Regulator cautions lenders in circular that new craze poses risks of money laundering and terrorist financing.
Central Bank of Kenya (CBK) has blacklisted virtual currencies and warned banks against dealing in them, citing security concerns.
The caution comes against the backdrop of heightened volatility in the values of digital currencies, including the most prominent one – Bitcoin.
CBK Governor Patrick Njoroge told legislators yesterday he had sent a circular to all banks warning them on the dangers of dealing in virtual currencies.
“A banking circular was also issued to all banks by CBK cautioning them against dealing in virtual currencies or transacting with entities that are engaged in virtual currencies,” said Dr Njoroge when he appeared before the National Assembly Committee on Finance at Parliament Buildings.
He added that the warning was consistent with actions taken by other financial regulators regionally and around the world.
The governor said cryptocurrencies are anonymous and lack centralised oversight, making them prone to money laundering and terrorist financing.
“There are risks associated with cryptocurrency particularly on consumer protection, fraud, hacking and loss of data and they are prone to be used as pyramid schemes,” he said.
A cryptocurrency is a digital or virtual currency that is decentralised and does not have the backing of a government or state agency as legal tender.
Njoroge has so far issued a guidance note on money laundering requiring among other things that all commercial banks appoint money laundering reporting officers to curb the vice and terror financing activities.
While clarifying that CBK is supportive to and welcomes innovation, the governor told the MPs that some of the emerging technologies carried huge risks which could harm the financial sector.
Consumer protection concerns led CBK to issue a notice in December 2015, warning the public against virtual currencies such as Bitcoin.
The notice indicated that Bitcoin is not a legal tender and thus no protection exists in the event that a platform that exchanges or holds a virtual currency fails or goes out of business.
On Wednesday, World Bank Group Senior Vice President Mahmoud Mohieldin said Blockchain technology may have many good uses in the world, but Bitcoin “could be the biggest bubble in history.”