The Central Bank of Kenya has issued a warning to persons trading in bitcoin and other virtual currencies that the cryptocurrencies are insecure and could be used to fund criminal activity.
In a public notice the CBK stated that Bitcoin and other virtual currencies are not recognized as legal tender in Kenya, and as such, it would not protect users in the event the platforms that exchanges or holds the virtual currency fails.
Bitcoin first appeared in January 2009, the creation of a computer programmer using the pseudonym Satoshi Nakamoto. His invention is
an open-source (its controlling computer code is open to public view), peer-to-peer (transactions do not require a third-party intermediary such as PayPal or Visa) digital currency (being electronic with no physical manifestation).
The Bitcoin system is private, with no traditional financial institutions involved in transactions. Unlike earlier digital currencies that had some central controlling person or entity, the Bitcoin network is completely decentralized, with all parts of transactions performed by the users of the system. With a Bitcoin transaction, there is no third-party intermediary. The buyer and seller interact directly (peer to peer), but their identities are encrypted and no personal information is transferred from one to the other.
However, unlike a fully anonymous transaction, there is a transaction record. A full transaction record of every Bitcoin and every Bitcoin user’s encrypted identity is maintained on the public ledger. For this reason, Bitcoin transactions are thought to be pseudonymous, not anonymous. Although the scale of Bitcoin use has increased substantially, it still remains small in comparison to traditional electronic payments systems, such as credit cards, and the use of dollars as a circulating currency.
How Does the Bitcoin System Work?
Bitcoin is sometimes referred to as a cryptocurrency because it relies on the principles of cryptography (communication that is secure from view of third parties) to validate transactions and govern the production of the currency itself. Each Bitcoin and each user is encrypted with a unique identity, and each transaction is recorded on a decentralized public ledger (also called a distributed ledger or a blockchain) that is visible to all computers on the network but does not reveal any personal information about the involved parties. Cryptographic techniques enable special users on the bitcoin network, known as miners, to gather together blocks of new transactions and compete to verify that the transactions are valid—that the buyer has the amount of Bitcoin being spent and has transferred that amount to the seller’s account. For providing this service, miners that successfully verify a block of transactions are rewarded by the network’s controlling computer algorithm with 25 newly created Bitcoins. This decentralized management of the public ledger is the distinguishing technological attribute of Bitcoin (and other decentralized cryptocurrencies) because it solves the so-called double spending problem (i.e., spending money you do not own by use of forgery or counterfeiting) and the attendant need for a trusted third party (such as a bank or credit card company) to verify the integrity of electronic transactions between a buyer and a seller. Public ledger technology could have implications not just for the traditional payments system but possibly also for a wide spectrum of transactions (e.g., stocks, bonds, and other financial assets) in which records are stored digitally.
It is important to note that, even though Bitcoin is not legal tender in Kenya, there is no official “ban” on virtual currencies in the country either. Warnings like these are meant to warn the everyday consumer about the possible pitfalls associated with digital currency, and how they should be aware of these risks.
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