China has become one of the main investors in Africa in the past few years, while the continent has been experiencing significant transformation in the digital space. Coupled with the rise in cryptocurrencies markets, do the different regulatory approaches adopted in China and in certain African countries favour a convergence of interests? We review how China and some African countries have approached crypto regulation and what this means for investors.
The 2019 United Nations Conference on Trade and Development’s World Investment Report indicates that between 2013 and 2017, Chinese direct investments in Africa grew by 65%, placing China among the top five direct investors in Africa after France, the Netherlands, the U.S. and the UK. In the wake of the African digital transformation in financial (especially payment) services and the expanding cryptocurrency markets, does the regulatory framework, or lack thereof favour a convergence of interests between China and the African continent?
China: blanket ban on cryptocurrencies and promotion of blockchain-based innovation
In October 2019, President Xi Jinping gave a speech describing blockchain as an “important breakthrough in independent innovation of core technologies” and calling on the country to become a leader in this technology. Xi Jinping’s endorsement of the technology contributed to a surge of the bitcoin and ethereum value, despite the fact that virtual currency had been prohibited in China since 2017.
The China ban on cryptocurrencies was preceded by a series of warning messages from the regulators. In 2013, faced with the speculative bitcoin bubble and the risk-taking behaviour of some Chinese investors, the Central Bank, along with other regulators in banking, securities and insurance, advised against bitcoin transactions. They indicated that Chinese financial and payment institutions were not allowed to engage in any activities related to bitcoin and had to report any suspicious transactions involving virtual assets that may be connected with fraud, gambling, money laundering or other criminal activities.
However, these initial measures could not curtail the nationwide cryptocurrency fever boosted by numerous initial coin offering (ICO) projects. According to the report issued by the Chinese Internet Financial Risk Assessment Platform on ICO development in the first half of 2017, approximately 65 projects raised up to $373 million, representing 20% of the total amount raised by ICOs across the globe. It turned out that the majority of those ICOs were scams and the increasing impact on the Chinese economy and social security led the country regulators to step in with an overall ban on ICOs.
In September 2017, the Central Bank and other regulators jointly issued a statement on the risks of ICOs, referred to as “unauthorised and illegal public fundraising”, which prohibited any individual or legal entity from conducting ICO-related activities, including operating cryptocurrency exchanges and providing related marketing and advertising services.
The ICO ban caused a short-term decline in cryptocurrency use and pushed Chinese platforms to go abroad. Despite the Government’s crackdown, the main Chinese exchanges, which appear to be shut down within China, have continued to provide trading services to Chinese investors via a broker-dealer network (over-the-counter), where many 'self-media' companies and individuals play a role in advertising and promoting ICO projects through social media, such as social media public accounts and other discrete channels. Consequently, with the boom of bitcoin, ICO activities were intensified in the first five months of 2018, with around 537 ICOs raising $13.7 billion, according to a PwC report.
As a result of those loopholes, the regulatory measures have been reinforced. In August 2018, Chinese regulators, led by the Central Bank and the Ministry of Public Security, issued another statement on the risk of illegal fundraising in the name of cryptocurrency or blockchain. Further to the declaration, service providers shut down many social media accounts promoting cryptocurrencies, access to overseas websites of domestic exchanges was blocked, and even hotels and restaurants stopped hosting events for ICOs.
In addition to the hostile stance of the Chinese authorities, the 2018 cryptocurrency crash significantly changed the market, with a plummeting number of ICOs and the reshuffling of key players. The surviving exchanges and investors are now hoping to grow markets in other territories which are, at best, friendly, and, at worst, not yet regulated.
Popularity of cryptocurrencies in Africa
Virtual money is particularly appealing to the population and entrepreneurs. Several factors make cryptocurrencies attractive in Africa. Only a small fraction of the population has access to bank accounts. When they do, the holding and transaction fees are often two to three times higher than in other countries. For similar reasons, Africa has been the world leader in mobile money, which allows payments and transfers using a simple (not necessarily smart) mobile phone, without a bank account or internet connection. The double-digit inflation rate in some African countries is also a contributing factor.
Beyond the use of bitcoin and other imported currencies, new currencies have started mushrooming throughout Africa. To some, in the West African Economic and Monetary Union countries, the creation and use of cryptocurrencies is seen as an opportunity to achieve monetary independence from the CFA Franc, an increasingly controversial post-colonial currency that is about to be renamed 'Eco'. A Cameroon secessionist group has created the AmbaCoin which is intended to be the currency of the state the militants want to create. Currency exchange platforms are also multiplying on the continent.
The authorities’ position
Some countries, such as Namibia and Algeria, have imposed a clear ban on the use of cryptocurrencies. For example, the 2018 Algerian Finance Act provides that “the purchase, sale, use or possession of so-called virtual money is forbidden”.
Like the Chinese Government, the African authorities are aware of the risks linked to the use and trading of cryptocurrencies, such as scams, Ponzi schemes or cyber attacks with the impossibility to trace the authors of such acts owing to the encrypted nature of the operations.
Other countries, which had initially adopted a 'wait and see' approach, have recently made public statements expressing their opposition to cryptocurrencies. For example, in November 2019, the Bank of Tanzania issued a public notice on cryptocurrency stating: “This is to advise members of the public against trading, marketing and usage of virtual currency because doing so is contrary to existing foreign exchange regulations.”
In September 2019, a similar statement was issued by the Ugandan Finance Minister. A few weeks earlier, the Governor of the Burundi Central Bank declared: “Virtual money, otherwise known as cryptocurrency, is neither regulated nor issued or guaranteed by any government or central banks. Therefore, it is not legal in Burundi”. In January 2020, the Bujumbura crypto money company Crowd1 was raided and over 300 people were arrested, 17 of which were placed in custody for suspected fraudulent activities.
Other central banks have declared that using or trading virtual money is not allowed, but used a language that denotes a certain level of tolerance. Ghana is an interesting example. Its central bank stated, without using the words 'illegal' or 'forbidden', that the use of cryptocurrency was not licensed but, at the same time, the central bank was exploring how to regulate such technology in a way that benefits the country:
“While the Bank of Ghana acknowledges the enormous potential in the blockchain technology and how that can significantly transform the payments system landscape and promote financial inclusion, we are assessing with stakeholders and other international partners how the subsequent use of the blockchain technology into digital currencies would fit into the global financial and payments architecture. The public is therefore strongly encouraged to do business with only institutions licensed by the Bank of Ghana to ensure that such transactions fall under our regulatory purview”.
Ghana is one of Africa’s leading countries with regard to FinTech and cryptocurrencies. It can be anticipated that an overnight strict ban could have adverse consequences on the country’s economy.
In Senegal, where cryptocurrencies are currently used to a lesser extent, the Government has backed the creation of the 'Akoin', a virtual currency to be used in Africa and primarily in a smart city to be built near Dakar at the initiative of the entertainer and entrepreneur Akon.
As regards Nigeria and South Africa, the authorities have been taking actual steps to regulate cryptocurrencies. In August 2019, the FinTech Roadmap Committee of the Nigerian Capital Market was approved. The report provides that the country’s Securities and Exchange Commission (SEC) needs to decide on its preferred classification of cryptocurrencies between commodities, securities or currency. The recommended classification is either as commodities or securities but not as currency. The report also suggests that the SEC should be responsible for the regulation of virtual financial assets exchanges and develop a framework around it.
South Africa has been proactive in its effort to regulate the cryptocurrency industry after a series of consultations with the stakeholders in the FinTech and banking industries. The authorities are looking to issue regulations in 2020.
Some grey areas and open doors to regulations
On a global scale, the use of cryptocurrencies is largely unregulated, even though some efforts are being made to design a legal framework in some countries and on an international basis. For example, it was announced at the January 2020 World Economic Forum in Davos that an international consortium of public and private stakeholders, such as banks and NGOs, would be put in place to draft guidelines for cryptocurrency governance.
With regard to China, we have seen that the country has not opted for a light regulatory framework with a regulatory sandbox for cryptocurrency but rather for a stringent centralised system, which is consistent with China’s political culture and its overall development strategy. Following the centralisation logic, as well as the efforts to develop blockchain-related technology to a high level of sophistication, the Chinese Government is considering adopting a state digital currency.
In Africa, where cryptocurrencies could be more beneficial than on other continents, only few countries have unambiguously prohibited cryptocurrencies. Others have warned against their use and countries such as Burkina Faso, Niger, Mali, the two Congos and Guinea have not expressed any position so far. Investors locally and internationally could view the absence of formal prohibition as an opportunity to develop their business provided that their activities are not in conflict with the local regulations and they also prepare themselves in the event of an overnight ban.
Hogan Lovells is present in China and in South Africa has a network of firms covering all African countries. Please let us know if you have any questions on the treatment of cryptocurrencies in Africa and China.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.