Bitcoin,” he said.

“But if you don’t trust me – because you know people reverse these transactions – we can meet face-to-face and I will send you the Bitcoin while you are there and you make sure that I don’t remain with it.”

However, if the transaction can be reversed, then it’s not Bitcoin. It’s probably fraud.

In the US, a New York-based company, Gelfman Blueprint, was sued by a regulator for engaging in a Bitcoin ponzi scheme that saw investors lose close to $60 billion (Sh6.2 trillion).

Nicholas Gelfman, the CEO and head trader at Gelfman Blueprint, is said to have told investors that he ran a fund that “employed a high-frequency, algorithmic trading strategy” to mine the currency. It is alleged to have “fraudulently solicited more than $600,000 (Sh62 million) from approximately 80 persons.”

China is also cracking down on anyone dealing in Bitcoin on suspicions that the cryptocurrency is being used for money laundering and online crime.

It’s difficult to trace Bitcoin transactions, which makes the currency popular in shady dealings. For instance, in the WannaCry cyber attack in May that affected businesses in 150 countries, victims were asked to pay ransoms in Bitcoin.

“Transactions in virtual currencies, such as Bitcoin, are largely untraceable and anonymous, making them susceptible to abuse by criminals in money laundering and financing of terrorism,” CBK said in its statement last December.

It added, “virtual currencies are traded in exchange platforms that tend to be unregulated all over the world. Consumers may, therefore, lose their money without having any legal redress in the event these exchanges collapse or close business.”

The CEO of JP Morgan, America’s largest bank, recently added his voice to that of dissenters. Jamie Dimon described Bitcoin as a “fraud”.

“Right now these crypto things are kind of a novelty. People think they’re kind of neat. But the bigger they get, the more governments are going to close them down,” he said in India last month.

“It’s creating something out of nothing that to me is worth nothing. It will end badly.”

However, analysts countered his sentiments in various articles, including in the The New York Times and Forbes, which noted that “the only way to shut down Bitcoin would be to shut down the Internet”.

An article in the former publication noted: “Undoubtedly, there will be plenty of hits and misses, as one would expect in the early days of a new technology. And there will be some outright scams as well. But the toothpaste is now out of the tube, and there is sufficient momentum for legitimate use cases to develop.”

 


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