Central Bank of Kenya has warned that the rising popularity of Bitcoins may be a pyramid scheme that will leave Kenyans smarting from losses.
CBK Governor Dr Patrick Njoroge said cryptocurrencies are risky and consumers may not be protected. In 2015, the regulator issued a similar warning on digital currencies.
CBK issued the warning after a Kenyan company BitPesa that offers the service came into the limelight when leading mobile service provider Safaricom ordered one of its clients Lipisha to cut links with BitPesa. The two firms have since sued the telco.
"We warned everybody that this was a risky venture and and the consumer is not protected,” Dr Njoroge said.
"It could very well be a Ponzi scheme of a kind, I think you have seen how the prices have gone up and down in various places.”
- 1 Heartbreak for pyramid scheme scams victims
- 2 CBK gives Treasury Sh5 billion to ease cash crunch
- 3 CBK mops up cash to steady liquidity
- 4 How greedy brokers took the shine off microlenders
Thousands of Kenyans are catching on the cryptocurrency craze, gambling millions of Bitcoins and Ethereum whose value has risen sharply over the past few months.
Social media has helped fuel this craze with stories of people who make Sh100,000 in daily income. The traders who pool their money in clubs mainly make money from mining the currency.
"Our point is that there risk and it is important that everybody knows that those risks can come back to haunt us and could have financial stability concerns,” Njoroge said.
The CBK boss also said he is opposed to the currency since it can be used in illicit trade due to its anonymity.
In the dark web (where computers use the internet without being identified), Bitcoin is the currency of choice for hackers, contract killers and drug peddlers. In fact, the designer of the Ransomware attack in June this year asked each affected computer (user) for Sh30,000 ($300) in Bitcoins.
“Of course there are other considerations for example allowing the illicit transactions and things like that, all those are there,” he said.
CBK also insists that it has the mandate to protect consumers from the ‘Bitcoin bubble’. A market bubble is where investors behave like a herd and push the value of instruments above what they are worth only for them to lose out when the market corrects itself.
Market bubbles include the 2008 mortgage finance crisis, the dot com bubble as well as the Dutch tulip bubble where speculation drove the prices of flowers over the value of a house in Amsterdam.
“We have seen this game before, we have seen it in the context of the global financial crisis, years ago we have seen the speculation that took place in the tulip mania. This are all risks that are out there,” he said.
Most of the international community is yet to come up with regulation for the Bitcoin system and most central banks have opposed it.
It has no home country so it is neither local nor foreign currency and so it is out of CBK’s scope. However, Central bankers have been studying the currency with a view of creating a safer system based on the technology.
"These cryptocurrencies are using a technology known as block chain. There may be a future for block chain. We are working with our peers around the world on things that could lead to using this technology in particular ways,” Njoroge said.
He said that Kenya needed to distinguish the product with technology which may very well be a good technology.
In fact, Bank for International Settlements, world’s central banks can’t ignore the growth in cryptocurrencies and may at some point have to consider whether it makes sense for them to issue their own digital currencies.