Until the time comes that African governments evolve a suitable regulatory response to the rise of web3 and blockchains, crypto self-regulation will help to shield customers against fraudulent elements within the ecosystem.
- Self-regulation is probably the best idea for Africa’s crypto industry.
- Regulating a decentralized and highly volatile system remains challenging for most African governments.
- In the case of cryptocurrencies, self-regulation means establishing industry organizations, guidelines, and a code of conduct for market participants to do business within the ecosystem.
Addressing the regulatory gap
Regulating a decentralized and highly volatile system remains challenging for most African governments. This is because proper regulation requires balancing maximizing innovation and minimizing risk. Only a quarter of African countries have adopted formal crypto regulation.
Two-thirds of African nations have employed some form of restraint against crypto. According to the IMF, six countries include the Republic of Congo, Tanzania, Sierra Leone, Lesotho, Ethiopia, and Cameroon. Last year, Zimbabwe ordered all banks to stop processing transactions last year, and Liberia placed implicit bans on local crypto startup operations.
Moreover, the growing list of hacks and scams has created an infamous reputation for the cryptocurrency industry. The FTX collapse occasioned the biggest crypto scandal so far in the relatively nascent digital assets sector. One positive that emerged from the FTX scandal and the numerous less famous scandals that have tainted the crypto industry in the past year is the likelihood that the actors and stakeholders will realize that better regulation is needed.
Hucksters have taken advantage of eager investors in the new technology. Their criminality, however, should not negate the potential of cryptocurrency. Crypto investors should be able to freely trade assets based on their real, market-determined value without the involvement of central banks and government monetary policy.
As such, the best thing Africa’s crypto industry can do – for itself, investors, and even governments – is to develop its regulatory framework. The framework should have strong sanctions for violators of the rules, supervised by institutions such as banks, to ensure fiduciary propriety. Self-regulation is probably the best idea for Africa’s crypto industry.
Understanding crypto self-regulation
In the case of cryptocurrencies, self-regulation means establishing industry organizations, guidelines, and a code of conduct for market participants to do business within the ecosystem. The guidelines can span a broad spectrum, ensuring security against hacks and scams and maintaining transparency through Know Your Customers (KYC) mechanisms.
A set of elements comprise crypto self-regulation. These include accountability, transparency, contractual relationships, information sharing, and coordination. Government regulatory agencies could offer additional oversight for crypto self-regulation.
Government regulators typically carry the task of bringing an unregulated financial to order. However, self-regulation can assist a government agency’s task. Crypto regulation agencies and policymakers must guarantee that the growth of the nascent crypto ecosystem does not happen in a disorganized style.
Member organizations follow the best practices drawn in their guidelines. As such. crypto self-regulation agencies can also help establish customer trust. Self-policing will also drive down costs for executing regulations.
Africa’s crypto industry should seek to produce enforceable, transparent, responsible, fair, actionable, and viable rules based on the realities of how the sector operates. This way, it will create a safer and more effective regulatory system. Such a system prevents excesses by would-be corrupt crypto moguls. It would also ensure that crypto investors operate on a fair playing field.
The most significant thing is to develop a system to harness the true innovation of a digital, verifiable means of financial exchange – and not a system that will have that potential regulated out of existence.
READ MORE: Crypto regulations hold back Africa’s Web3 potential
Benefits of crypto self-regulationHaving a self-regulatory body for the cryptocurrency space has several benefits for the industry. One of the key benefits is demonstrating that the industry will remain responsible and proactive about safeguarding investor interest, averting fraud, cautioning against cyber-attacks, and phasing out scams. This could appease regulators enough to delay or stop the introduction of heavy regulation. However, the assumption is that self-regulation goes far enough to prove to be effective.
The prevailing uncertainty is removed by eliminating the threat of heavy regulation and replacing it with self-regulation. Consequently, this brings back confidence in the market. It also allows organizations to plan effectively with a renewed focus on innovation.
Industry-driving self-regulation will ensure that this regulation is not only fit for purpose, allowing innovation in the space to continue. It allows adaptability and evolution according to market needs or changes.
Additionally, rather than a one size fits all approach, separate and specific regulations could be developed for different types of cryptocurrencies, such as privacy coins, smart contracts, and settlement networks. The following graph shows how cryptocurrencies may be differentiated, although this could be split further.
Self-regulation also combats one of the drawbacks of every country potentially having different regulations. Separate regulations make it increasingly difficult for companies to operate as a unit across the continent. Self-regulatory bodies have more opportunities to collaborate and introduce consistent global regulations that meet the needs of investors and cryptocurrency companies.
Self-regulation can often be useful for governments too. It is not only faster to implement, but the burden of costs falls on the industry rather than the government. This is a major selling point of self-regulation. Consequently, industry actors must involve and keep updating the governments. This way, the governments will have no issue leaving the industry in the hands of self-regulatory bodies.
The bottom line
African policymakers have remained apprehensive that people could use cryptocurrencies to illegally transfer funds from the region and sidestep local rules to avert capital outflows. Widespread crypto usage could also create risks for financial and macroeconomic stability by undermining the effectiveness of the monetary policy.
The risks become even greater if countries adopt crypto as legal tender. Many people feel that if governments accept and hold crypto assets as means of payment, it could put public finances at risk. Until the time comes that African governments evolve a suitable regulatory response to the rise of web3 and blockchains, crypto self-regulation will help to shield customers against fraudulent elements within the ecosystem.
READ MORE: Blockchain startups are on course to make Africa a crypto continent