Cracking the Code: A Guide to Navigating Africa's Crypto Regulations

By Joshua Ogwu

The growth of the crypto economy has been nothing short of astronomical! As at 2021, the  networth of the entire crypto economy was well above $3trillion exceeding big names like Apple and Microsoft in market valuation. African countries have contributed a huge chunk to that figure, as crypto-activities have continuously blossomed within the continent. 

However, despite its market success in Africa, the crypto economy is still faced with enormous risks within the continent. While some states like Morocco and South Africa are drafting legislations to regulate cryptocurrencies, most states are yet to take a stance on the regulation of cryptocurrency. Others have completely outlawed crypto transactions in every form.

Many experts have pointed out that the absence of financial regulations will leave crypto investors hanging and make the market susceptible to fraud, money laundering, and terrorism financing among other social ills. It, therefore, follows that regulation can serve as a tool to enable states to maximise the benefits of the crypto industry and cut down on potential risks.

Here is a brief guide on how to regulate the crypto industry in Africa!

How to Regulate Cryptocurrency

There is currently no globally recognised framework for cryptocurrency regulation. Framework considerations may be adopted based on the dominant activities in the market within the continent’s ecosystem. Some of these considerations are:

Licensing

African governments should first identify crypto/virtual asset service providers (CASPs/VASPs) through registered licences. CASPs are platforms that facilitate the conduct of crypto exchange for either fiat currencies or other cryptocurrencies. 

The sensitivity of their operations make them largely susceptible to hacks and fraud. For instance, South Africa's Mirror Trading International unpopularly holds the record of one of the world's biggest crypto frauds, with over $558million stolen by them. Similarly, Uganda’s Dunamisicoin also scammed Africans of millions of dollars before ceasing operations overnight. 

Licensing bodies should ensure the formulation of clear rules that provide robust risk assessment tests to ensure service providers adhere to Anti Money Laundering /Counter Financing of Terrorism (AML/CFT) requirements. 

Aside from these large-scale scams, there are many smaller crypto rip-offs on CASPs, all wreaking havoc in varying degrees. Licensing can prevent this, as CASPs can be identified in a manner similar to other financial service providers. For instance, platforms offering initial coin offerings (ICOs), that is, platforms using cryptocurrency to generate funding or capital, should have  regulatory requirements similar to the securities market and be supervised by  capital market regulatory authorities. 

Asset providers offering payment services or other bank related services should also have requirements similar to those of bank deposits, and should be supervised by Central banks or other payment managements. Licensing bodies should ensure the formulation of clear rules that provide robust risk assessment tests to ensure service providers adhere to Anti Money Laundering /Counter Financing of Terrorism (AML/CFT) requirements. 

Countries seeking to attract investors should offer friendly incentives by cutting down on capital gain taxes for individuals and only charging corporate income taxes on businesses involved in crypto. This is worthy of consideration as countries like Zimbabwe and South Africa have as high as 50% and 45% capital gain taxes.

This will prevent illicit activities in the crypto-ecosystem. On the other hand, while licensing could be a useful tool to ensure consumer protection of Africans in the crypto-economy, it could also be a strong discouragement for willing investors, particularly when the fees are unreasonably high.

Taxation

Cryptocurrencies have a total market capitalization of over $1.7trillion, and there are over $9 million transactions conducted daily, with Africa having a handsome share of those numbers. In 2022, Paxful made over $400 million trading volume worth in the first quarter of the year from Nigeria alone. Should African states choose to regulate cryptocurrencies through taxation, state revenue will certainly peak! 

Taxing cryptocurrencies is not as easy as it may seem, mainly because of their decentralised nature. Some countries impose capital gain taxes CGT(tax on the profit from the sale of an investment) on cryptocurrencies. However, countries seeking to attract investors should offer friendly incentives by cutting down on capital gain taxes for individuals and only charging corporate income taxes on businesses involved in cryptocurrencies. This is worthy of consideration as countries like Zimbabwe and South Africa have as high as 50% and 45% capital gain taxes.

Nothing tells stability and conditioning to an industry than clear regulatory guidelines. In the absence of clear rules, everyone experiments, drowning the market in an ocean of confusion. Plethora of guidelines, circulars and regulatory directives may also prove disturbing to investors who will prefer a handbook of rules to abide by. 

Furthermore, it is more beneficial for African States to adopt a balanced approach to taxation by creating tax free incentives for individual investors, and only charging considerable income and corporate income taxes on companies/businesses transacting with cryptocurrencies. Excessive or heavy taxation can easily drive investors to places where taxation is favourable.

Establishing Clear Regulatory Frameworks

Nothing else gives firm stability and conditioning to an industry than clear regulatory guidelines. In the absence of clear rules, everyone experiments, drowning the market in an ocean of confusion. Plethora of guidelines, circulars and regulatory directives may also prove disturbing to investors who will prefer a handbook of rules to abide by. 

For African states to become the next crypto-frontier, they have to develop a succinct regulatory framework for the ecosystem. This can either be done solely by a State or through the numerous regional blocs existing in the continent such as ECOWAS or SADC, etc.   

To draw up a successful regulatory framework, there must be deliberate consultation with local startups and stakeholders in the blockchain/crypto space to understand the perspectives of crypto-operators in Africa.  Also, the regulatory framework should affirm the rights of investors and consumers to seek legal redress within African courts upon loss of their assets either through fraud or hacking. 

Regulatory Sandboxes

A crypto regulatory sandbox is a live-like testing environment used to ensure regulatory compliance and security checks for crypto operations. Sandboxes enable new entrants in the crypto space to experiment projects with the support of regulators, thus enabling trust. African states looking to develop robust frameworks to cater for the long interest of the crypto economy should consider regulations creating sandboxes for the crypto-industry.

Lastly, it is essential to note that the success of regulations on the crypto-economy is hinged on many other factors, particularly the effective regulatory conditioning in some sectors that are intertwined with the digital economy. Therefore, States should look towards strengthening policies in other areas such as data protection/privacy, consumer protection, cybersecurity,  innovation, and startup incentives.