Sh14bn gangsters paradise: How Kenya turned into a playground for fraudsters

Central Bank of Kenya in Nairobi

A civil society activist walking past Central Bank of Kenya in Nairobi during protests against illicit cash. The regulator has warned banks and investors against trading in cryptocurrencies.

Photo credit: File | Nation Media Group

Six days after Bitstream Circle, the ponzi scheme designed as a crypto trading platform that went under with over a billion shillings of investors money, the Central Bank of Kenya issued a warning.

While speaking at the World Consumer Rights Celebration Day in Mombasa on March 22, CBK Governor Patrick Njoroge warned financial institutions supporting cryptocurrency transactions that they risked losing their licences.

“There are people who are excited about cryptocurrencies because they see it as an investment they can make money from,” said the governor.

“But for every person who wins something, there are hundreds who lose,” warned Dr Njoroge.

Although it is unclear whether the governor was aware that Kenyans had just lost Sh1.18 billion in the week preceding his address in Mombasa against cryptocurrency trading, it was not the first time Dr Njoroge was warning Kenyans against trading in an unregulated digital currency.

Kenya has never prosecuted anyone for engaging in cryptocurrency scams.

In fact, the first time CBK came out strongly against the trade of cryptocurrency was in December 2015 when the Bitcoin craze was just beginning to catch in Kenya. At that time, Safaricom was embroiled in a court case after the mobile giant discontinued the exchange of Kenyan shillings with bitcoins through the Lipisha platform.

Lipisha was a payment processor for Bitpesa, a pan African Nairobi based Bitcoin trading platform that had among its board members Joe Mucheru who had just been nominated by President Uhuru Kenyatta as the ICT Cabinet Secretary.

After his nomination to Cabinet, Mr Mucheru immediately quit from Bitpesa and put his stake up for sale. However in Safaricom’s opinion at that time Bitcoin was illegal in Kenya.

But as the case was on going in court, CBK dropped a bombshell.

“Domestic and international money transfer services in Kenya are regulated by the Central Bank of Kenya Act and other legislation. In this regard, no entity is currently licensed to offer money remittance services and products in Kenya using virtual currency such as Bitcoin,” said CBK in a circular.

“Virtual currencies such as Bitcoin are not legal tender in Kenya and therefore no protection exists in the event that the platform that exchanges or holds the virtual currency fails or goes out of business,” said the regulator.

In short, this meant that licensed financial institutions were no longer allowed to offer exchange of Kenyan currency into cryptocurrencies and vice versa. Kenyans too were advised against trading of cryptocurrencies as they risked losing their money and there would be no redress. In short the trading of cryptocurrencies was banned within the Kenyan territory.

“Virtual currencies are traded in exchange platforms that tend to be unregulated all over the world. Consumers may therefore lose their money without having any legal redress in the event these exchanges collapse or close business,” warned CBK.

“There is no underlying or backing of assets and the value of virtual currencies is speculative in nature. This may result in high volatility in value of virtual currencies thus exposing users to potential losses,” said the regulator.

The warning by CBK and subsequent ban on licensed financial entities from allowing their customers to convert Kenyan shillings to cryptocurrencies and vice versa only pushed the industry underground.

With a high unemployment rate, a youthful population, smart phone penetration rate and good financial services infrastructure powered by mobile money, the number of eager Kenyans willing to try their luck at making a fortune trading in virtual currencies shot up.

Motivated by over the top lifestyles displayed on the internet by early cryptocurrency investors in the west like Cameron Winklevos who is worth $3 billion (Sh351 billion), Michael Sawyer (Sh269 billion), Tim Drapper (Sh176 billion) and Brian Amstrong (Sh760 billion) thousands of young Kenyans wanted to cash in.

So big was the eagerness by Kenyans to trade in cryptocurrencies that Kenya currently leads in Africa in crypto adoption and is ranked fifth in the world ahead of some of the most developed countries like the United States, China, Russia, Germany and the United Kingdom according to Chainalaysis.

The top four countries in terms of crypto adoption according to the firm which does a review annually are Vietnam, India, Pakistan and Ukraine.

Another survey by American company Finder says that 16 percent of Kenyan adults or an estimated 4.8 million people in the country own some form of cryptocurrency or have tried to trade in cryptocurrencies which is above the global average.

Additionally, according to The Mastercard New Payments Index survey, 43 percent of Kenyans have said that they “plan to use cryptocurrency in 2022, with more than 69 percent noting they are more open to using crypto than they were a year ago.”

This mad rush into cryptocurrency trading has caught not only the attention of Kenyan investors, but also scammers who have created get quick rich ponzi schemes masquerading as cryptocurrency trading platforms. The losses have been colossal.

“Last financial year Kenyans lost about $120 million (Sh14 billion) in scams on cryptocurrencies? Many of your readers are being caught up in these scams and they end up suffering on their own because they are not getting this information,” ICT CS Joe Mucheru recently told a meeting of crime journalists.

“As you investigate these issues you can also be giving people guidance on how they need to invest and protect themselves,” said the CS.

Interestingly all this tremendous growth in the use of cryptocurrencies in the country has taken place in a span of just seven years and despite a tough stance by the CBK on the trade and use of cryptos.

However, beneath this façade of growth and a display by Kenyans eager to adopt with the changing times is a dark secret. Unlike on other countries where the trade of cryptocurrencies in regulated and governments actually earn taxes from those who buy and sell cryptos, Kenyans are buying and selling cryptocurrencies online with other users directly.

Also known as peer to peer crypto trading or P2P, this is the act of buying and selling cryptocurrencies directly between users, without a third party or intermediary. A number of websites and mobile applications like Paxful, Binance, Local Bitcoins and Coin Desk currently allow P2P trading in Kenya where traders can use platforms like Mpesa.

In P2P trading all a user needs to do is to register and log in to an app of their choice then look for a person who in most cases is operating using a pseudo name that is selling whatever crypto they want and at a price of their choice and then lock a sale.

While this looks easy to the eye, in reality it means that if you want to buy cryptocurrency using a P2P platform, you will be essentially sending money to a person you don’t know and hope they will send crypto coins to your crypto wallet for you to use in trading.

According to the government, such anonymity is being used by criminals to launder money or get cash to support activities like terrorism.

One of the cases currently being investigated by Interpol involving a senior politician and three Nigerians who had moved Sh25 billion into the Kenyan financial market has put the spotlight on cryptocurrencies. This is because some of that money was used to purchase Sh5 billion worth of bitcoins in order to make it untraceable. The money was frozen in March by the Assets Recovery Agency (ARA)

“Few years back, we had issued a warning to all Kenyans and even people beyond our borders that we were seeing significant risk from cryptocurrencies not because it was unregulated, but because of services it was supporting, majority which were illegal transactions,” said CBK governor Patrick Njoroge in March.

Those who are lucky not to get conned when trying to change their Kenyan shillings into crypto coins get confronted by an even bigger challenge. They have to decide which cryptocurrency trading platform is safe and which one is a scam. And even if they are able to get to a genuine cryptocurrency trading platform they still have to figure out how to trade in order to make a profit.

These two issues demonstrate the catch 22 situation that Kenyans have found themselves in. On one hand is a digital currency being touted as the future of money and trade that will be devoid government control or global fluctuations and on the other is a reality that many people still don’t have an idea of what cryptocurrencies really are.

Apart from Bitstream Circle, some of the cryptocurrency trading platforms that had operations in Kenya but collapsed under mysterious circumstances in recent years include Velox 10 Global, CG and Nuru Coin which on its own disappeared with Sh2.7 billion of investors’ money according to investigators.

Chainalalysis currently ranks Kenya third in Africa in terms of cryptocurrency scams in Africa after Nigeria and South Africa. According to experts among the red flags traders should look out for in fake cryptocurrency trading platforms is excessive marketing, promises of guaranteed returns, celebrity endorsements, unnamed team members, and free money.

“Scammers sometimes create fake cryptocurrency trading platforms or fake versions of official crypto wallets to trick unsuspecting victims.,” says technology security company Karspersky.

“Initially, the site may allow you to withdraw a small amount of money. As your investments seem to perform well, you might invest more money in the site. However, when you subsequently want to withdraw your money, the site either shuts down or declines the request,” warns the company.


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