Kenya should brace for next currency revolution

Thursday, October 31st, 2019 08:50 |
Mobile money. Photo/File

By Tony Olang       

Trust is the engine that drives trade. That is why car buyers send money to someone they have never met in Japan and get their car delivered at the port. Online shopping operates on the same principle. But even with these rapid developments, the currency world remains messy. Paper money is sometimes of no use outside the country of issue, currencies rise and fall every second, people from lower income groups are not able to navigate and participate fully in the local or global economy. Then there are the criminal elements, cyber crime, counterfeiting, conmanship and theft. 

Innovation consistently fires new models of finance and doing business. Tokens provide a new way to represent money and assets and much easier ways to transact, afforded by the block chain. To this end, ‘tokenisation’ refers to the process of issuing a blockchain token that digitally represents a real tradeable asset – in many ways similar to the traditional process of securitisation. These security tokens are created through a type of Initial Coin Offering (ICO) sometimes referred to as Security Token Offering (STO). A new “token economy” offers the potential for a more efficient and fair financial world by reducing the friction involved in the creation, buying, and selling of securities. 

For a token to be created, the rights to a thing of value (an asset) are stored digitally on a block chain or a distributed ledger and the rights can be transferred via the block chain or ledger’s protocol. The more acceptable it becomes, the more users will be able to purchase products in the tokenized economy and spend tokens for something they need in their life. In this case, tokens are not creating new systems, but simply offering a way to improve the current system. It confers several benefits. Removal of middlemen which leads to drastic reduction in fees and transaction costs, which in turn vastly decreases the time taken for transactions and the associated bureaucracy. This will also have the effect of opening up investment locally and globally, as trading will be accessible to anyone with an internet connection, and consequently increase the pool of potential investors. 

Tokens are highly divisible, meaning investors can purchase tokens that represent incredibly small percentages of the underlying assets. If each order is cheaper and easier to process, it shall open the way for a significant reduction of minimum investment amounts. Moreover, the higher liquidity of security tokens could also reduce minimum investment periods since investors can exchange their tokens on secondary markets; which are theoretically global and function on a 24 hour, seven days of the week basis.

Tokenization has already started taking place in Kenya, however the Central Bank of Kenya (CBK) has warned against unregulated transfers of funds in the crypto currency space. Indeed, some obstacles ought to be overcome if tokenization and the broader token economy are to succeed. A big problem revolves around regulatory alignment, especially considering the fact that blockchain-based platforms are de facto decentralised. Security regulations are typically technology agnostic, meaning that tokens can fall under the full scope of relevant security regulations, which vary from jurisdiction to jurisdiction. Consequently, many of the advantages of tokenization are undermined if regulations prevent the free and international exchange of security tokens. What is needed are compliant methods of creating and exchanging tokens in a domestic and international scope.

At Laser Infrastructure and Technology Solutions, we expect that with the spread of tokenization there will be new actors, new roles and new services. A decentralised financial system does not guarantee one without financial institutions, and prepared and forward-thinking institutions will be those that are able to embrace the token economy. Traditional players will have the opportunity to meet the new demands of a token economy, be it a provision of platforms for storing tokens, or acting as intermediaries for when the blockchain is not sufficient. Those that do not rise to the challenge will struggle in the face of fierce competition in an new, tokenized world.

—The writer is the Head of Laser Infrastructure and Technology Solutions 

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