SU+ @ Strathmore University Library Electronic Theses and Dissertations This work is availed for free and open access by Strathmore University Library. It has been accepted for digital distribution by an authorized administrator of SU+ @Strathmore University. For more information, please contact library@strathmore.edu 2021 Consumer protection in Kenya in the age of decentralized virtual currency. Kibwage, Caroline Buyaki Strathmore Law School Strathmore University Recommended Citation Kibwage, C. B. (2021). Consumer protection in Kenya in the age of decentralized virtual currency [Thesis, Strathmore University]. http://hdl.handle.net/11071/12889 Follow this and additional works at: http://hdl.handle.net/11071/12889 https://su-plus.strathmore.edu/ https://su-plus.strathmore.edu/ http://hdl.handle.net/11071/2474 mailto:library@strathmore.edu http://hdl.handle.net/11071/12889 http://hdl.handle.net/11071/12889 Consumer protection in Kenya in the age of decentralized virtual currency. Caroline Buyaki Kibwage Submitted in partial fulfillment of the requirements for the Master of Laws Degree (International Financial Law and Regulation) at Strathmore University Strathmore Law School Strathmore University Nairobi, Kenya ii DECLARATION I declare that this work has not been previously submitted and approved for the award of a degree by this or any other University. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made in the thesis itself. © No part of this thesis may be reproduced without the permission of the author and Strathmore University. Caroline Buyaki Kibwage Signature …………… ………………. Date……17/10/2021……………………………… Approval The thesis of Caroline Buyaki Kibwage was reviewed and approved by the following: Dr. Isaac Rutenberg, Lecturer, Strathmore Law School, Strathmore University Dr. Peter Kwenjera, Dean, Strathmore Law School, Strathmore University Dr. Bernard Shibwabo, Director, Office of Graduate Studies, Strathmore University iii ABSTRACT Virtual currencies are an outcome of technological progression and the evolution of money both in form and function. The increased popularity of virtual currencies is by dint of digital confluence of markets from all over the world. The uptake and adoption of decentralized virtual currencies in Kenya continue to grow and there are significant risks associated with their uptake and adoption. This study makes the case for consumer protection regulation with respect to decentralized virtual currencies by employing a doctrinal approach. The study considers the regulatory provisions in Kenya, South Africa and Mexico and outline the risks posed to Kenyans by the regulatory gaps. The key findings are that the consumer protection regulatory framework in Kenya is insufficient with respect to decentralized virtual currencies. The legal ambiguities expose Kenyan decentralised virtual currencies users to further risks. Further, consideration of South African and Mexican regimes showed the varied approaches to consumer protection in decentralized virtual currencies: South African takes a limited approach while Mexico, though it does not recognize it as legal tender, allows transactions with approved decentralized virtual currencies therefore offering a layer of consumer protection. The main recommendation offered is the reviewing of existing consumer protection provisions and other secondary provisions in Kenya to encompass decentralised virtual currencies and ensuring extraterritorial cooperation to ensure judicial compatibility. iv Table of Contents DECLARATION ...................................................................................................................................... ii ABSTRACT .............................................................................................................................................. iii LIST OF STATUTES ............................................................................................................................. viii LIST OF CASE LAW ............................................................................................................................... x TABLE OF ACRONYMS ....................................................................................................................... xi ACKNOWLEDGMENT ......................................................................................................................... xii DEDICATION ........................................................................................................................................ xiii CHAPTER ONE: INTRODUCTION .................................................................................................... 1 1.1 Background ..................................................................................................................... 1 1.2 Statement of The Problem .............................................................................................. 6 1.3 Statement Of Objectives ................................................................................................. 6 1.4 Research Questions ......................................................................................................... 7 1.5 Hypothesis....................................................................................................................... 7 1.6 Justification And Significance of The Study .................................................................. 7 1.7 Theoretical Framework ................................................................................................... 8 1.8 Research Methodology & Approach ............................................................................ 11 1.9 Limitations .................................................................................................................... 11 1.10 Chapter Breakdown ...................................................................................................... 12 2 CHAPTER TWO: CONSUMER PROTECTION IN DECENTRALIZED VIRTUAL CURRENCIES ........................................................................................................................................ 13 2.1 Introduction ................................................................................................................... 13 2.2 Consumer Protection ..................................................................................................... 14 2.2.1 Who is a Consumer? ................................................................................................. 14 2.2.2 What is the rationale for Financial Consumer Protection? ....................................... 15 v 2.2.3 Principles for Consumer Protection .......................................................................... 15 2.2.4 Approaches to Consumer protection ......................................................................... 17 2.2.5 Regulatory responsibilities ........................................................................................ 18 2.3 Decentralized Virtual Currency .................................................................................... 20 2.3.1 Main Actors .............................................................................................................. 20 2.3.2 Transactions, mining, and the block chain ................................................................ 22 2.3.3 Advantages & Disadvantages of decentralised virtual currency .............................. 24 2.3.4 Decentralised virtual currency and the Roles of Money ........................................... 28 2.4 Self-regulation framework of decentralised virtual currency ....................................... 30 2.5 Consumer risks with decentralised virtual currencies .................................................. 32 2.6 Conclusion .................................................................................................................... 33 3 CHAPTER THREE: REGULATORY FRAMEWORK FOR CONSUMER PROTECTION AND DIGITAL PAYMENT SYSTEMS IN KENYA ....................................................................... 35 3.1 Introduction ................................................................................................................... 35 3.2 Consumer Protection Regulatory Framework .............................................................. 36 3.3 Digital Payment Systems Regulatory Framework ........................................................ 38 3.3.1 International Regulatory Framework ........................................................................ 38 3.3.2 National Regulatory Framework ............................................................................... 40 3.4 Kenyan Regulatory Approach to Digital Payment Systems Regulation ...................... 46 3.4.1 Institutional/Functional Approach ............................................................................ 46 3.4.2 Partial Consolidation Approach ................................................................................ 48 3.5 Consumer Protection Regulatory Challenges in Decentralized Virtual Currency in Kenya 48 3.5.1 Regulatory uncertainty .............................................................................................. 48 3.5.2 Regulatory overlap .................................................................................................... 48 3.5.3 Regulatory arbitrage .................................................................................................. 49 vi 3.6 Conclusion .................................................................................................................... 49 4 CHAPTER THREE: DIGITAL FINANCIAL SERVICES REGULATORY FRAMEWORK IN SOUTH AFRICA AND MEXICO .................................................................................................. 51 4.1 Introduction ................................................................................................................... 51 4.2 South Africa .................................................................................................................. 52 4.2.1 Provisions Targeting Decentralized Virtual Currencies ........................................... 54 4.2.2 Consumer protection provisions ............................................................................... 57 4.3 Mexico .......................................................................................................................... 57 4.3.1 Provisions Targeting Decentralized Virtual Currencies ........................................... 58 4.3.2 Consumer protection provisions ............................................................................... 61 4.4 Conclusion .................................................................................................................... 61 5 CHAPTER FOUR: FINDINGS AND RECOMMENDATIONS ............................................. 64 5.1 Introduction ................................................................................................................... 64 5.2 Findings ........................................................................................................................ 64 5.3 Recommendations ......................................................................................................... 66 5.4 Conclusion .................................................................................................................... 67 5.5 Further research ............................................................................................................ 68 6 BIBLIOGRAPHY ........................................................................................................................... 69 6.1 Books ............................................................................................................................ 69 6.2 Chapter in books ........................................................................................................... 69 6.3 Journal Articles ............................................................................................................. 70 6.4 Institutional Reports ...................................................................................................... 73 6.5 Dissertations .................................................................................................................. 74 6.6 Working Paper .............................................................................................................. 75 6.7 International Resolutions .............................................................................................. 75 vii 6.8 Online Resources .......................................................................................................... 76 viii LIST OF STATUTES Kenya 1. Anti-Corruption and Economic Crimes Act 2. Banking (Amendment) Act, No. 10 of 2018 3. Bribery Act 4. Capital Markets Act 5. Central Bank of Kenya Act 6. Central Bank of Kenya Amendment Bill, 2020 7. Companies Act, No. 17 of 2015 8. Competition Act, 2010 9. Computer Misuse and Cyber Crimes Act (No 5. Of 2018). 10. Constitution of Kenya, 2010 11. Consumer Protection Act, 2012 12. Data Protection Act, 2019 13. Extradition (Contiguous and Foreign Countries) Act Cap 76, Laws of Kenya 14. Kenya Information and Communication Act, 2013 15. Kenya Information and Communications (Consumer Protection) Regulations, 2009 16. Money Remittance Regulations, 2013 17. Mutual Legal Assistance Act Cap 71 A, Laws of Kenya 18. National Payment Systems Act, 2011 19. National Payment Systems Regulations, 2014 20. Prevention of Terrorism Act 21. Proceeds of Crime and Anti Money Laundering Act South Africa 1. Currency and Exchanges Act 9 of 1933 2. Electronic Communication and Transaction Act, No. 25 of 2002 3. Electronic Services Regulations by Government Notice No. 42316 of 18 March 2019 4. Electronic Services Regulations by Government Notice No. R221 of 28 March 2014 5. Financial Advisory and Intermediary Services Act 37 of 2002 6. Financial Institutions (Protection of Funds) Act 28 of 2001 ix 7. Financial Intelligence Centre Act 38 of 2001 8. Financial Markets Act 19 of 2012 9. Income Tax Act58 of 1962 10. Taxation Laws Amendment Bill 11. Value Added Tax Act 89 of 1991 Mexico 1. Federal Consumer Protection Law 2. Federal Law to Forecast and Identify Operations Using Illicit Proceeds 3. Law to Regulate Financial Technology Institutions 4. Securities Markets Law LIST OF INTERNATIONAL INSTRUMENTS 1. OECD Guidelines for Multinational Enterprises (2011). 2. United Nations Guidelines for Consumer Protection (2016). 3. UNCITRAL Model Law on Electronic Commerce, 1996. x LIST OF CASE LAW 1. Kenya Human Rights Commission v Communications Authority of Kenya & 4 others [2017] eKLR 2. Lipisha Consortium ltd & Another v Safaricom Ltd [2015] eKLR 3. Okiya Omtatah Okoiti v Communication Authority of Kenya & 8 others [2017] eKLR 4. Wiseman Talent Ventures Limited v Capital Markets Authority [2019] eKLR 5. Securities and Exchange Commission v Trendon T Shavers and Bitcoin Savings and Trust [2013] Eastern District of Texas No. 4:13-CV-416 6. United States v. Ulbricht, 31 F. Supp. 3d 540 (S.D.N.Y. 2014) xi TABLE OF ACRONYMS AML Anti-Money Laundering CBK Central Bank Of Kenya CDBC Central Bank Digital Currency CDS Central Depository Systems CIS Collective Investment Schemes CMA Capital Markets Authority DAF Digital Assets Framework DAO Decentralised Autonomous Organization DAPP Decentralised Applications DFS Digital Financial Services DLT Distributed Ledger Technology E-Money Electronic Money FATF Financial Action Task Force FC Fiat Currency GDP Gross Domestic Product ICO Initial Coin Offering KYC Know Your Customer P2P Peer-to-Peer URL Uniform Resource Locator VC Virtual Currency VCF Venture Capital Firms xii ACKNOWLEDGMENT I owe an enormous debt of gratitude to my supervisor, Dr. Isaac Rutenberg, who patiently provided insightful guidance and support. My heartfelt gratitude to my friends. I am thankful, for their support and care, during the unrelenting moments of this process, for staying hopeful when I could not and for the consistent cheering on. I also thank my LLM class colleagues whose constant motivation, pushed me to keep going. xiii DEDICATION I dedicate this thesis to my siblings Clive, Mike and Chris, and most importantly my parents, Isaac and Jane. 1 CHAPTER ONE: INTRODUCTION 1.1 Background Money is used within different societies to facilitate trading activities. Money’s legitimized source of value stems from a collective agreement by society of what is an acceptable tender of payments rather than the physical component of what is used1. A common consensus among economists is that money serves three main functions. First, it is a ‘medium of exchange’, facilitating exchange of goods and services. Second, it is a unit of account, allowing measurement and recordkeeping. Lastly, it is a ‘store of value’ facilitating transfer of purchasing power from now to the future. The advancement of technology has influenced the change in the composition of the global economy2 including the rise of virtual and digital currencies. Virtual currency (VC) is a form of digital currency that is unregulated and exists in electronic form3. Virtual currency has been defined as “digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to fiat currencies but is used as a means of exchange and can be transferred, stored or traded electronically” by the European Banking Authority4. The Financial Action Task Force defined virtual currency as “a digital representation of value that can be digitally traded and function as a medium of exchange, a store of value or a unit of account, but does not have legal tender status in any jurisdiction”5. Virtual Currency has no intrinsic value, only what consumers are willing to pay for it6 and it is not issued by a central authority. It is distinguished from electronic money such as pay pal, 1 John Eatwell and others, The New Palgrave: A Dictionary of Economics, Macmillan, Stockton Press, Maruzen, 1987. 2 Liu J, Kauffman RJ, Ma D, ‘Competition, Cooperation, and Regulation: Understanding the Evolution of the Mobile Payments Technology Ecosystem’ 14 Electronic Commerce Research and Applications (2015), 372. 3 ‘Jake Frankenfield: Virtual Currency’ Investopedia on 1 August 2020. 4 ‘European Central Bank: EBA Opinion on ‘virtual currencies’, EBA 2014. 5 Financial Action Task Force, Virtual Currencies - Key Definitions and Potential Anti Money Laundering and Counter Terrorism Financing Risks, 4, 2014. 6 Griffiths ME, ‘Virtual Currency Businesses: An Analysis of the Evolving Regulatory Landscape’ 16 30. 2 cashapp and Mpesa. Electronic money ensures a link between the funds, a financial institution and a legal foundation while Virtual currency exist only in digital form as an alternative to Fiat Currency or that can be converted. Virtual currencies are an outcome of technological progression and the evolution of money both in form and function. The increased popularity of virtual currencies is by dint of digital confluence of markets from all over the world. Transactions from different economies, each with different currencies and relying on different financial institutions has increased over the years with direct interaction on a daily basis7. This has been expedited by access to Wi-Fi networks. Subsequently, virtual currencies, Bitcoin being the most popular, have emerged. Virtual Currency can either be centralized or decentralized with the former predating the latter, or convertible or non-convertible. Centralized Virtual Currencies are issued and controlled by a single organization and cannot be converted into currency for example loyalty points while decentralized Virtual Currencies have no singular regulatory authority such as Bitcoin8 and are open source, math based and peer to peer9. Convertible virtual currencies can be exchanged for traditional currency and have an equivalent value in real currency.10 Non-convertible Virtual Currencies, such as Q Coins, exist within a particular virtual domain and cannot be exchanged for real currency. Non-convertible Virtual Currencies are considered centralized, as they are issued by a specific authority that establishes rules that make them non-convertible. As such, they pose fewer risks to the public than decentralized Virtual Currencies.11 Decentralized virtual currencies run on a distributed ledger technology named blockchain. Blockchain keeps a record of transactions on a self-reinforcing network12. The system itself 7 Jeans ED, ‘Funny Money or the Fall of Fiat: Bitcoin and Forward-Facing Virtual Currency Regulation’ 13 30. 8 ‘European Central Bank: EBA Opinion on ‘virtual currencies’ EBA 2014. 9 Meiring I et al., ‘Blockchain and Crytptocurrency Regulation: South Africa’, 432. 10 Meiring I et al., ‘Blockchain and Crytptocurrency Regulation: South Africa’, 432. 11 Meiring I et al., ‘Blockchain and Crytptocurrency Regulation: South Africa’, 432. 12 Levi D, Kavanaugh B, Korinek K, Sandler B, ‘Off the Chain: Blockchain Technology—An Information Organization System’ Technical Services Quarterly (2019). 3 serves as a database for information that would normally be stored on a backup system13. All computers on the network are referred to as nodes and receive all the encrypted information as triggered by each transaction14. Blockchain is transparent and private15 and no past transactions can be altered. The users are identified using hash values16 which are used to match transactions with blocks through mining17. Blockchain champions argue that in a well-functioning system, no single node controls the system/blockchain18, therefore reducing the incidences of hacking or exploit19. Each user receives their own private key coupled with a public key to access the blockchain20. Bitcoin was invented by a computer programmer by the pseudo name Satoshi Nakamoto21. It is a “peer-to-peer network that uses cryptography to allow the secure transfer of unique digital assets (bitcoin) between any two parties in a decentralized manner (independent of a trusted third party)”22. It precludes the need for a trusted third party e.g. a bank by using ‘blockchain’, a publicly available ledger containing all Bitcoin transactions in chronological order shared with all users upon joining the Bitcoin network, addresses and balances right from the genesis block and is updated regularly upon completion of blocks23. 13 Levi D, Kavanaugh B, Korinek K, Sandler B, ‘Off the Chain: Blockchain Technology—An Information Organization System’. 14 Brandon D, ‘The blockchain: The future of business information systems?’ International Journal of the Academic Business World (2016) 34. 15 Cartier L, Ali S, Krzemnicki, M, ‘Blockchain, chain of custody and trace elements: An overview of tracking and traceability opportunities in the gem industry’ Journal of Gemmology (2018). 16 Levi D, Kavanaugh B, Korinek K, Sandler B, ‘Off the Chain: Blockchain Technology—An Information Organization System’. 17 Levi D, Kavanaugh B, Korinek K, Sandler B, ‘Off the Chain: Blockchain Technology—An Information Organization System’. 18 Levi D, Kavanaugh B, Korinek K, Sandler B, ‘Off the Chain: Blockchain Technology—An Information Organization System’. 19 Atzori M, ‘Blockchain technology and decentralized governance: Is the state still necessary?’ Journal of Governance and Regulation (2017),4. 20 Levi D, Kavanaugh B, Korinek K, Sandler B, ‘Off the Chain: Blockchain Technology—An Information Organization System’. 21 Nakamoto S, Bitcoin: A Peer-to-Peer Electronic Cash System 9. 22 Nakamoto S, Bitcoin: A Peer-to-Peer Electronic Cash System 9. 23Eatwell and others, The New Palgrave: A Dictionary of Economics. 4 Virtual Currency users champion for various benefits. Firstly, economic benefits such as lower costs of transactions despite the value of the transaction, no inflation24 and financial inclusion facilitated by no cost of entry. Secondly, there are no geographical restrictions. Thirdly, anonymity and transparency due to the public record of all transactions25. Fourthly, swift transaction speeds26. Virtual Currencies continue to grow in popularity and in number. Many of the initial Virtual Currency coins were developed to addresses perceived shortcomings of bitcoin. The surge is also attributed to the relatively costless entry and the pursuit of profits enjoyed by previous developers.27 Consumers but these currencies for either its potential use as a currency, as an asset, or both28. Within the first half of 2020, Kenya saw a 199% volume increase in trading of virtual currency (bitcoin in particular) with 125% increase in Nigeria, 194% in South African and 257% in Ghana29. Africa has so far seen bitcoin trade worth a total of $15million placed at the second largest in growth among the youth. Some businesses are already accepting bitcoin payments30 despite pushback from banks and the government. Kenya is reported as one of the countries that holds the largest amount of decentralized virtual currencies, especially crypto currencies, per capita. Kenyans hold an approximate Kes 163.3 billion which translated to 2.3% of the country’s GDP as at November of 2018.31 This exposes the Kenyan financial system as well as consumers to tremendous risks. 24‘Tatjana Boshkov: Blockchain and Digital Currency in the World of Finance’ Blockchain and Cryptocurrencies 2018 on 2 August 2020. 25 on 2 August 2020. 26 on 2 August 2020.. 27 Halaburda H, ‘Competition in the Crytpocurrency Market’, Bank of Canada (2014). 28 Halaburda argues that both factors influence the uptake of virtual currencies: 29 ‘CryptoGuru: Bitcoin Adoption in Africa Is Setting All-Time Highs Every Week, Say Crypto Analysts’ Bitcoin KE 1 July 2020) on 23 July 2020. 30 ‘Mary-Ann Russon: Crypto-Currencies Gaining Popularity in Kenya’ BBC News 22 February 2019 on 2 August 2020. 31 Kenyan Wall street: https://kenyanwallstreet.com/kenya-among-countries-world-highest-per-capita-holding- bitcoin-citi/ on 10 December 2020. 5 Bitpesa32 is a digital service that allows receipt of money in Kenya from abroad by converting bitcoin into Kenya shillings. Kipochi is another example of VC in Kenya. It was an e-wallet integrated with Mpesa but has since fallen following disapproval by the Central bank of Kenya among other issues33. An e-wallet is a password protected online/virtual account that allows users to store money for use during online transactions34. Kenya, through its Ministry of Information, Communication and Technology commissioned the Emerging Digital Technologies for Kenya: Exploration and Analysis, since dubbed the Blockchain Taskforce Report35. The Taskforce, tasked with investigating issues of distributed ledger technology and artificial intelligence, in its report looked at the issue of cryptocurrencies, a form of virtual currencies. Two proposals emerged: firstly, to launch a Central Bank Digital Currency (CBDC) and secondly, to enable a Digital Asset Framework (DAF) for virtual currency in Kenya. The report also proposed the creation of a virtual currency regulatory sandbox36 which has since been implemented by the Capital markets Authority for blockchain technology firms, but none that deal with Virtual Currency. The Capital Markets Authority has stated that it would take a more encompassing approach to include virtual currency37. Ensuring consumer protection under financial products is usually a mandate of a supervising authority38 and the lack of one with decentralized virtual currencies dwindles the necessity to guarantee the same39. The decentralized virtual currency providers themselves can ensure certain safeguards within their own networks but they can also decide not to. 32 ‘BitPesa: Africa’s Cryptocurrency and BTC Exchange’ BitPesa Africa’s Crypto and BTC Exchange on 2 August 2020. 33 ‘What Actually Happened at Kipochi?' Stake Ventures on 2 August 2020. 34 ‘What Is E-Wallets? Definition of E-Wallets, E-Wallets Meaning’ The Economic Times on 2 August 2020. 35 Distributed Ledgers Technology and Artificial Intelligence Taskforce Kenya, Emerging Digital Technologies for Kenya: Exploration and Analysis, 2019. 36 Distributed Ledgers Technology and Artificial Intelligence Taskforce Kenya, Emerging Digital Technologies for Kenya: Exploration and Analysis, 2019, 37. 37 Capital Markets Authority, The Capital Markets Soundness Reports Quarter 1, 2021, 33. 38 Animashaun S, 'Regulating Virtual Currency Payment Systems', 29. 39 Malala J, Consumer Protection for Mobile Payments in Kenya, 2. 6 Virtual currencies bare similar characteristics of conventional currency, stores of value, units of account and mediums of exchange, however they are not legal tender40. Further, there have been differing opinions on the classification of VC41. Classification assists in establishment of institutions and entities involved in the system. This would eventually provide a platform for the correct administrative bodies allowing for avenues of redress whenever issues arise thus decreasing regulatory uncertainty and subsequently protection of consumers. The lack of general consensus as to the classification of decentralized virtual currencies creates holes in antitrust regulation. There is also a need to define whether any specific decentralized virtual currency is akin to a company or a market in itself. 1.2 Statement of The Problem The uptake of decentralized virtual currencies continues to grow influenced by access to internet resources and the global market. The decentralized nature of these virtual currencies places more risks on consumers than in any other payment systems where the financial institutions bear the burden. DVC pose both immediate and remote risks to consumers including volatility risks and cyber risks. They are however, issued by private entities and are not recognized by most governments. Ensuring consumer protection under financial products is usually a mandate of a supervising authority42 and the lack of one with decentralized virtual currencies dwindles the necessity to guarantee the same43. The decentralized virtual currency providers themselves can ensure certain safeguards within their own networks but the can also decide not to. It is upon this premise that the study is based. 1.3 Statement Of Objectives The general objective of the research is to critically analyze consumer protection within the decentralized virtual currency sphere in Kenya. 40 Kalbaugh GE, ‘Virtual Currency, Not a Currency Conference Articles’ 16 Journal of International Business and Law (2016) 26. 41 Securities and Exchange Commission v Trendon T Shavers and Bitcoin Savings and Trust [2013] Eastern District of Texas No. 4:13-CV-416. 42 Animashaun S, 'Regulating Virtual Currency Payment Systems', 29. 43 Malala J, Consumer Protection for Mobile Payments in Kenya, 2. 7 The study will focus on the following specific objectives: I. To examine the extent to which the existing consumer protection regulatory framework in Kenya is efficient. II. To analyze in what ways an inefficient consumer protection regulatory framework exposes Kenyans to risks within decentralised virtual currency. III. To draw comparisons from South Africa and Mexico on approaches to regulation of consumer protection within decentralised virtual currency. 1.4 Research Questions This study seeks to answer 3 principal questions: 1. Is the existing consumer protection regulatory framework in Kenya efficient? 2. What risks does an inefficient consumer protection regulatory framework expose a Kenyan to within decentralised virtual currency? 3. What can be learnt from South Africa’s and Mexico’s approach to the regulation of consumer protection within decentralised virtual currency? 1.5 Hypothesis This paper proceeds from the hypothesis that the current legislative framework for consumer protection in Kenya is insufficient for decentralized virtual currency. 1.6 Justification And Significance of The Study Decentralized virtual currencies are posited to be a revolutionary payment system for transactions. With their continued growth in investment and usage, it is proving increasingly important to address the risks associated with DVC. Their uptake is coupled with threats to national security, market systems as well as the private rights of the users. Thus, Kenya needs to take a proactive approach toward DVC and specially to ensure consumer protection of the Kenyan user. This study seeks to contribute to the ongoing discussions regarding regulation of virtual currencies and legitimization of the industry in Kenya. It outlines the risks and omissions, 8 allowing consumers to make informed choices. Furthermore, the recommendations that will be informed by the deductions of this study are expected to assist industry players, lawmakers and policy-makers in designing appropriate tools and strategies to further encourage and address various types of virtual currency and therefore forging the way toward consumer protection. 1.7 Theoretical Framework The study is premised on the Public Interest theory of Regulation and Libertarian Theory of Innovation. Public Interest theory of Regulation This theory as developed by A.C. Pigou (1932)44 posits that the regulation of enterprises and various economic factors promotes public interest. Regulations are intended to ensure the good for the general public and not that of private individuals45. Market failures and efficient government intervention are fundamental concepts to the theory. Due to the ever changing nature of decentralized virtual currencies, there is a need to manage any possible market failures as well as ensure protections of consumer rights. Further, the anonymous nature of the system allows criminal activity to take place. Given the volumes of DVC in Kenya, there is need to prevent market failure and crime. This theory fits this study because of the overall objective of the study being consumer protection with regards to DVC. The lack of a sufficient or effective policy and legal regulatory framework bolstering the use of VCs poses momentous setbacks to their adoption and usage in Kenya.46 The nonexistence of proper regulatory framework subjects the traders or users of VCs to credit, liquidity and operational risks combined with the decisiveness and definiteness of VCs dealings.47 Soft reforms allow for certain liberties to still exist and maintain innovative 44Michael Hantke-Domas, ‘The Public Interest Theory of Regulation: Non-Existence or Misinterpretation?’ 15 European Journal of Law and Economics (2003) 165. 45‘Public Interest Theory – My Assignment Help : Samples & Case Study Review Sample’ on 2 August 2020. 46Michael Hantke-Domas, ‘The Public Interest Theory of Regulation: Non-Existence or Misinterpretation?’ 15 European Journal of Law and Economics (2003) 165. 47Michael Hantke-Domas, ‘The Public Interest Theory of Regulation: Non-Existence or Misinterpretation?’ 15 European Journal of Law and Economics (2003) 165. 9 environments48.This body of research argues for the minimum regulation of decentralized virtual currencies in Kenya to ensure protection of consumers and for legitimization of the industry. It champions the rationale49 that regulation, through legislation, should require the enterprises to disclose certain information and activities that it is taking to ensure the protection of the society at large. VC decentralized nature, pseudonymous nature of its users and irreversibility of transactions solidify the need for regulation to ensure protection of consumers. Eventually, regulation of VC will increase the confidence of the public in their uptake, enlarge the tax base, sustain comparable and associated innovations in Fintech and perhaps map Kenya in the international fiscal dealings. Libertarian Theory of Innovation Libertarians theorize that private entities should enjoy freedom of choice, autonomy, individualism and free/voluntary association50. Theorists under this school of thought oppose political systems and state power. Hayek, holds the view that government intervention should be minimized in market activities in the interest of freedom51. Governments are accused by libertarians of creating barriers to innovation and development by embracing the ‘precautionary principle’ that results in eventual slowed movement or outright prohibition52. Some libertarians justify the state as a necessary instrument in the protection of individual rights. Hayek popularized the concept of ‘catallaxy’ that translated from the Greek word katallato meaning ‘to exchange’ and ‘to admit into community’. The concept describes the emergence of order from chaos. 53 Decentralized virtual currencies is considered disruptive and an unpredictable technological financial innovation that is cumulated from systems and ideologies by various individuals. A libertarian approach acknowledges the associated uncertainties and 48 Sandler T, ‘Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships by Mancur Olson’ 39 Journal of Economic Literature (2001),1282. www.jstor.org/stable/2698562. Accessed 21 May 2021. 49 on 2 August 2020. 50 https://www.libertarianism.org/essays/libertarian-vision-for-technology on 19 May 2021 51 Arnold G, ‘Libertarian Theories of the Corporation and Global Capitalism’ 48 Journal of Business Ethics, (2003), 156. www.jstor.org/stable/25075173 on 21 May 2021. 52 https://www.libertarianism.org/essays/libertarian-vision-for-technology on 19 May 2021. 53 ‘Pouliot F: Catallaxy: The Origins of Bitcoin, Innovation and Spontaneous Order’ Medium, 19 Septmber 2017https://medium.com/@francispouliot/catallaxy-the-origins-of-bitcoin-and-innovation-93dbc3190eac on 19 May 2021. 10 risks while holding space for discovery54. The theory does however have its short comings in placing enormous importance on individual self-determination above all else. Consequently, it is only applicable under capitalism55. Libertarians argue for minimal reliance on government56 to ensure safeguards of private property, rights and liberties. In this case, the issuers and users of decentralized virtual currencies willingly contracting with each other would only require the government to provide minimum regulatory standards that protect the consumers. This body of research argues that governments, under the current capitalistic economy, should be involved minimally in the decentralized virtual currency sphere. Their involvements should ensure it does not stifle innovation and the free will of its people. According to Libertarians varying information flows in all directions and thus ensures the public is well aware of their undertakings. 57 All individuals are subjected to read between the lines and choose the information they require and its genuineness pegged fully on human rationality. The channels of information should not be stifled even when criticizing government policies. Even though there is freedom and free flowing information which empowers the media, misuse of power is legally controlled. 58 Overall, this theory encourages transparency in dealings, encourages healthy competition and the same time ensures that the state authorities and the government are kept in check with regards to consumer protection and general regulatory mandates. Summary Regulation is a prerequisite to market behavior that ensures protection of public interests. To facilitate the use of VCs, the design of an enabling policy and regulatory framework is imperative, thus, the public interest theory should be the central supervisory and anchoring 54 https://www.libertarianism.org/essays/libertarian-vision-for-technology on 19 May 2021 55 Block W, ‘The Libertarian Minimal State?: A Critique of the Views of Nozick, Levin, and Rand’ 4 Journal of Ayn Rand Studies (2002), 155. www.jstor.org/stable/41560207 On 21 May 2021. 56 Block W, ‘The Libertarian Minimal State?: A Critique of the Views of Nozick, Levin, and Rand’, 142. 57 Block W, ‘The Libertarian Minimal State?: A Critique of the Views of Nozick, Levin, and Rand’ 4 Journal of Ayn Rand Studies (2002), 155. www.jstor.org/stable/41560207 On 21 May 2021. 58 Block W, ‘The Libertarian Minimal State?: A Critique of the Views of Nozick, Levin, and Rand’ 4 Journal of Ayn Rand Studies (2002), 155. www.jstor.org/stable/41560207 On 21 May 2021. 11 theory. Libertarianism, however, endows governments with powers to vindicate the rights of individuals that they are solicited to protect. Libertarianism also discards the concept of "collective rights," that novel freedoms can spring from the formation of communal units. Rights are inherent in an individual, who may assign or exercise it, nonetheless establishment of officialdom does not develop rights. Moreover, public interest has diminutive value, but their unlimited suppleness provides cover for activities that are to some extent justifiable as enforcing individual rights as paralleled to endorsing a government officer’s private interests. Under this theory, the Central Bank of Kenya should be vested with the appropriate regulatory structure whose application will juncture the safeguard of the general public interest, mitigate market failures and at the same time encourage innovation. 1.8 Research Methodology & Approach This research employed doctrinal focus. Reliance was placed on desktop research, purposing the use of books, articles, law and financial journals, international and regional publications, reports and working papers as informational sources on consumer protection and virtual currencies. The data collected was purely textual. The analysis focused on consumer protection regulatory provisions in the age of virtual currency with elements of comparative analysis. 1.9 Limitations This study is limited by design as it excludes quantitative data from fieldwork. The area of virtual currency is capricious and change is inevitable during the length of this research. To wit, this study is limited to the state of technology and law between to June 2020 and July 2020. Further, this thesis will not benefit from informational sources from non-English speaking countries where English translations of resources are not available owing to language limitations. The COVID-19 pandemic and it’s consequent effect on the global economy affected the trends in adoption and uptake of DVCs with a huge increase occasioned by lockdowns and avoidance of physical contact. 12 1.10 Chapter Breakdown Chapter one of this thesis is the introductory chapter. It provides a background on decentralized virtual currencies including their adoption, nature, risks, and evolution as well as a background on consumer protection laws. It sets out the research questions, research objectives, justification, limitation and the methodology. The chapter hypothesizes that the existing consumer protection regulatory framework is insufficient under the decentralized virtual currency sphere and that some level of regulation is necessary. The second chapter provides insight into decentralized virtual currencies and gives examples of popular ones. The chapter further gives advantages and disadvantages and discusses the decentralized VC vis-à-vis fiat currency characteristics. The chapter discusses consumer protection and the principles upon which effective consumer protection laws should be founded. Further, the chapter draws a comparison between decentralized virtual currencies and fiat currency. The chapter concludes by discussing the specific consumer risks raised by decentralized virtual currencies. The third chapter discusses the regulatory framework of consumer protection and digital payment systems in Kenya. The chapter posits that by simple definition decentralized virtual currencies could fall under the definition of digital payment systems. It further addresses the challenges associated with regulation of consumer protection withing decentralized VC by Kenya. The fourth chapter draws admonition from the regulatory approaches in Mexico and South Africa in the face of adoption of virtual currency and subsequent consumer protection concerns. The chapter identifies their approaches and consequent appropriateness for Kenya. The fifth chapter makes recommendations and conclusions based on chapter one, two, three and four. 13 2 CHAPTER TWO: CONSUMER PROTECTION IN DECENTRALIZED VIRTUAL CURRENCIES 2.1 Introduction An impartial appraisal of consumer protection issues in decentralized virtual currency necessitates a basic understanding of the notions on which decentralized virtual currency technology stands. To begin, we contemplate upon the query “What is the genesis of the money?”. The existing global financial system borrowed its current form from the closure of the Bretton Woods system in the year 1972: when the globe transformed to rely on currency unlike the previous reliance on inherently valuable possessions, like gold, to fiat currency59. Fiat currency banks on government’s backing in ensuring that they are acceptable as a legal tender. It is valuable, partially, since governments necessitate that duties be paid in legal tender, thus this guarantees demand for it will ever exist. Money is consequently generally deliberated to be a formation of governments, nonetheless the commercial banks likewise have a vital part in the manner of creating money60. Before something can be called money, it must fulfill three requirements: it must function as a store of value, a medium of exchange, and a unit of account61. As a result, despite the fact that fiat money has no inherent worth, it nevertheless serves as a store of value (as a promise to pay) in that its paper or coin form may be traded for goods of comparable value at a reasonably steady rate. Consequently, money is fundamentally a reflection of public trust in a currency's ability to maintain a system of value exchanges. National governments and their central banks are usually the ones that maintain this trust. However, the question today is whether, if a section of the population has faith in an alternative financial system, such an alternative currency can survive without proper protections for consumers. The introduction of new payment technologies, which include decentralized systems for ledger administration, payment verification, and currency supply, brings about consumer risks to reconsider. 59 Economic Commission for Latin America and the Caribbean, Opportunities and risks associated with the advent of digital currency in the Caribbean, 2016. 60 Economic Commission for Latin America and the Caribbean, Opportunities and risks associated with the advent of digital currency in the Caribbean, 2016. 61 Stanley W J, Money and the Mechanism of Exchange, D Appleton & Co, New York, 1876. 14 Owing to Bitcoin being the first decentralized virtual currency, it will be used to demonstrate how such systems function. The capitalized term Bitcoin will be used in referring to the payment scheme throughout this chapter, while “bitcoins,” written in lower case, will refer to the currency's units. This adheres to a Bitcoin community standard. 2.2 Consumer Protection 2.2.1 Who is a Consumer? The Black’s Law Dictionary defines a consumer as one who buys goods or services for personal or commercial use. The Consumer Protection Act Kenya62, gives a broad definition of the meaning of consumer as: 1. One to whom particular goods or services are marketed in the ordinary course of the supplier's business; 2. a person who has entered into a transaction with a supplier in the ordinary course of the supplier's business, unless the transaction is exempt from the application of this Act; 3. a user of particular goods or a recipient or beneficiary of particular services, irrespective of whether that user, recipient or beneficiary was a party to a transaction concerning the supply of those particular goods and services; and 4. a franchisee in terms of a franchise agreement, to the extent applicable in terms of this Act.63 The Kenyan Consumer Protection Act’s definition, unlike Black’s Law Dictionary’s, refers broadly to mean both natural and artificial persons. The research paper will adopt the definition in the Kenyan Act because it captures broadly various elements of consumer protection. Financial consumer protection generally ensures a fair exchange between providers and consumers of various financial services64. It entails measures meant to safeguard consumers of goods and services from unfair market practices and fraudulent transactions65. 62 Consumer Protection Act (2012). 63 Section 2, Consumer Protection Act (2012). 64 Financial Sector Deepening, Kenya, Consumer Protection Diagnostic Study Kenya, January 2011. 15 2.2.2 What is the rationale for Financial Consumer Protection? The United Nations Manual on Consumer Protection 2016 addresses the importance of consumer protection by highlighting disparities in bargaining power, knowledge and resources between consumers and service providers. It states that state intervention is necessary for ensuring individual rights are protected and distributive justice66. Malala asserts that consumer protection is elucidated and rationalized by the concept of a “weaker party” 67.Consumers are considered to be at a disadvantage compared to their contracting partners and the professionals68. They are assumed to need help with protecting their interests owing to their subjacent bargaining power. Further, the concept of vulnerability asserts that some consumers are more vulnerable than others, an aspect that has been recognized by legislation. Consumer protection is notably imperative in Kenya where financial education levels are generally lower and information flows strained69. 2.2.3 Principles for Consumer Protection Consumers enjoy various universal rights70. The first is the right to basic needs which ensures the access to affordable and good quality basic goods like food, clothing, shelter, water, proper sanitation, healthcare, public utilities and education. The second is the right to safety. Consumers are entitled to goods and services that are not harmful to their health and wellbeing and the onus is on the provider to carry out sufficient safety tests. Third is the right to commensurate information regarding the products and services to allow for an informed choice. The information should include instructions, elements/ingredients, precautions and all other necessary information. The same should be informative rather than persuasive71. Fourth is the 65 Harvey BW and Penny DL, The Law of Consumer Protection and Fair Trading, 6ed, Oxford University Press, 2000, 25. 66 United Nations Conference on Trade and Development (UNCTAD), Manual on Consumer Protection 2016 2. 67 Malala J, Consumer Protection for Mobile Payments in Kenya: An Examination of the Fragmented Legislation and the Complexities It Presents for Mobile Payments, (2013), 22. 68 Malala J, Consumer Protection for Mobile Payments in Kenya, 23. 69 Malala J, Consumer Protection for Mobile Payments in Kenya, 23. 70Ibarra V, Revilla C, ‘Consumers’ Awareness of their Eight Basic rights: A comparative study of Filipinos in the Philippines & Guam ‘International Journal of Management and Marketing Research (2014), 67-69. 71 Ibarra V, Revilla C, ‘Consumers’ Awareness of their Eight Basic rights: A comparative study of Filipinos in the Philippines & Guam ‘, 67. 16 right to freely choose from a diverse portfolio of available quality alternatives within the market. Fifth, consumers enjoy the right to representation in the formation of relevant policies as well as in regulatory processes. The sixth is the right to a healthy environment which includes clean air and surroundings through proper waste management as well as sustainable exploitation of natural resources. The seventh right ensures consumer education resulting in an informed consumer. Consumer education encompasses four important aspects: (i) informed choice- this empowers the consumer to obtain information on their own and make judgments based on the same; (ii) value systems - expose consumers to the impact of their individual choices on resource allocation within the community; (iii) wise decision making; and (iv) stimulus for change - this ensure knowledge of the power which consumers hold to influence change72. The eighth consumer right is the right to redress which constitutes the right to legal remedies in a court of law and compensation for misrepresentation of defective goods and services73. The United Nations has indexed principles74 upon which consumer protection frameworks are to be built as they represent the bare minimum standards. The objectives of the principles are: to ensure maintenance of sufficient consumer protection; to ensure production mirrors consumer demand; to spur ethical conduct among producers and distributors; to promote sustainability; to curb abusive business practices and to facilitate international partnership75. The principles apply to both private and state enterprises. 2020 marks thirty-five (35) years since the adoption of the first variant of the principles however some scholars76 argue that there has never been any observational study on the tangible effect of the principles therefore inhibiting the ability to note their contribution to national consumer protection laws. Consumer protection principles under digital financial services (DFSs) exist as well. ‘Good consumer protection practices protect the interests of consumers, creating trust in using digital financial services (DFS), while preserving the commercial incentive to provide these services at 72 ‘Singh B: Consumer Education on Consumer Rights and Responsibilities’ Code of Conduct for Ethical Business and Importance of Product Labelling. For Direct Selling Association of Malaysia (2002). 73 Ibarra V, Revilla C, ‘Consumers’ Awareness of their Eight Basic rights: A comparative study of Filipinos in the Philippines & Guam ‘, 68 74 United Nations Guidelines for Consumer Protection 35. 75 United Nations Guidelines for Consumer Protection. 76 Durovic M, ‘International Commercial Law: What is it all about?’ Journal of Consumer Policy (2020), 129. 17 scale’77. Firstly, clear, transparent and complete product disclosure. Consumers must understand the different rights and obligations. Secondly, clear, available and accessible recourse, redress and dispute resolution mechanisms. Thirdly, timely and accurate disclosure of terms and all relevant information. Fourthly, provision for continuity in the event of disruption and network outages.78 2.2.4 Approaches to Consumer protection A consumer is any person who purchases a product or service and uses it. Consumer dissatisfaction has been a result of unsafe products and services and poor quality of information. Consumers have previously been in a disadvantaged position in the merchant-consumer relationship. As a result of the same as well as global financial crises, consumer protection has increasingly gained importance. Consumers are to be protected from abusive business practices and encouraged to make informed decisions79. Two approaches exist toward consumer protection: Risk Based Approach A risk-based approach allows allocation of resources and strategic prioritization of interventions to address assessed risks80. According to the GPFI white paper81, the increasing remonstrance to effective consumer protection extended by digital financial inclusion and emerging consumer risks further bolster the need for specific guidance on risk-based consumer protection supervision. This approach argues that risk currently holds four main capacities in regulation. Firstly, as an object of regulation. Secondly, providing a justification for regulation. Thirdly, ‘constituting and framing regulatory organizations and regulatory procedures’. Lastly, ‘framing accountability 77 Malady L, ‘Consumer Protection Issues for Digital Financial Services in Emerging Markets’ Social Science Research Network (2016). 78Malady L, ‘Consumer Protection Issues for Digital Financial Services in Emerging Markets’. 79‘World Bank Group: Good Practices for Financial Consumer Protection' 2017 Edition World Bank 2017 on 2 August 2020. 80 ‘Risk-Based Supervision in the Digital Financial Inclusion Era’ on 2 August 2020. 81 ‘Global Standard-Setting Bodies and Financial Inclusion: The Evolving Landscape' GPFI on 2 August 2020. 18 relationships.82 Risk suggests the probability of an undesirable outcome as a result of human activities and thus mandating the government to intervene and prevent the same83. Technology advancements are coupled up with regulation in an attempt to manage the subsequent risks. Principle Based Approach The principle-based approach to consumer protection shifts toward broadly stated standard principles and away from detailed strict rules84. Principles have a number of characteristics: they are outlined at a high level of generality, with the intention to overarch and be applied flexibly to rapidly changing industries; they contain qualitative terms rather than quantitative; they are purposive and explain reasons; they are broadly applicable to a range of circumstances; they are mostly behavioral standards and are concerned with manner of carrying out business and treatment of consumers; and breach of a Principle must involve an element of fault and can involve public enforcement action85. This approach has the potential benefit of flexibility and a higher chance of success and thus fulfilling regulatory objectives as it is easier to comply with. 2.2.5 Regulatory responsibilities Durovic86 posits that consumer law as a discipline arose from the increase of consumer protection frameworks. He argues that, contemporaneously with the development of national laws around consumer protection, there has been internationalization of consumer protection law with its two main goals being minimum standards for consumer protection and ease of cross border trade and transactions87. 82 Black J, ‘The Role of Risk in Regulatory Processes’ in Baldwin R, Cave M, Lodge M (eds), The Oxford Handbook of Regulation, Oxford University Press, 2010. 83 Baldwin R, Cave M, Lodge M , The Oxford Handbook of Regulation, 1st edition, Oxford University Press, 2010. 84 Black J, Hopper M, Band C, ‘Making a Success of Principles-Based Regulation’ 1 Law and Financial Markets Review, (2007), 191. 85 Black J, Hopper M and Band C, 'Making a Success of Principles-Based Regulation' 191. 86 Durovic M, ‘International Commercial Law: What is it all about?’, 126. 87 Durovic M, ‘International Commercial Law: What is it all about?’, 127. 19 Lumpkin emphasizes the need for balance between consumer protection and financial innovation88. He makes an argument that market confidence and consumers are undermined if adequate protections do not exist.89 Malady90 notes that the nature of digital financial services diversifies the range of regulators leading to variability in regulatory and protection regimes91. According to Aminashaun92, clarity of consumer accountability enables proper approach and redress. Traditional financial services are regulated mainly by the central bank93. They are catalysts and liquidity providers. The central banks’ role as a catalyst ensures stability through various regulations, rules and guidelines94. In cross-border transactions, central banks act as clearing institutions. Malala95 notes that the lack of regulatory provisions exposes consumers to risks. Further, rapidly changing technologies hamper the government’s ability to forecast and pinpoint the future96. There exists a connection between consumer protection and the stability of the market97. International regulatory bodies like the International Monetary Fund (IMF), World Bank, United Nations Conference for Trade and Development (UNCTAD), Organization for Economic Cooperation and Development (OECD) and International Organization for Securities Commissions (IOSCO) are also involved in the regulation of financial services98 and ensuring consumer protection99. They ensure international cooperation and coordination toward global 88 Lumpkin S, ‘Consumer Protection and Financial Innovation: A few Basic Propositions’ 1 Financial Market Trends (2010), 128. 89 Lumpkin S, ‘Consumer Protection and Financial Innovation’, 128. 90 Malady L, ‘Consumer Protection Issues for Digital Financial Services in Emerging Markets’. 91 Malady L, ‘Consumer Protection Issues for Digital Financial Services in Emerging Markets’. 92 Animashaun S, ‘Regulating Virtual Currency Payment Systems’ 4 Cambridge Law Review (2019), 29. 93 Animashaun S, ‘Regulating Virtual Currency Payment Systems’ 4 Cambridge Law Review (2019), 29. 94 Animashaun S, 'Regulating Virtual Currency Payment Systems', 29. 95 Malala J, Consumer Protection for Mobile Payments in Kenya, 2. 96 Malala J, Consumer Protection for Mobile Payments in Kenya, 20. 97 Malala J, Consumer Protection for Mobile Payments in Kenya, 22. 98 Animashaun S, 'Regulating Virtual Currency Payment Systems', 29. 99 Durovic M, ‘International Commercial Law: What is it all about?’, 129. 20 financial stability100. Rules and laws by international bodies for soft, nonbinding laws that require voluntariness to implement101. 2.3 Decentralized Virtual Currency The decentralized virtual currency marketplace is a novel playing arena where diverse players each has a certain and unique part to play for the success102. 2.3.1 Main Actors Consumers First and foremost, and a very central actor is the DVC user. This is a legal entity or an ordinary individual who acquires virtual currencies to spend them (1) to carryout peer-to-peer (P2P) disbursements, (2) to make investments and withholds them in speculation of the future dealings, or (3) to buy virtual or real services or goods from a set of particular dealers. These users are able to get their coins in numeral ways. First, they can basically purchase their coins using a different decentralized virtual currency or fiat money on a decentralized virtual currency exchange; Second, they can purchase from a different virtual currency consumer directly through a transaction platform frequently denoted as a “P2P exchange”; Third, rewards from mining of new coins in virtual currencies is founded on Proof of Work (PoW) agreement strategy; Fourth, in some circumstances they can get the coins straight from the coin offeror, either in crowd sale framework put in place by the offeror or as portion of a free preliminary offering of coins; Fifth, if an individual vends services or goods in exchange for virtual currency, the individual obtains coins as compensation103; sixth, if a coin's blockchain "hard forks", the individual will spontaneously receive an amount of the recently fashioned coin; and lastly, the individual can obtain coins as donations or gifts from a different cryptocurrency customer. Virtual currency exchanges 100 Animashaun S, 'Regulating Virtual Currency Payment Systems'. 101Alexander K, Dhumale R, Eatwell J, Global Governance of Financial Systems: The International Regulation of Systemic Risk, Oxford University Press, 2006. 102 Financial Action Task Force, Virtual Currencies – Key Definitions and Potential Anti Money Laundering/Counter Terrorist Financing Risk, June 2014. 103 Sadhaseevan L, ‘The Regulation of Crytpocurrencies in the Context of South Africa’s Financial Sector’ Unpiblished LLM Thesis, University of KwaZulu-Natal, 11 September 2019. 21 The second cluster of important participants are the "virtual currency exchanges." A decentralized virtual currency exchange is a person or organization that provides exchange amenities to DVC customers, and usually requires a certain commission.104 They permit DVC operators to sell their coins in fiat currency. Use fiat currency to buy currency or acquire a new currency. They habitually act as foreign exchange offices and some kind of exchange offices. It is noteworthy that a number of transactions are purely virtual currency deals, meaning that they usually only receive disbursements in other virtual currencies rather than Bitcoin (such as Binance), while others also accept payments in U.S. dollars or euros (such as Coinbase) and other legal currency payments. In addition, several virtual currency exchanges merely permit their consumers to purchase a specific set of coins. Many decentralized virtual currency exchanges (that is, regular and pure virtual currency exchanges) act as providers of custodial banks (such as Bitfinex). Currency Exchange provides its users with a variety of payment choices, like credit cards, PayPal transfers, bank transfers and other currencies. A number of exchanges also offer figures about the virtual currency market (such as transaction volume and currency volatility) and provide conversion services to traders who agree to take virtual currency payments. Miners The third player is a "miner" who plays a part in transaction verification on the blockchain and solves the "cryptographic puzzle".105 As mentioned, the mining procedure refers to the cryptocurrency grounded on the PoW unanimity mechanism. Use computing supremacy to verify dealings and get rewards for coins that are newly mined (that is, via automatic devolved re- issuance). For fiat currencies (such as U.S. dollars or euros) or other cryptocurrencies. A number of miners are grouped in professed mining pools to increase computing supremacy. Currently, the alleged "mining"-related risk business" seems to be underestimated.106 Coin offerors 104 Sadhaseevan L, ‘The Regulation of Crytpocurrencies in the Context of South Africa’s Financial Sector’ Unpiblished LLM Thesis, University of KwaZulu-Natal, 11 September 2019. 105 Sadhaseevan L, ‘The Regulation of Crytpocurrencies in the Context of South Africa’s Financial Sector’ Unpiblished LLM Thesis, University of KwaZulu-Natal, 11 September 2019. 106 Maanda MH, ‘Legal Implications of Virtual Currencies’, LLM Thesis, University of Pretoria, January 2019. 22 The key players in the last group that should be emphasized are the "bidders." A coin product is an individual or organization provided to cryptocurrency users when the coin is first launched, for a fee (through bulk sales) or free (as part of a special (registered) plan (z below)), usually to fund the coin, promote development or increase its preliminary visibility107. Official coin issuer is either partly pre-mined, or pre-mined (that is, cryptocurrency consumers can create additional coins after issue) or completely pre-mined. It should be noted that not every coin has a distinguishable coin dealer, not all coins are pre-mined, or all their inventory is pre-minted. Token issuer can be the identical individual as the originator of the token, or a different person or business.108 Coin inventors There are also players called "coin inventors". The coin inventor is the person or organization that develops the practical foundation of cryptocurrency and makes the primary guidelines for using it. In some circumstances, their identities are recognized (such as Ripple, Litecoin, Cardano), nevertheless usually they are still unknown (z, Bitcoin, Monero). Some maintenance and improvement of encryption Currency codes and underlying algorithms (in principle, no administrator rights), while others simply disappear (such as Bitcoin). 109 2.3.2 Transactions, mining, and the block chain Customarily, financial systems necessitate the Central Bank to preserve a transactions ledger within the commercial banking scheme that is capable for use in verification of transactions amid clients of these commercial banks. Though, a system based on distributed ledger-based employs regular cryptographic methods in maintaining a public score of any transactions that has ever been carried out in that system. A system of this kind does not need a central authority to uphold the reliability of the transaction ledger, as a replacement for, the reliability of the civic ledger is 107 Sanz-Bas D, Rosal C, Alonso SLN, and Fernández MAE, ‘Cryptocurrencies and Fraudulent Transactions: Risks, Practices, and Legislation for Their Prevention in Europe and Spain’ Laws (2021) 108 Sadhaseevan L, ‘The Regulation of Crytpocurrencies in the Context of South Africa’s Financial Sector’ Unpiblished LLM Thesis, University of KwaZulu-Natal, 11 September 2019. 109 Sadhaseevan L, ‘The Regulation of Crytpocurrencies in the Context of South Africa’s Financial Sector’ Unpiblished LLM Thesis, University of KwaZulu-Natal, 11 September 2019. 23 guaranteed through the arithmetic of cryptography. For instance, in the Bitcoin procedure110, whenever two parties take part in a payment deal, a log is generated showing that value has been transmitted to an “address” contained in a “wallet” of a party and into the others address contained in another wallet. This record of the transaction is transmitted to the network, as a verification that the funds being transmitted have not previously been transmitted somewhere else in the system. The role of verification is done by exceptional contributors on the system named “miners.” Miners constantly receive broadcasts of dealings on the system and carry out verification of the transactions. However, these verified transactions will not automatically become part of the transaction book. Instead, mining systems must use computing power to solve complex mathematical problems. Each group of confirmed transactions added to the distributed ledger is called a "block". Each block is cryptographically linked to all previously generated blocks and later generated blocks. This series of mathematically related blocks collectively records all transactions that occur in the system and is called a "blockchain"111. Considering the limitations of modern technology and computing power, the encrypted connection between each block in the blockchain is so strong that forgery is almost impossible. The computational complexity of creating a new block on the blockchain has been improved and adjusted so that all the mining power on the network creates a new block approximately every 10 minutes. This transaction can be integrated into the block immediately when it occurs for the first time. There a period until the next block is created. Transactions occurring at the same time when the last block is created, means transactions can be intertwined. After 10 minutes, a transaction becomes a block. After a transaction is integrated into the blockchain at the six-block level, it will be sent to the block after you write the block of the transaction. After five blocks are added to the chain, it is considered a complete "confirmation". This mechanism is designed to prevent double spending of Bitcoin. 110 Lyndell K, ‘Virtual currencies: regulatory and tax compliance issues’, Nova Science (2014). 111 Scott T, Blockchain Blueprint to dissecting the hidden economy: Smart contracts, Bitcoin and Financial technology, CreateSpace Independent Publishing Platform, 2016, 12. 24 2.3.3 Advantages & Disadvantages of decentralised virtual currency Virtual and digital currencies have become more prominent through the development of diverse digital coins112. With the attractiveness of these currencies growing, several pros and cons can be acknowledged when using this payment system. Novel technologies, predominantly cloud-based and network technologies like block chains, suggest prospects for meaningful competition and innovation. Nevertheless, the regulation of payment structures ought to have objectives and competing policy at equilibrium. It also must preserve the balance between competition-driven invention, stability and efficiency as well as ensure integrity and confidence. Consequently, novel technologies like virtual currencies essentially should focus on sustaining some degree of efficiency and stability just like present electronic payments have, which will certainly show their advantages. Bitcoin being the most prominent and oldest digital currency will be used as an example in exploring the weakness the system and the ways in which these impacts consumers and businesses. 113 The probable pitfalls and benefits are outlined below. 2.3.3.1 Benefits of decentralized virtual currency There are fundamental benefits of the usage of decentralized virtual currencies. No Appropriation of Funds114 DVC offers safety from freezing and seizure of funds or wallets by governments during transactions since DVC is not centralised. Andreessen records that Bitcoin offers security and safety whenever one user transfers digital property to another through a decentralised system of trust that is non-reliant on or necessitate a central intermediary. Consequently, Bitcoin is devoid of government interference and the consumers who desire to transfer lump sum sums of currency, for instance, across many countries, can agree to take Bitcoin as a means of transaction. In addition, as previously alluded to, Bitcoin is not aided by a mediator like the Central Bank and hence government intervention is irrelevant except it is controlled in ways that assist in the process of being accepted as legal tender and thus a legitimate exchange in Kenya.115 112 Small S, ‘Bitcoin: The Napster of Currency’, 37 Houston Journal of International Law (2015), 581. 113 Australian Payments Clearing Association, Submission 43 to the Senate Economics References Committee, Inquiry into Digital Currency, November 2014, 3. 114 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 115 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 25 Anonymity and Privacy116 Bitcoin dealings are principally done in private via the adoption of assumed names, and dealings can be undertaken during the consumer’s own time in any geographical region minus going into a banking establishment. Customers therefore continue to be unidentified as a private key is designated for each user that merely shows their key digit without a name. Anonymity is describable dually: Nothing links organisations or individuals to the accounts acknowledged in the dealings and the fact that the wallet is hard to be traced back to its proprietor. And so, the entities in the Bitcoin deals are not declared explicitly by name, but by use of a Bitcoin address making it the chief advantage and enticements for consuming Bitcoin as a product. 117 No Transaction or Minimal Costs118 During transactions, there are negligible or no operating costs involved. This is because Bitcoin, as a digital exchange, has no participation of a third party like banking establishments which have high charges for client transactions. What's more is that the Bitcoin system is free to use. As a consequence, institutions like the World Bank have been contemplating the use of decentralised virtual currencies due to this beneficial feature. Equally, arrangements like BitPesa offer reasonably priced access to making transactions with the intention of assisting individuals who are not able to pay for traditional banking charges when making transnational payments. In the long run this may result in banking institutions plummeting their transaction and banking subscriptions as Bitcoin extends and becomes popular. 119 2.3.3.2 Pitfalls of decentralized virtual currency Criminal Activities Bitcoin like many DVC is unregulated and runs on anonymity, making it easier for individuals to utilise Bitcoin disbursements for unlawful or illegitimate undertakings. These deeds often comprise money laundering, tax evasion, fraud or theft, and terrorist financing, among others. 116 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 117 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 118 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 119 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 26 Moreover, as a consequence of the decentralised nature of Bitcoin, it is challenging for the enforcement of the law because of challenges relating to tracing the illegal undertakings and thus ‘decentralised virtual currencies … are employed in ways that can possibly be used by ordinary currencies’120. An instance where such illicit use of Bitcoin is the Silk Road case whereby an individual would be able to order illicit goods and drugs on this website via Bitcoin. The state and the transnational battle against these cyber-criminal actions is a hard nut to crack for governments. 121 Variation in Valuation Due to the lack of a set currency value allocated to it as a scheme of payment the valuations fluctuate on a daily basis. This means that the exchange rates for Bitcoin experience variations. This potentially brings difficulties when an individual wish to accumulate Bitcoins, since the exchange rate never stays constant. Consequently, concerns are raised whether Bitcoin have to be controlled as a currency. It is worth noting of Bitcoin’s prominence as a venture scheme, regardless of it being utilised in day to day actions; nevertheless, venture capitalist ought to be cognisant of the fluctuating feature of the exchange rate owing to the fact that consumers and businesses still use traditional system of payment as compared to Bitcoin for the sole reason of maintaining the value. This property makes Bitcoin a vulnerable payment scheme when compared to traditional methods like Electronic Funds Transfer (EFTs). 122 Irrevocable Transactions Presently there is inadequate security for users desiring to employ Bitcoin in their normal transactions because they prefer it as a means of payment with concerns about an erroneous transaction. Anonymity makes Bitcoin transactions irreversible, meaning that once payment is made to a wrong account, there is no charge back as the case is with normal bank transactions like ‘PayPass’ and credit card dealings. According to Moore and Christin this irrevocability renders Bitcoin transaction concerning a single or many intermediaries prone to an increased risk, for example, if the intermediary turns out to be bankrupt or leaves suddenly with user’s deposits. For that reason, consumer protection holds an indispensable role in every undertaking 120 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 121 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 122 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 27 when trading with Bitcoin thus ensuring users are well cognisant of the risks inherent when utilising this scheme.123 Instability of Bitcoin Although Bitcoin has gained prominence in usage by consumers and businesses as a means of payment, not everyone in the society trust Bitcoin transactions due to the point that Bitcoin is not recognized as legal tender by many governments, hence it leads to it being unstable and a poor exchange. The key matter with appropriateness of Bitcoin is the anonymity of consumers. This renders the old banking establishments to continue being the most chosen way through which financial transactions are done. Consequently, consumers as well as businesses without Bitcoin accounts are not indebted to consent to being paid by individuals who use it as a means of payment. Additionally, the Finance Discipline Group (FDG) in Sydney’s University of Technology pointed out that Bitcoin is highly esteemed in investment domains better than a ‘medium of exchange’ or currency. 124 After considering the pros and cons of Bitcoin as a DVC, the enquiry is whether DVC is capable and should be deliberated on as store of value, medium of exchange and a unit of account when gauging the roles of money and whether it satisfies the meanings of legal currency and tender. This is pertinent when the intention is to ensure consumer protection under DVCs. As Brito and Castillo125 during their consideration of DVCs within the realm of legal tender and money, posit that DVC transactions are not denominated in yen, euros, or dollars, as on PayPal. Instead, they are denominated in bitcoins. As a result, it is both a VC and a decentralized payment network. The currency's worth is determined by the value that people place on it, not by gold or government fiat. A DVC's dollar worth is decided on an open market, just like any other currency. This explanation demonstrates why DVC transactions are distinct from ordinary ones in that worth is assigned to DVC and the DVC network by society and network users, rather than by a government. To establish if DVC is legal tender, it is important to examine the roles of money and consequently the status of legal tender alongside the features of DVCs. 123 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 124 Stanford University, Advantages of Bitcoin: Decentralized, Peer-to-Peer, Cryptocurrency, 2010. 125 Brito J and Castillo A,Mercatus Centre, Bitcoin: A Primer for Policymakers, 2013. 28 2.3.4 Decentralised virtual currency and the Roles of Money The foregoing discussions thus beg the question surrounding the legal standing of Bitcoin and its position, or lack thereof, as currency. Its determination as currency or not guides its government recognition, legal acceptability and consequent consumer protection126. Medium of Exchange Bitcoin, a DVC, can only be employed as a medium of exchange after being acknowledged as a way of disbursement for services or goods. Darling J believes that DVCs are a medium of exchange under the following circumstances: Things that move freely in the community end up with debt relief and full payment of goods. Regardless of the character or credibility of Davidson and Block, they point out that "if a commodity... has been valued only because of the services in their direct use (production or consumption), then they are appreciated because of their role in indirect exchange”127. As Davidson and Brock explained, "If it has an objective exchange value based on other purposes when it is used as currency, then it cannot be used as a currency object." The means of payment has added value, so Bitcoin functions as an intangible commodity and as a medium of exchange128. Graf also explained that Bitcoin serves as a medium of exchange because it has been used to create value on the network and does not have to be tangible for this role129. This shows that the design of modern disbursement systems is that tangibility is not a prerequisite of being a medium of exchange thus may comprise digital payment networks like Bitcoin. Likewise, Tucker pointed out that Bitcoin is associated with payment systems because of its connection to the blockchain that determines the sale and acceptance of Bitcoin worth130. The usage of Bitcoin is only controlled in certain nations, which is equivalent to the role of a medium for international exchanges. The cost depends on the user who buys digital currency on 126 Mandjee T, ‘Bitcoin, Its Legal Classification and Its Regulatory Framework’ 15 Journal of Business and Securities Law (2014), 12. 127 Davidson L and Block W, ‘Bitcoin, the Regression Theorem, and the Emergence of a New Medium of Exchange’ 18(3) The Quarterly Journal of Austrian Economics (2015) 313. 128 Barnett W and Block W, ‘Crash and Carry: Financial Intermediaries, the Intertemporal-Carry Trade, and Austrian Business Cycles’ Ethics & Politics (2009) 455. 129 ‘Konrad Graf, Bitcoins: The Regression Theorem, and that Curious but Unthreatening Empirical World’ Blog 27 February 2013 . 130Jeffrey Tucker, Bitcoin and Mises’s Regression Theorem (September 2014) Liberty 29 the trading platform131. The only distinguishing feature of Bitcoin is that it will depreciate once it reaches its limit, but as the previous discussion shows, Bitcoin will perform its first function: currency as a means...just because it can be used by companies and consumers as exchange if they accept it as a means of payment. Unit of Account In order for Bitcoin to become a unit of account, Bitcoin needs to be measurable as a unit related to services or goods. Carlson posits that a currency unit means "the sum of commodities...…. which means all commodities exist in each currency unit"132. An attractive feature of DVCs is that they are changeable and divisible as similarity with electronic currency. According to Barber, Boyan, Shi, and Uzun, “this is the Achilles heel of the electronic money system (strictly anonymous)” because the denominations must be standardized so that they cannot be linked, which in turn leads to the calculation cost of the transaction. However, due to fluctuations in the exchange rate of DVCs like Bitcoin, it is occasionally problematic to know the precise price, so Bitcoin is all the time measured in Euros or U.S. dollars133. Therefore, it is not a disbursement scheme that allows operators to apply for credit cards or credit due to fluctuations in value, because they are not government legal tender134. Bitcoin is mainly used as a trading platform. In the past two years, the transaction volume of Bitcoin goods and services has increased slightly, so it can be compared to a unit135. An instance is the Winkdex index, which is a track fashioned around the price of Bitcoin136. It is safer. Therefore, although the exchange rate of Bitcoin fluctuates, it can be regarded as a unit of measurement whenever utilised as a disbursement scheme. Store of Value After all, money must have some store of value. This role is usually challenging to achieve since the "value" of Bitcoin is intangible, so it is hinged on how individuals receive goods in Bitcoin 131 Federal Reserve Bank of Boston , Stephanie Lo and Christina Wang, Bitcoin as Money, 2014. 132 Carlson D, Money as Measure, 33 Cardozo Law Journal (2012) 2543. 133 Barber S, Boyen X, Shi E and Uzun E, Bitter to Better - How to Make Bitcoin a Better Currency, 7397 Financial Cryptography and Financial Security (2012). 134 George O, Bridging Bitcoin’s Gender Gap, 12(2) New York University Journal of Law and Business (2016), 440. 135 Pagliery J, Bitcoin and the Future of Money, Triumph Books, 2014, 3. 136 ‘Jose Pagliery: Winklevoss Twins Launch the Bitcoin ‘Winkdex’ 20 February 2014 CNN Money 30 transactions. In Bitcoin transactions; nevertheless, digital currency is deposited electronically (in the wallet) and will not be used instantaneously, indicating that Bitcoin can perform this function if there are multiple Bitcoin reserves for future use. It is that the value of Bitcoin fluctuates differently, depending on the public's acceptance of Bitcoin, so the only exception is the value that may fluctuate between Bitcoin and the "save" function. Butler and Boylan also pointed out137 that if the savings function of all major currencies is severely damaged, whether it is due to unsustainable monetary and fiscal guidelines around the world, or due to a universal reluctance to permit important relative appreciation, venture capitalist must find alternatives. This clearly shows that DVCs can be used as a store of value. Although Bitcoin has its shortcomings as mentioned above, they can still be used as investment and profit storage to stimulate capital growth. Regarding if Bitcoin fulfills the function and definition of virtual currency provided by Financial Action Task Force (FATF), the definition states: "A digital value representation that can be digitally traded, which can be used as (1) an exchange medium; (2) accounting unit; (3) a store of value in any jurisdiction, but not legal tender (that is, if offered to a lender, it is a valid legal tender offer)138. Bitcoin is deliberated to fulfill the role of money; nevertheless, the query lingering is if Bitcoin is regarded as legal currency hence a legal tender. 2.4 Self-regulation framework of decentralised virtual currency Self-regulation frameworks typically involve administration and governance within the community139. Some operators of blockchain technology believe that a central approach to management and regulation will limit access and the freedoms enjoyed alongside it140. Blockchain technology is the basis of decentralised virtual currencies. It uses a distributed ledger system that secures information within the system and carries out distribution among the 137 ‘John Butler and Jon Boylan: Is Money a Store of Value?’, Financial Insider (online), November 2010 138 Financial Action Task Force, Virtual Currencies – Key Definitions and Potential Anti Money Laundering/Counter Terrorist Financing Risk, June 2014. 139 ‘Giovanni Perani: Blockchain: Is Self Regulation Sufficient?’ Medium, 2 May 2018 https://medium.com/coinmonks/blockchain-is-self-regulation-sufficient-5bb68ac7e33f on 20 April 2021. 140 Joseph Young, ‘Interview: Vitalik Buterin on Scaling Ethereum, Its Popularity in Asia and ICOs’ Bitcoin Magazine, 8 June 2017 link on 20 April 2021 31 users therein141. The nature of the system makes all blocks within it visible to all participants. The systems maintains records of any edits as well as deletions, providing an alert to all users in the event of deletion142. This security feature promotes transparency and accountability as it inhibits any manipulation and fraudulent behaviour. Further, the technology utilizes smart contracts as the basis of each transaction. These contracts contain the terms and conditions governing the transaction without the need for an intermediary. The execution of these smart contracts is based on automated algorithms and creates a layer of trust between the parties143. It requires permissions and cryptography to ascertain the identity144 of the user preventing tampering and access by unauthorized persons. Access to transaction records allows users to verify information without the need for a third party of intermediary. The system also ensures access to free-flowing information through the distributed ledger. The fair and relatively affordable access to the information informs better decisions and increases efficiency. The information efficiency and decentralized nature minimizes instances of concentration of power. Some virtual currency exchanges, for example Paxful and Luno, have provisions that ensure the transfer of cryptocurrencies in the administration of a deceased’s estate, provided all relevant documentation is presented145. This ensures that the rightful beneficiaries receive their due. It is evident that despite the decentralised nature, there exists a minimum standard for the varied decentralised virtual currencies. The system provides its own checks and balances, albeit not so thorough. Avenues for redress are not always available making it more difficult to enforce rights under the smart contracts. 141 ‘Heckstall V: Blockchain Technology- The Key to Self Regulation in the Digital Revolution’ Medium, 28 March 2018 https://medium.com/blockchain-technology-the-key-to-self-regulation-in-the-digital-revolution-4c9303094fba on 20 April 2021. 142 Distributed Ledgers Technology and Artificial Intelligence Taskforce, Emerging Digital Technologies for Kenya: Exploration and Analysis, 2019, 29. 143 Heckstall V: Blockchain Technology- The Key to Self Regulation in the Digital Revolution’ Medium, 28 March 2018 https://medium.com/blockchain-technology-the-key-to-self-regulation-in-the-digital-revolution-4c9303094fba on 20 April 2021. 144 Distributed Ledgers Technology and Artificial Intelligence Taskforce, Emerging Digital Technologies for Kenya: Exploration and Analysis, 2019, 30. 145 https://www.luno.com/help/en/articles/11000093637?contact_reason=29 32 2.5 Consumer risks with decentralised virtual currencies A myriad of risks is associated with decentralised virtual currencies including volatility, cyber and structural risks.. The Silk Road scandal146 where sale of illegal drugs and money laundering took place and the Mt Gox147 scandal where 740,000 bitcoin were stolen from customers raised fundamental issues around consumer protection regarding virtual currencies. Regardless of the enhanced security that decentralized virtual currencies may bring, cyber risks, for example hacking, remain a material issue These issues include sensitivity to fraudulent activities, cyber- attacks and devaluation of currency148 occasioned by cyber, volatility and structural risks. Volatility of Decentralised virtual currencies Decentralised virtual currencies, being a creation of a few individuals, can be affected by any manner of thing. For example, there was a recent crash in the cryptocurrency market149 following tweets by the CEO of Tesla, Elon Musk. On more than one occasion, his utterances have affected the market and the price of the currencies. On this specific occasion, he stated that Tesla would no long be receiving bitcoin as a form of payment since their mining has huge environmental implications. This volatility is one aspect which presents a risk to Kenyan users. It is difficult to regulate what affects the market entirely. The risk of loss due to hacking or the loss of private keys Yermack150 notes that no deposit insurance for decentralized virtual currency balances exist compared to those in banks. This means that once a user has lost their currency, there is no 146 ‘Silk Road: The Dark Side of Cryptocurrency’ on 1 August 2020. 147‘Matthew Beedham: A Brief History of Mt. Gox, the $3B Bitcoin Tragedy That Just Won’t End’ Hard Fork The Next Web, 14 March 2019 on 1 August 2020. 148 Griffiths ME, ‘Virtual Currency Businesses: An Analysis of the Evolving Regulatory Landscape’ 16 30. 149 ‘@MattWallace888: Elon Musk: Makes Bitcoin go down 100billionin market cap with Tesla no longer accepting it.’ Twitter’ https://twitter.com/MattWallace888/status/1393930223004098564?s=20 on 19 May 2021. 150 Yermack D, ’Is Bitcoin a real currency? An economic appraisal’, National Bureau of Economic Research (2013). 33 reprieve or compensation. Ali et al151 indicate that 146 strains of malware designed to steal bitcoins from individuals' computers have been discovered. The malware steals by obtaining private keys from digital wallets or switching addresses to deliver funds erroneously. This exposes consumers to loss of their currency. A change in structure can happen at any time putting consumers’ funds at risk. For example, the Decentralized Autonomous Organization hack where a bug in the code allowed a hacker to withdraw funds from other users. Following this, the developers employed a hard fork152 to protect the remainder of the funds and ensure the rightful owners received their money. Irreversibility and lack of recourse mechanisms Yet another risk is that a transactor could erroneously send decentralized virtual currency balances to an incorrect or non-existent address. The lack of a central authority or intermediary means that there is no mechanism to reverse unintended transactions. Most electronic payment systems provide mechanisms to protect consumers against unauthorized transfers, and indeed such protections are often codified into law. The absence of such protections in decentralized virtual currency poses risks to consumers153. 2.6 Conclusion Based on the fore going, it is evident that decentralized virtual currencies bare various monetary advan