Formulating regulatory frameworks in Africa’s crypto sector

High demand for crypto set to influence novel regulatory frameworks on the African continent.


The embrace of crypto assets is causing a remarkable shift in government and regulator attitudes on the African continent. According to Atlantic Council’s GeoEconomics Center’s CBDC tracker, countries on active research mode include South Africa, Ghana, Tunisia, Morocco, Madagascar, eSwatini, Kenya and Rwanda. They are looking to forge policies and regulatory frameworks that will support both existing crypto assets and their governments’ state-owned Central Bank Digital Currencies (CBDCs), albeit with a notable level of hesitancy from some.

As an example, in its position paper on the regulation of crypto assets published with the support of the country’s Department of Treasury in June 2021, South Africa’s Intergovernmental Fintech Working Group (IFWG) seemed at pains to explicitly state that bringing crypto assets into the regulatory remit should not be viewed as an endorsement thereof, but rather as a means to “promote responsible innovation”.

Some North African countries, the likes of Libya and Morocco have demonstrated their skepticism by imposing bans on the use of digital currencies.

“The most common position, however, is one of caution… countries such as Namibia and Burundi, while also not banning usage, have issued bans against trading, citing the lack of consumer protection as the motive,” according to a report by Arcane Research.

Lisa-Marie Bowes, partner at Schindler’s Attorneys in South Africa says hesitancy may be due to associated risks and the difficulty governments face in using current policies to regulate the crypto sector.

“The process of regulatory reform in general can be protracted and, having regard to the complexity of crypto assets and its continuously emerging use cases, authorities have had a hard time fitting them into the current regulatory framework,” says Bowes.

Demand drives regulation

The upward trajectory of digital assets in Africa is primarily attributable to prevalent societal challenges. Factors such as high inflation rates and currency volatility, political instability, poor financial infrastructure, digital and mobile trends are cited by Arcane Research’s State of Crypto: Africa report as catalysts for fast adoption of crypto and blockchain on the continent.

Ease of access also plays a significant role. Delving into crypto assets enables Africans who have continually grappled with excessive bank fees to transact at reasonable cost, explore traditionally distant investment opportunities, and trade on mobile platforms that do not require complex infrastructure.

This is well-demonstrated in the explosion of mobile money accounts on the continent, which the International Monetary Fund (IMF) says form nearly ‘half of mobile money accounts worldwide’. This segment of previously ‘unbanked’ and ‘underbanked’ citizens, have access to a world of new opportunity on their mobile devices.

Risks posed by failure to regulate

Regulatory reforms are not only necessary but crucial in averting multiple risks associated with this demand. South Africa’s IFWG broadly identifies at least three so-called generic risks.

The first is the inevitable introduction of parallel and fragmented monetary systems. Secondly, lack of consumer protection, threats to market veracity, inaccurate financial data, tax evasion, illicit trade and misuse through money-laundering and terrorist financing. Thirdly, lack of regulatory oversight which is a prerequisite to governments accounting for “the actual inflow and outflow of the volume and monetary equivalent of such crypto assets…”

The position paper further identifies five crypto asset-specific risks based on use cases ranging from buying and selling of crypto assets by consumers to capital raising using ICOs.

The understated risks are often those associated with the nature of implementation, especially given that it has taken governments a relatively long time to finally formulate relevant policies. They are now having to catch up with a decade-old system which has up to now been heavily self-reliant and self-regulating. Bowes says governments and regulators just need to find the middle ground. 

“Regulation may hinder or stimulate growth in the crypto space depending on how it is implemented. If it is very restrictive, it may well have a stifling effect on criminal exploitation of technology but may also restrict innovation and push the crypto industry into more crypto- friendly jurisdictions. Balanced regulations are thus crucial,” says Bowes.

Impact on business

The rapid pace in the creation and utilisation of crypto technologies necessitates strong public-private partnerships in the continent’s crypto sector. Governments will need private sector expertise to formulate efficient and up-to-date regulatory mechanisms.

This will require a reciprocal approach in which regulations are agile enough to allow companies the space they need to be both innovative and profitable so as to address common problems such as endemic unemployment rates. Private companies, in turn, will need to share their expertise and be willing to adjust their current policies to meet compliance standards.

The implementation of the new rules may also spell trouble for entities which have failed at clearly defined internal policies.

“Crypto asset service providers who have not set up shop in a manner that will allow for a smooth transition once regulations come into effect, will have to become compliant with what may be stringent requirements in a relatively short space of time. They may have to overhaul policies and their entire way of doing business. New or existing businesses operating in this space should seek legal advice to ensure awareness of proposed regulations before they come into force,” says Bowes.

Bowes further warns of cybercrime and other risks associated with the lack of regulation for businesses. She says companies need to exercise vigilance to avoid complicity in activities such as money-laundering and terrorism financing, through the employment of existing legislation such as South Africa’s Financial Intelligence Centre Act (FICA) 38 of 2001, which compels companies to know their clients.

Africa is consistently touted by credible global organisations as the next frontier for digital cryptocurrencies. While instability is certain at the emergence of regulatory systems, an array of opportunities can also be expected in the sector.