KENYA: NFTS – THE ‘NEW’ WAVE OF REGULATION OF NFTS, CRYPTO-ASSETS AND CRYPTO-CURRENCY ACROSS THE GLOBE
Non-Fungible Tokens (NFTs) are an increasingly innovative way to prove digital ownership and trade valuable collectible items. An NFT is a unique digital asset whose authenticity can be verified on a block chain ledger. Each NFT is distinct and traceable and can be used to label and identify digital assets and control their supply. 'Non-fungible' means an NFT is not interchangeable for other items because they all have unique properties and features. NFTs have enabled people to tokenize items such as art, tweets, real estate, photos, videos, GIFs, music, and such NFTs are sold on blockchain-backed marketplaces.
In the Kenyan context, Eliud Kipchoge (Kenyan long-distance runner and world-record holder – marathon) auctioned his career highlights as NFTs earning the athlete over USD 35,000 (approx. KES 3.5m). Ownership of NFTs is handled through the uniqueID and metadata that no other token can imitate. An NFT is markedly different from cryptocurrency because each NFT has a digital signature that makes it impossible for NFTs to be exchanged for one another (hence, non-fungible).
Possible regulation in Kenya? - Central Bank of Kenya Act (CBK Act);
To regulate digital assets and digital currencies in Kenya, the CBK Act would require thorough amendments to include digital assets and currencies under the definition of “currency/unit currency” in Kenya. The interpretation of “a money remittance operator” would also need to be reviewed in this regard to cover remittance of digital assets and currency via blockchain.
In February 2022, the Central Bank of Kenya (‘the CBK’) published a discussion paper on the suitability of a central bank digital currency (‘CBDC’). The CBDC (if accepted) will be a universally acceptable form of payment as sovereign legal tender in Kenya (electronic currency). This is a step in the right direction by the CBK towards understanding financial technology innovations with a view to regulating the same and making digital currency attractive to different stakeholders across the financial services sector. Kenya’s legislative and structural approach would require an overhaul to cater for this change including a tweak in the legislative approach towards cryptocurrency generally.
Elsewhere, Central African Republic’s (CAR) ‘Sango’ coin started selling in June 2022. The government of CAR launched its digital currency with a projection to raise about $1 billion from its sales within the year 2022/23.
Further steps toward regulation in the European Union (EU) and United States of America (USA);
In March 2022, the European Parliament adopted its negotiating position on the draft EU Regulations (MiCA Regulation), paving the way for a more-inclusive crypto regulation conversation. It is important to note however that further discourse and negotiations on the draft EU Regulations are expected to continue beyond 2022 and well into 2023. In this regard, further proposals for regulation were made to the Chair of the European Parliament Committee on Economic and Monetary Affairs in October 2022. The proposal made in October intends to extend the scope of regulation to any natural or legal person issuing or offering to the public trading of crypto assets. Some of the entities that will not be regulated include include public international organizations and liquidators/administrators. Crypto assets that qualify as financial instruments, deposits, funds, or pension products are excluded under the proposal, and crypto-asset issues to the public shall first be preceded by a crypto asset white paper.
Also as of May 2022, the Cyprus Parliament had already drafted a bill on crypto assets. The legislators in Nicosia prepared their own legislation to regulate crypto assets and are increasingly likely to adopt their legislation before the EU finalizes the EU draft Regulations for a common regulatory framework. The draft EU Regulations include regulations that would apply to NFTs in certain cases and defines in the EU a crypto asset as a “digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology”.
The proposal being made in the EU is part of a wider legislative framework on crypto-assets and builds on foundational background work done by the Financial Action Task Force (the ‘FATF’).
In June 2022, legislators in the USA tabled their version of crypto-regulation – the ‘Responsible Financial Innovation Act’ (‘Crypto-Bill’). The Crypto-Bill seeks to extend a comprehensive set of regulations across digital assets in the USA which would grant sweeping powers to the Commodity Futures Trading Commission (‘CFTC’). Bitcoin and Ether may yet fall under the purview of the CFTC if they are to be treated as commodities while the other cryptocurrencies may be under the scope of the SEC as securities. The Crypto-Bill would for instance require certain disclosures to the U.S. Securities and Exchange Commission (‘SEC’) from companies that raise funds through digital asset sales. The Crypto-Bill will also give clarity in how cryptocurrency exchange companies handle customer holdings to prevent further scenarios where customers’ tokens get mingled with an exchange’s assets in the event the company declares bankruptcy. Crucially, crypto-assets will not be treated as securities, unless the asset-holders enjoy certain rights reserved for qualified investors such as dividends, liquidation rights, among others. There will also be a special charter for non-bank issuers of stablecoin.
Enhanced regulation generally will hopefully ensure more consumer and investor protection and market integrity in the crypto-asset markets, as well as addressing the financial stability and monetary policy risks that could arise from a wide use of crypto-assets and Distributed Ledger Technology (DLT) based solutions in financial markets.
The commercialization of NFTs is quickly gaining ground as we recently witnessed at the 66th edition of the Ballon d'Or annual football awards, where the French media house L'Équipe which organizes the awards entered the world of web3. L'Équipe announced the launch of NFT collections for the award winners and certain attendees of the 2022 ceremony. The NFTs were created by the crypto-artist Léo Caillard, a member of the NFT Factory, whose creations were inspired by pyrite, the mineral forming the base of the trophy. L'Équipe has chosen to use the Tezos blockchain, which is apparently designed to be energy efficient. We continue to keep an eye on further regulatory developments.