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How Bitcoin’s ‘dark’ global network cashes in on worthless digital coins

By Otiato Guguyu | March 19th 2019

As Kenyans seek the next investment buzz word, many have been lured into the mysterious world of crypto-currencies.

With the allure of quick returns, unsophisticated investors are changing valuable cash for figures on a screen with the hope they will make a killing when the value of the digital currencies they invest in the rise.

This murky world devoid of regulation is creeping with dangerous games of deceit, cooking of books and setting up a trap by mimicking established capital markets products to bait unsuspecting investors into pyramid scheme like investments.

Already, a local cryptocurrency company Wiseman Talent Ventures is embroiled in a court battle against the Capital Markets Authority (CMA).

It wants the regulator to keep off from poking its nose in its business - exposing tricks used by some cryptocurrency firms to lure naïve investors.

Between April and August last year, the company offered to sell digital coins dubbed Kenicoin at Sh100 each whose prices gained to Sh400 over the five months. To have more people buy digital investment, the company promised 10 per cent monthly gains.

But what it did was fix a higher price at its trading website 20 times the value of the investment. “The CMA observed that the plaintiff promised guaranteed returns of 10 per cent monthly on initial investments in coins which were issued at Sh100 and were purportedly being marketed as trading at Sh2,000 at the Kenicoin exchange,” a CMA reply filed by Timothy Githendu read.

Further, the firm cooked figures of the number of people buying their product to show that 27,768 people had raised Sh535 million while in reality, only 2,000 people had raised Sh2 million.

When CMA summoned Haron Kiriba the founder and CEO of the crypto platform and questioned him, they changed the figures on their website.

“The honourable court to consider the anomalies in the information that the plaintiff had supplied for instance how previously faulty and incorrect information on the plaintiff’s website was corrected after the plaintiff held a meeting with CMA on December 2018,” Lawrence Mumina Head of Investigations at CMA reckoned.

Mumina said that CMA got a complaint from the public after the company started raising money by selling the coins to the public which would trade at a profit. When summoned, Kiriba told CMA that his enitiy is a ‘mentorship firm’ with a vision to nurture talent among the youth and begun Kenicoin investment business model to raise funds for ‘mentorship.’

It was clearly hard to see how this business model could generate 10 per cent monthly return or 120 per cent a whole year.

Reading their inconsistencies, CMA Chief Executive Paul Muthaura issued a warning against the use of the digital coins from Kenicoinexchange.com.

“We have noted discrepancies in the information provided on the firm’s website and the information provided to the authority during interviews of Wiseman Talent Ventures leadership in relation to the total number of Kencoin sold and the total funds raised. “It is important for the public to know that the nature and features of the capital raising and coins trading promoted by Wiseman Talent Ventures have not been approved by the authority,” he stated.

Safaricom which had registered the company’s paybill is said to have closed the payment channel after the CMA warnings.

Then the crypto firm rushed to court to stop the regulator, claiming CMA had no jurisdiction over its activities, neither does the regulator understand blockchain activity.

Kiriba said the decentralised nature of Blockchain hindered him from providing CMA with crucial information including names of subscribers, banks used to receive the trades and settlements. Kiriba said that his initial coin offering (ICO) was actually fundraising and that a public ICO would be done later.

He argued that unlike an Initial Public Offering to buy company shares of venture capital, ICO will not give shareholding to buyers but a hope that the coin will rise in value at a later date.

“CMA has no mandate over businesses dealing with cryptocurrencies as they have no regulations nor guidelines over the same,” Kiriba argued. The regulator said the crypto security token, a tradable asset that has been gaining traction globally. “Security token offering are widely regarded as the next phase of crowdfunding revolution with examples being initial coin offering,” read CMA reply.

The February 2017 IOSCO Research Report on financial technologies (fintech) notes that such assets can exist in a variety of forms including currencies, commodities or securities.

Where a crypto asset falls within an authority’s legislative authority, the agency may be required by law to regulate platforms trading crypto assets in the same manner as any other platform that facilitates trading in financial products within its jurisdiction.

CMA argues that Kiriba’s case is built on the assumption that the cypto business he offers should not be regulated, at least by CMA which understands trading of securities.

Resisting oversight has been key in the dark-web like cryptocurrency business that flourishes on speculation with no real fundamental businesses that can generate the returns they promise their investors.

After collecting the hard currency from their customers, they have been known to bolt away leaving their clients with worthless figures on a screen, robbed clean with no regulator to protect them. Recently, Velox 10 Global - a Brazilian pyramid scheme disappeared with millions of Kenyan shillings invested in Bitcoins.

The firm had promised those who would be ranked among its biggest investors by April 18, 2018, a free five-day trip to the United Arab Emirates, where they would meet “top global business gurus”.

Then there is the world famous Canadian Cryptocurrency company whose owner and CEO of QuadrigaCX Gerald Cotten, reportedly died of Crohn’s disease in India in December with the password that locked in $190 million (Sh19 billion) worth of bitcoins.

Central Bank Governor Njuguna Ndung’u also warned against investing in cryptocurrencies.

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