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Startups and Bitcoins in Kenya

Kenya is a namesake of the Kenyan Mountain, also known as “the resting place for Gods”, which is a paradox because Gods are never at rest in Kenya. In 1890th Kenya under the name East Africa Protectorate had been one of the major economic strongholds of the British Empire on the Black Continent. To extend their military presence further into African landmass, Brits spearheaded the building of the Kenya-Uganda railway (1890–1900).

That railroad received an intensive media coverage after a pair of lions repeatedly attacked Indian construction workers in the Tsavo region. This episode even caused an armed uprising among local population, which was agitated by a rumor that this railroad might be the legendary “iron snake”, prophesied to devour all Kenyans. However, fifty years later, when country’s devastation had really happened, it was caused not by the railway or mythological creatures but by the prolonged war for independence. In 1963, as a result of the Mau Mau Uprising, its main torchbearer — Jomo Kenyatta — became the first president of the new Kenya.

Soon enough Kenyatta led party — Kenyan African National Movement or KANU — transformed Kenya into the one-party-state. During the following 40 years the state’s apparatus had closely monitored and regulated all aspects of social, economic and political lives of Kenyans. KANU praised itself for restoring country’s civil order and for creating favorable economic conditions under which large foreign investments poured into government’s big infrastructure projects. However, when, in 2002, KANU’s grip on power had loosened, it quickly led this country to the new civil war, fueled this time by ethnic tensions — not by ideological disagreements.

Those days, as twenty years ago, seven largest native groups — Kikuyu, Luhya, Luo, Kalenjin, Kamba, Kisii and Meru — are in a state of permanent disagreement, constantly jockeying for political dominance on all levels of Kenyan government pyramid. Thankfully, today, this fight mostly takes civilized, parliamentary forms and expresses itself in an acute competition for economic resources, nasty bureaucratic intrigues and fierce electoral battles. As a result, country’s main legislative body — 349-members National Assembly — consists of the broad political coalitions with two major ones — the ruling, right-wing Jubilee Party and the big-tent, centrist National Super Alliance — holding, accordingly, to 171 and 126 seats.

Despite notable modernization, which local economy has undergone in the past two decades, the agricultural sector, with one of the world’s largest tea production industries, employs almost 80% of Kenyan population. However, this sector is responsible for less than a quoter of country’s GDP, with more than 60% generated by tourism, telecommunication and finance related activities. Still, the consequences of 2008 global crisis are felt throughout all branches of local economy with annual GDP growth rate fluctuating between 3–5% (as opposed to 6–9% in the early 2000th).

Kenyan two main urban centers — Nairobi and Mombasa — attract the major bulk of local and foreign investments into native fledgling startups. From point of view of world’s leading VCs, Kenya, with its 50 million potential consumers and $75 billion economy, is not only a gate-way to the Eastern Africa but also presents to IT businesses a number of unexploited market opportunities in such niches as FinTech, e-marketplaces, e-services and EduTech.

On the negative side, country’s modern, services-orientated economy is in its early infancy and Kenyans mostly rely on subsistence agriculture for living. On top of that, SME regulatory environment is inhospitable, with multiple administrative barriers blocking the way for an efficient, fast development to fledgling Kenyan enterprises. Not to mention that the rising level of political uncertainty devalues local startup ecosystem’s long-term growth expectations.

Kenya, together with Ghana, Nigeria and South Africa, has became one of the few African nations to embrace Bitcoin. In 2013 this country served as a launched-pod for the first African internationally recognized money transmitter startup, which used cryptocurrencies to conduct its business. Kenya also hosts one of the largest blockchain-incubators in Africa.

Nevertheless, the Central Bank of Kenya has more than once expressed its hawkish, anti-crypto position in several public memorandums. The most widely cited one is the CBK circular number 14 of December 2015, which, among other preventive measures, introduces the following: Financial Institutions are advised not to open accounts for any person dealing in virtual currencies such as Bitcoin. Failure to comply with this directive will lead to appropriate remedial action from the Central Bank.

In 2017 such aggressive stance of Kenyan financial watch-dogs towards crypto-currencies resulted in several persecution cases mounted against local entrepreneurs, which used Bitcoin to run their companies. At the same time, crypto domain remains officially unregulated in Kenya. CBK public stance on the legality of programmable money is the following: … 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. Still, there’s a little doubt that in the foreseeable future Kenyan legislators will do their best to make lives of local crypto-enthusiasts much more exiting than it’s really necessary.

Business Notes for Startups Founders:

  • political climate: not friendly;
  • economic climate: relatively friendly;
  • regions to focus: locally;
  • industries to focus: FinTech, SAAS, on-line entertainments, e-marketplaces;
  • major limitations: slowing GDP growth rate, high CB interest rate (10%), high taxes (individual income tax stands at 30%), population relies on subsistence agriculture and the majority of potential IT services users lives under the poverty line, rising level of ethnic tensions;
  • stimulus: fast growing young generation of mobile Internet users, increasing importance of services sector in the overall structure of GDP, relatively high fixed Internet penetration rate (almost 50%), an expanding startup ecosystem (specially in Nairobi);
  • opportunities: to launch a variety of services (e.g. in FinTech and entertainments) aimed at the largest cities youths.
  • Crypto-currencies and ICO (outlook): non-regulated (negative).

The author: Svyatoslav (Svet) Sedov

Angel investor and founder of The First International Incubator for Silicon Valley Companies (FirstInternational.In) in the Bay Area, CA, USA.

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