Unregulated crypto market scares investors from capital markets

Lack of regulations for cryptocurrency exchanges and coins is scaring away investors who would otherwise invest in the less volatile and well-regulated capital markets in the region, experts warn.

Crypto exchanges have taken advantage of the lack of regulation in the sector to freely advertise their products to lure investors, something that is prohibited across the region for any products of the capital markets.

This has seen the number of crypto investors rise rapidly, nearly doubling that of domestic investors in the local equity markets in the region.

In Kenya, the number of crypto investors has grown to 4 million while the equity market only has about 2 million domestic investors. Across the region, there are over 12 million crypto investors, which is nearly double those investing in the equity markets.

Eric Musau, head of research at Standard Investment Bank in Nairobi, told The EastAfrican that although the crypto markets have captured many investors, “we have always advised such investors to strongly consider the risk of engaging in non-regulated products.”

“Most crypto investors seem to be chasing returns without considering the downside risks; and mechanism of receiving their investments back,” Mr Musau said.

In its latest policy brief, the United Nations Conference on Trade and Development (UNCTAD) urged developing countries to speedily enact regulations for the crypto markets, “to mitigate the global risks posed by cryptocurrencies.”

“Require the mandatory registration of crypto-exchanges and digital wallets and make the use of cryptocurrencies less attractive, for example by charging entry fees for crypto-exchanges and digital wallets and/or imposing financial transaction taxes on cryptocurrency trading,” the brief reads.

UNCTAD also recommends the barring of financial institutions from holding cryptocurrencies and stable coins, or providing related services to their clients.

The UN agency also encouraged the developing markets to restrict or outlaw the advertisement of crypto exchanges and wallets on mainstream media or social media. “This new type of virtual, and often disguised, advertisement requires policymakers to expand the scope of regulation beyond traditional media.

“This is an urgent need in terms of consumer protection in countries with low levels of financial literacy, as even limited exposure to cryptocurrencies may lead to significant losses.”

According to UNCTAD, allowing the crypto market to continue unchecked may jeopardise countries’ monetary sovereignty by growing to become a “widespread means of payment and even replace domestic currencies unofficially (a process called cryptoization).”

In an earlier report, the International Monetary Fund also warned of the risks that the crypto markets pose to global and national financial markets, calling for urgent regulation rather than trying to stop their spread.

“Crypto assets should be regulated like securities at the very least; or be a completely separate asset class with its own rules, regulations and taxation,” Mr Musau told The EastAfrican.

But despite repeated calls to regulate the crypto markets, regulators and central banks in the region have made little steps towards this, with many only announcing plans to introduce central bank digital currencies.

“The cryptocurrency ecosystem is global by nature and many of its components are outside the jurisdictions of States, making cryptocurrency regulation a challenge,” UNCTAD said in the policy brief.