Cryptocurrencies: The regulation puzzle

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Tafadzwa Chinamo

Jeffrey Gogo
Securities and Exchange Commission of Zimbabwe (SecZim) chief executive Tafadzwa Chinamo has warned bitcoin investors on the local exchange Golix.io “are doing so at their own risk” because the exchange was not registered.
Chinamo’s concerns are understandable, not inexcusable. But then, that’s just the problem — how to regulate a currency that prides itself as independent of government or bank control, a stateless currency, so to speak. This is what makes bitcoin and the rest of the cryptocurrencies attractive, the people-centric approach, and may be, as well, a formidable rival to fiat money.
Now when Chinamo’s SecZim, as capital markets regulator, threatens to take away the freedom that makes bitcoin what it is, by asking Golix.io to register, it is not clear what impact this could have on digital currencies trading here. And perhaps, that explains SecZim’s ignorance over Golix.io existence, two years after it started trading.
“The commission has not licensed any exchange trading in bitcoin,” Chinamo told the Business Weekly by email, and in the same breadth, cheering “the development of new products, key to the growth of the capital markets”.
“Exchange Golix or any other exchange has not applied for registration as an exchange to the commission and we shall engage it to understand whether what they are doing falls under the Securities and Exchange Act.”
So we now know that Golix.io (what a funny name; compare that with the original BitFinance) is not registered with the SecZim. Unconvincing in his defence of the exchange’s dull, unbisuness-like name, Golix.io co-founder and advisor Verengai Mabika this week confirmed “we are not registered”. It doesn’t need to, really, at least for now.
Not understood
There is no law that supports or criminalises trading of bitcoin and other crypto-currencies in Zimbabwe, registered or not. Also, there’s doubt whether regulatory authorities have at all fully understood the concept behind bitcoin. And Mabika knows this weakness all too well.
“Bitcoin or crypto-currencies do not have any regulation,” he asserted, by text message.
“Many governments are still learning the technology and are not sure where to start except the open minded governments like Japan and in other developed nations.”
Clearly, Zimbabwe’s financial laws had not anticipated a situation when trusted bank notes and other value storers like gold risked losing style to a currency that’s not even physical, only tangible to computers or smartphones — and one that is turning into a hit with those investors taken to risk.
However, somewhere in the Securities and Exchange Act could help form the basis for future digital currencies regulation, should SecZim decide to do so. Chinamo illustrated how the Commission’s mandate “is to regulate trading in securities”, effectively putting Golix.io within his radar.
Looking at the stricter definition of a security, how it relates as any financial asset that can be bought, held or sold like shares, bitcoin is in that sense a tradable security, never mind the fuzzy terminologies such like “crypto-currency”. And, therefore, subject to supervision by the SecZim, just like common stocks on the Zimbabwe Stock Exchange.
The regulation may not necessarily directly apply to investors, rather to the cryptocurrency exchanges, of which there is only one in Zimbabwe, which support the trading of digital currencies.
For Chinamo, the primary objective has never been in doubt — protect investors, prevent fraud and crypto laundering. “Before these (digital currencies) products are offered to the public, the Commission has to ensure that there are adequate investor protection mechanisms and systems in place,” he s said.
So, when Golix.io is eventually licenced as an exchange by SecZim, Chinamo, who is looking overseas for guidance on virtual money regulation, will expect to see Mabika and company to follow “a clear and laid out process on the registration, development, promotion and issuance” of new securities as indicated by the regulator.
These include extensive consultation and research, public awareness and education, the dos and don’ts of trading in bitcoin, among other issues.
Worldwide headache
Regulation of digital money still remains as obscure as the virtual currencies debate itself. Bitcoin and the rest of the alt coins represent an era in financial technology that at best remains speculative, seldom understood both by citizens and by governments, though, in its current state, open to criminal abuse.
In China, for example, the government in September cracked down on some of the country’s biggest bitcoin exchanges such as Huobi, OKCoin, Yunhi and others, reportedly ordering them to cease operations. Chinese authorities accused bitcoin of lacking a legal foundation.
They were concerned about how unregulated exchanges could fuel illegal dealings by drug lords and other criminals of the underworld. The uncertainty in China, which accounts for about a tenth of all global bitcoin trades, at the time, precipitated a sharp decline in the price of bitcoin, even when no exchange was eventually closed.
In Japan, bitcoin is now recognised as legal currency after the government applied rules and regulations that curb fraud and illegal activity. Japan’s actions effectively legitimised investment in a currency that capital markets regulators from across the world are still trying to wrap their heads around, a currency, which with a global market capitalisation of $95 billion, can no longer be ignored.
Here, Verengai Mabika’s Golix.io have made attempts at legitimising operations. Enquiries for legality yielded a verbal thumbs up from the Reserve Bank of Zimbabwe, Mabika says, evidently because, without supporting legislation, the central bank could neither block nor approve Golix’s intended business.
“The Reserve Bank knows us, they know we are operating,” Mabika said.
“When we started, the RBZ instructed us to work with a bank. We now have two, CBZ and Steward Bank, and more are now asking to test with us, even though they refused in 2015 when we started.”
It is a curious relationship — legacy banks supporting a digital currency revolution that is almost certain to eat away at their businesses. Questions sent to Reserve Bank chief Dr John Mangudya had not been responded to at press time. Calls to his mobile phone went unanswered.

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