A TIDE of red ink engulfed the fintech community in Zimbabwe when at the stroke of a pen the Reserve Bank of Zimbabwe (RBZ) on May 15, 2018, issued a decree directing Golix to cease its operations, shut down its virtual currency exchange business and ordering the closure of its bank accounts with its bankers. Established in 2014, Golix is the pioneer in virtual currency business in Zimbabwe trading in Bitcoin, LiteCoin, Bitcoin Gold and Bitcoin Cash. Golix was thriving and had even set up an ATM to facilitate virtual currency transactions in Harare!
The RBZ issued a Circular to Banking Institutions No. 2/2018: Virtual Currencies whose import was to ban the local banks from offering banking services to virtual currency businesses and Golix was singled out as such business in the circular. The financial institutions were further banned from using, trading, holding and/or transacting in any way in virtual currencies.
Aggrieved by the RBZ ban, Golix engaged the services of Advocate Fadzayi Mahere to seek the suspension of the RBZ ban on an urgent basis at the Harare High Court. The matter was heard by Justice Chitakunye on May 24, 2018.
But what is a virtual currency?
The most common virtual currency is Boitcoin. This is because Bitcoin was the first virtual currency to be created in 2009 by Nakoshi Sakamoto which is an alias for a programmer or group of programmers. Bitcoin constitutes both a virtual currency and a digital payment system within which transactions in this currency are made. The RBZ has adopted the Financial Action Taskforce definition of virtual currencies as “a digital representation of value, that can be digitally traded and functions as (1) a medium of exchange; and /or (2) a unit of account; and / or (3) a store of value, but does not have legal tender status.”
The general convention is to distinguish Bitcoin (with a capital B) and bitcoin (in small case). The former refers to a digital money ecosystem which is an entire system and network used to store, record and transmit value to participants via the internet (although other networks can be used). The latter refers to the unit of currency used in that network.
Unlike fiat currencies issued by governments like the US Dollar or the South African Rand, bitcoins are not printed. Instead, they are produced by people and businesses on the Bitcoin network all around the world, using software that solves mathematical problems, in accordance with the Bitcoin protocol.
Bitcoin, therefore, constitutes both a virtual currency and a digital payment system within which transactions in this currency are made. Bitcoin as a virtual currency is denominated in virtual units of account called bitcoins. Bitcoin as a payment system is not controlled and/or owned by any entity and is based on a decentralised peer-to-peer network which consists of users and functions under the Bitcoin protocol.
Enter the miners
I bet your head is spinning right now. Just be patient one more second, we are almost done with this algorithm mumbo jumbo!
Since Bitcoin is a decentralised system, there is a need for a decentralised workforce to keep it running. Miners are this workforce, who help to keep the infrastructure running and are paid for their services in newly minted Bitcoins. The miners verify Bitcoin transactions in the public ledger and the Bitcoin network enters new coins into circulation. The miner’s computer is used by the Bitcoin network to solve a complex algorithm called a “hash”. Essentially, miners are paid by inflating the money supply, through charges on everyone who has Bitcoins.
All bitcoin transactions are made public in the online public ledger called the blockchain. The information available in the blockchain includes the details of every bitcoin transaction. These details do not include information which could directly identify the parties of a transaction. The details, however, include the exact time and the estimated amount of the transaction. Though the identifying information is not public, the other available data can be used to track the transaction to certain individuals. Since the complete anonymity of the transacting parties is not achievable, Bitcoin can be classified as partly anonymous.
How does one acquire virtual currencies?
A person may acquire a virtual currency through three ways. The first is that a user can acquire the virtual currency through conversion of their local or conventional currency to bitcoins via exchanges like Golix. The second way to acquire bitcoins would be obtaining them in exchange for goods and services. The third approach is through the complex process referred to above as mining. Bitcoin businesses, therefore, offer a platform for people to acquire and trade in bitcoins for a profit or are taught how to mine bitcoins and thereafter sell them or use them to buy goods or acquire services at places where bitcoins are accepted as a payment option. The Bitcoin industry is fueled by the high demand for bitcoins globally. Every bitcoin owner has an electronic wallet linked to the Bitcoin network, in which the bitcoins are deposited and withdrawn through transfers.
Are virtual currencies money?
Lawyers generally know the standard legal definition of money as aptly captured in the English case of Moss v Hancock ( 2 QB 111, where Justice Darling defined money in the following words: “Money is that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment of commodities.”
Ideally, bitcoins are meant to be an alternative payment method outside the conventional currencies issued by different governments. Other alternative payment methods common to us include cheques. Cheques have been accepted by the banking industry and governments as an alternative payment method even though they are neither money nor legal tender. In essence one is not obligated at law to either make payment or accept payment through a cheque.
The RBZ position on virtual currencies
After considering a lot of factors including issues raised above, the RBZ Governor in a press statement issued on December 20, 2017, raised the following concerns and legal observations: virtual currencies are different from fiat currency (also known as real currency, real money or national currency) which are the coins and paper money of a country that are designated as its legal tender; virtual currencies are not only unregulated but are also neither issued by public authority nor guaranteed by the State and virtual currencies do not have legal tender status in Zimbabwe or in any jurisdiction in the world.
The Governor also noted the risks of virtual currencies as being that they are attractive to money launderers, terrorism financing, tax evasion and fraud because of their supposed anonymity. The Governor thereafter issued a chilling warning that in Zimbabwe, any person who invests in virtual currencies or participates in any transaction involving virtual currencies, does so at their own risk and will not have legal protection from, or recourse against, any regulatory authority. It is in light of this complex background that the operations of Golix were suspended by the RBZ on May 15, 2018.
The court case
Advocate Mahere advanced the following key arguments against the Golix ban:
- That the ban in effect outlaws and classifies cryptocurrency businesses as illegal in Zimbabwe and that would amount to lawmaking, a function that belongs to the legislature and not the RBZ. The RBZ therefore was clandestinely usurping Parliament’s lawmaking powers.
- That the RBZ violated section 68 of the Constitution requires that administrative action be lawful, reasonable, proportionate and procedurally fair.
A provisional order was granted by Justice Chitakunye on May 24, 2018, in favour of Golix. The RBZ did not pitch up at court nor did they file any opposition papers. The order was therefore granted in default. The order suspended the RBZ ban pending the return day.
The RBZ has, however, filed opposing papers challenging the confirmation of the provisional court order in favour of Golix to the effect that it acted outside of its authority in issuing the ban. The RBZ raises the following arguments:
- The Banking Act gives the RBZ powers to supervise banks and prescribes a variety of supervisory actions that the bank may take as a measure to correct any conduct that may be a threat to the smooth operation of the banking and financial sectors.
- It is as a result that the RBZ directed banks not to deal with Golix as its activities were not only unregulated and illegal, but presented all kinds of risk, including but not limited to fraud, money-laundering, evasion of the country’s exchange, terrorism financing.
- The RBZ’s interpretation of the Banking Act is that Golix was engaging in banking activities like currency exchange services, money transfer services and an ATM. Their activities are illegal since they are unlicensed. Therefore, Golix was operating unregulated and illegally.
- Golix was operating a ponzi scheme and the RBZ had to act decisively to protect the banking system and the banking public. It is the RBZ’s view that the scheme would burst anytime thus significantly harming the financial system and the public.
At the time of writing this article, Golix has not resumed trading pending the finalisation of the matter. Furthermore, its customers have not been reimbursed either their fiat money or crypto currencies. Golix has told its customers that it cannot access its bank accounts. Unfortunately, Golix customers cannot seek relief from the RBZ or any authority in light of the 2017 press statement by the RBZ to the effect that any person, who invests in virtual currencies or participates in any transaction involving virtual currencies, does so at their own risk and will not have legal protection from, or recourse against, any regulatory authority. We are yet to see how Golix will respond to the RBZ arguments and how the matter will unravel.
Thomas Sibanda is a lawyer and commercial arbitrator. He’s a principal in a law firm based in Gaborone, Botswana. E-mail: [email protected]