CMA Kenya Regulatory Sandbox Regulator James Hillary // Web3 Accountant Radio Ep9 Transcript
James Hillary is the founder of James Hillary Consult and also a Regulatory Sandbox regulator at Capital Markets Authority Kenya
James Hillary Consult is a leading consultancy firm at the intersection of financial technology, innovation, and regulatory sandboxes in Kenya. He assisted the Capital Markets Authority- Kenya in making informed decisions regarding the regulation and supervision of new services and providers entering the market and guided fintech firms in understanding the regulatory landscape, ensuring their products are market-ready. Conducted research on market trends, customer needs, and regulatory developments. He ensured innovators and new service providers comply with Capital Markets Authority- Kenya regulations, offering guidance on compliance frameworks, monitoring adherence, and navigating the regulatory landscape.
In this conversation, we dive into:
1. Crypto Adoption in Kenya?
2. Nigeria/ Binance Issue?
3. Regulatory Sandbox in Kenya, application process?
4. Success cases – Pezesha
5. Why did James decide to enter the Web3 space？
6. What is the most important lesson learned in the Web3 space?
7. What is James looking forward to in the Web3 space?
And more!
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Connect with James & James Hillary Consult 👇
Linkedin: / obonyojames/
Hi everyone, welcome to the Web3 Accountant Radio, the podcast where we dive into the fascinating world of Web3 Finance and Compliance. I’m today’s host Diana and my partner is Wei Xiang. Hello Wei Xiang.
Hi Diana, today we have a very special guest with us, James, all the way from Africa. Hi James. Hi Winston.
Hi Diana. Hello James, nice to meet you today. And here James is the seasoned finance professional with over five years of experience in investment analyst, FinTech and ESG impact assessment.
As a financial analyst in the licensing session at CMA Kenya, he has mastered the regulatory sandbox process, guiding FinTech firms through onboarding, admission and exit. His expertise in regulatory compliance, risk identification and ESG assessments empower the executive and investment committees to make well-informed decisions. Additionally, James Hillary is a skilled stakeholder manager who excels in fostering collaboration with external consultants and conducting impactful training sessions.
Beyond his regulatory role, James Hillary has advised and consulted with over 10 firms that have successfully navigated the sandbox journey. His deep understanding of FinTech’s transformative potential and extension industry network make him a valuable asset to FinTech firms. He offers insights into regulatory framework and helps FinTech prepare for life beyond the sandbox, ensuring compliance and smooth integration with industry players.
James Hillary holistic approach and proactive guidance make him a trusted expert in the FinTech space, contributing to industry initiatives and driving financial inclusion, sustainability and innovation. Welcome James Hillary. Thank you very much, Diana.
Yeah, thanks a lot, Diana. Yeah, so, James, we should start with how is the crypto adoption in Kenya currently? Thanks for the question. So, Kenya is one of the few African states that has seen a lot of adoption and acceptance of crypto.
Looking at the numbers in 2023 from sources like analysis, we are seeing about two billion dollars worth of crypto moving from Kenya. And in Kenya, we also have a very vibrant blockchain ecosystem where we have major players who are very interested in setting up and most of them to get regulation and just see that they are under the regulator and they’re doing something that is orderly. So, Kenya, we’re doing quite well.
We’re comparing well with South Africa, which is leading because then they have no regulation set out. Then we’re following closely Nigeria and then Kenya will take third place. So, very vibrant.
Okay. So, just now you mentioned Nigeria itself. So, in Africa itself, some of the countries that you mentioned, like Kenya is one and Nigeria is another one.
So, this is the top two countries in Africa for crypto adoption currently. And South Africa comes first because now they have regulation around it. And Nigeria also is doing quite well.
They launched their stable coin, which has been there for a while now. And also we’re seeing a lot of virtual asset service providers also trying to set up in Nigeria. And the regulator is trying to have them on boarded and have a framework just to see how they operate.
So, yes. Do you have any comments with the elephant in the room, the Nigeria Binance story? It’s like, it is currently the biggest, hottest topic. I mean, everybody, even myself, when I follow the story, I think everybody is following.
So, what do you have any… Now, I’ve heard stories where people are afraid of entering Africa because of the capture. I think this is a very classical case of traditional finance trying to find its way with this new technology. We have to be alive to the fact that the central finance is something that is coming to shake up what you have known, the status quo.
And the governments have to be very wary. Nigeria is not alone in this. We’ve seen most central banks having such a strong sentiment when it comes to cryptocurrency and how now cryptocurrency could take the place of fiat currency.
And my comment would be, this is one of the crossroads where all the stakeholders have to sit down and just see how everything can work because traditional finance has been there ever since. And most economies are held by the traditional finance, talking about fiat, talking about the capital markets. But then we can’t bury our heads in the sand and get to accept the fact that blockchain is here, crypto is here, and just to see how both can coexist.
And that’s why we need regulators to move with speed, to have frameworks, so that we don’t have a couple of situations like we have in Nigeria, where now finance is having quite a rough time. But I think such instances where now it brings to us the attention that we really need to see how we can have a framework in which virtual asset service providers can operate and have the regulator somehow have some comfort on how the technology is coming to interrupt the whole system. I see.
So I do understand that Kenya itself has a regulatory sandbox. Do you all have the full VASP license already or what stage is it currently at? Thanks a lot for that question actually. So Capital Marks Authority has a regulatory sandbox, which has been operating for almost now six to seven years, established in 2019.
And until very recently, we have gone to the step of admitting real world asset tokenization application, which now it is the real estate tokenization. And onto your question of if we have a regulatory framework. So the sandbox works in a very interesting way, because the sandbox is one of those ideas or initiatives which allows FinTech applications which are innovative, and the current regulatory frameworks don’t cover such applications.
Such FinTechs would come to the sandbox and test out their product for a period of 12 to 18 months. And then after which now the regulator from seeing how these innovative solutions work would get to have or establish a framework in which now we can have regulation. And now then the innovative solution becomes part of an asset class or a licensed product in the market.
So going to the fact that I told you that we had onboarded a real world asset tokenization application. So with this process, after getting to understand how it works and the nuances and what to expect, I think this will give us empirical evidence on the framework we’ll have and the regulations around tokenization and blockchain as a whole. So it’s work in progress.
We are hoping to learn a lot. And by the end of that testing application, I think it will have given the regulator perspective on how blockchain works, tokenization, and evolution just around it. So yes.
So this is very interesting, James, because we started the conversation with the understanding that there is a lot of crypto flowing through Kenya. So you mentioned a few trillion maybe, but like currently also I understand from you, there is no license in Kenya for the crypto exchanges. So now for a license, not really because a license will only come when you have regulations around it.
So without regulation, we can’t have a license because everyone will license. We have a regulation which outlines the kind of requirements that are supposed to be there. And then now if you adhere to that, then give you a license.
But without regulation, so we can’t really have a license. So as of now, no license. So now is a case where we are in the gray area where maybe the regulators, we close one eye, and then the people who are operating within the country, they manage it on their own standards.
So currently that will be the position, yes. But then for now, the Capital Markets Authority, the regulatory sandbox provides an area or a safe space where you can come and test out your product. So with this initiative, we get to see that the regulator is open to understand this new technology and innovation in the capital market space.
So it’s not a matter of the regulator closing its eye, it’s a matter of the regulator trying to understand what the virtual assets providers are doing and how we can enable the market and have regulation. Because at the end of the day, we do understand that when you have regulation, that’s when we have an orderly and an efficient market. And to also understand that at the very core of this is the investor.
We want to ensure that people feel safe to come and invest in crypto or virtual assets. And to the point that if anything is to happen, the investor is very certain and has trust in the regulator that there will be recourse and the issues are addressed. And that’s the whole point of having a regulator, yes.
Yeah, sounds good. So are there examples of companies who have graduated from the sandbox? Yes. A lot.
And these are some of the hallmark innovations that we’ve had in the Kenyan market. We’ve had one that was dealing with crowdfunding, which is called Pezesha. I think it has had an international spotlight.
We’ve also had another category called the intermediary service provider platform, where these are fintech firms who actually, we call them aggregators, where we came to realize that for fund managers in Kenya, they were not really keen on getting the retail sector of investors, where now people who had an amount of, let’s say, 100,000 Kenya shillings to start investing. But for the intermediary service provider, also called aggregators, they came and tapped into the retail sector, where now somebody will be able to get access to the money market funds using their mobile phones. And one of the very notable applicants is called Tunes.
They graduated and they’re doing very well. So now, using a smartphone, actually, you can download their app. Then now, for us, Kenya, we have the mobile money service called M-Pesa.
So somebody could take money from their mobile wallet and send it to the app, which is Tunes now. And then now, Tunes will take that money to the fund manager and have your money invested in the money market fund. So quite a very interesting innovation.
They’ve recorded great numbers, actually. Asset undermanagement in Kenya now has increased exponentially because of tapping into the retail sector. So those are two of the very notable successful examples, successful exits from the sandbox, which we are very proud of in Kenya.
Yeah, I’m very proud also, I mean, to hear this story, because if somebody in Kenya without this technology would want to invest in the money market fund using swift transfer or the traditional application process, it is very taxing and it might require a very high level of resistance from the retailers. But now, I think it’s a lot better. So maybe can you share a little bit about what does a crypto applicant who want to apply for the Kenya regulatory sandbox, what do they need to prepare and how long is the sandbox period? All right, so for any applicant who wants to make the application, you can go and get or download the application form in our website, the Capital Markets Authority website.
And with that, I think it outlines the documentation that you need to have, that will include the business plan, it will include your test plan, it will include your customer onboarding policy, it will include your organogram, how you set it up, among others, yeah, quite an extensive… Yeah, I’m quite sure you have mentioned the key items. Yes, and then after that, by that point, you’ll get to meet the sandbox committee, which now you’ll have to explain how your product works and what’s the innovation around it because you need to understand that the basis of the sandbox is your innovation needs to be something that is new and hasn’t been around in the market. And not only about blockchain and crypto, this is one of the very innovative technology solutions that we’ve had in the recent days.
With that, I think it goes, so whether you’re an exchange, whether you are doing tokenization, all that. When you come and you explain how your product works to the committee and a review is taken, then at that point, that’s when now you might be considered to join the sandbox after you have adhered to the requirements that are in the application form. For the time taken to be onboarded, it’s all definite and it’s usually dependent on how prepared the applicant is after getting what you’re required to have in the application form.
I think the readiness of the applicant will determine how soon you’ll be onboarded into the sandbox. It’s more dependent on the applicant as compared to the sandbox. I see.
Nice. So just another question is, have you rejected anybody from the sandbox application? And if yes, why? I mean, this is for applicants to take note of what they should be aware of before they apply. Most of the time you’d find for the sandbox, we have the policy guidance note, which will outline what you need to be onboarded in the sandbox.
You’d find if the applicant hasn’t adhered to all these requirements, that will be grounds to be not to be denied, but you’re told to go and review and then come back. And then the whole idea of the sandbox is to come on board and have your test objectives. What exactly are you coming to test in the sandbox, which will be for the period, let’s say 12 months.
So now in the event that in the 12 months you have not demonstrated or you haven’t proved that you can test the objectives that you’re required to test, then you see indeed that will say you have not to the great extent or to the regulator satisfaction indeed tested your objectives. That’s ground for being denied entry into the sandbox because now after testing and getting to prove that your objectives have been satisfied, then that’s usually the criteria to now get to the mass market. If you fail to do that or to show that, then that would be ground for dismissal.
Yes. What’s the cost of getting into the sandbox? Do you have the number? The cost of getting sandbox is 10,000 Shillings. That would be a hundred dollars.
I think one more thing I did a bit of research on James yourself, other than being part of the regulators itself, you also have a consulting firm where anybody which have any issues in Kenya or about FinTech or blockchain, they can reach out to you for consulting. What kind of consultancy work are you seeing a lot of action recently? Thanks. This will go to international firms that want to come to Kenya and they really want to understand the regulatory landscape of Kenya.
And probably if you want to set up your business, what do you need to do? What do you need to have on board? Would it be fund managers? Would you need to talk to a trustee? We need to have a lawyer in place. All this, if now you get to come and meet James Hillary now as a consultant, I’ll guide you through the whole process. I’ll introduce you to the Kenyan ecosystem, the key blockchain players who are in Kenya, who are doing something that is similar to yours or who can add on to what you’re doing and exchange notes.
I think that’s how I guide you and you get to be comfortable in Kenya. Thank you. I think this is a very good introduction of why do people need to contact you? Because I mean, you are the best person to approach, to know, to get a foot of how to be regulated.
I think so. Thanks for the word of confidence, Winston. Okay, so let’s move to today’s free talk session.
And in this session, I will ask some questions about the web series space. Because I learned from your linking that you may work for the CMA Kenya for about seven years. So I would like to know why did you decide to enter the Web3 space at first? Thanks, Diana, for that question.
So actually, some time back, say, like three to four years ago, I was working in the investigation desk. And that’s the first time we had an inquiry about a coin that had been launched in Kenya. And an investor was trying to confirm with the authority, the capital markets authority, if the coin has been registered in Kenya, and trying to get into it and get to know exactly what this coin is about.
This is now the first time I got to realize that indeed, the people in Kenya actually, who are dealing with blockchain and purporting to have a stable coin, or a Kenyan coin for that matter. This grew my interest. And actually, we got to have a discussion with this person and just to understand what exactly they’re doing, and what this coin is about.
That’s how I get to Web3 now, with the regulator now. Okay. And during your career working for the crypto compliance and the Web3, can you share maybe one key experience or lesson that you have learned from this Web3 journey? The Web3 journey, and particularly in the Kenyan scene, has been marred with a lot of stereotypical kind of thinking.
And this is because from the very beginning, we’ve had a lot of scams, and people who are duped into putting in the investment for things that are not even close to blockchain, or cryptocurrency. We’ve had instances where we have scammers would go and tell the public that if they put their money into whatever thing they’re doing, which they claim to be crypto, then they’ll get quite substantial interest on their money. A lot of people have been scammed.
And that’s the kind of test, the bad test it left in people’s mouth in Kenya. And anyone who speaks of crypto right now, the Kenyan investor will want to think twice or third about the whole situation. We’ve been trying so hard to try to change the name.
As much as I work for the regulator, on the other side, I’m very involved with the blockchain ecosystem, and just try to exchange notes from the private sector and the public sector with the regulator. Why is it that we cross paths and how don’t we understand each other? And with time, we’ve got to raise the voice high. The private sector have even gone and petitioned to the Kenyan parliament, and they’ve had their draft regulation, which was presented to the parliament.
And now it’s being considered as one of those bills that can be ascended into law and could have regulations around virtual assets. Coming from an area where everyone was thinking about crypto being a scam to the point where now we are mainstreaming it and having discussions around it, having events, we are inviting people from outside just to come and understand what we’re doing and spread the word. So now we are getting to this other side where everything is legit and the private sector wants to engage the regulator and see how they can come under regulation so that the whole blockchain and crypto space in Kenya can be legit.
So that has been my experience. It’s very interesting. Okay, thank you for sharing.
I think Africa is a developing area of the crypto. So as the crypto expert in Africa, could you tell us something about what are you looking forward to in the compliance aspects in the future? Very interesting question. Currently right now, Kenya as a country has been listed by the Financial Action Task Force.
And one of the recommendations was to have a legal framework around virtual assets because this has been a very vulnerable place where there’s a lot of transactions taking place, but it’s not under watch from any regulator. So just starting from there, the crypto space has been said to operate like the Wild West, where everyone is doing everything. And it would make a lot of sense if we’d have some kind of standardization or regulations around it so that everyone could operate fairly and have a fair play game for everyone and limit the instances where now there can be recorded fraud or anything.
With that also, looking at Africa as a whole, one of the very key things that limits trade across Africa is a cross-payment. Because now if let’s say somebody in Kenya wants to make a payment in South Africa, a Kenyan has to change their currency into the US dollar. And after changing the US dollar, then change into the South African rand so that they can do business.
And with that transaction, you get to realize that a lot of money is being lost just by changing of currency. Crypto has come to Africa to deliver Africa from that international transaction. And by next time, we’d have an African stablecoin where anyone could trade with one another without changing our currency.
I think that will be the epitome of the blockchain technology for Africans. And that’s where we’re looking towards. I’m also envisioning a situation where we’d have an African blockchain.
Right now, everyone, as much as we have a lot of adoption of blockchain, all blockchains are coming from the West or from the East. But I’m looking at a situation where we’d have an African blockchain where now developers and everyone else in the ecosystem would work with a blockchain that is African and ours, and we can own it. So actually, if you ask me, that’s what I’m envisioning for Africa and blockchain.
Thank you, James, for your sharing. I think that they will come very soon. Every day when we speak about Africa, we speak about payments.
Just now you talk about financial costs of the transfer. But I tell you, what is more painful than financial costs is the trust and the time. It’s not going to say you pay money and then you can transfer.
You need to wait a few days before the money can reach. And you don’t know whether the money will reach. But with blockchain, it can happen a lot faster.
And there are other teams that are working on this thing that is happening at the moment. Instantly, yes. Yes.
And also we have a point in the blockchain. I think it will help a lot. Yeah.
Africa is a very important path around the world. So if we, if the blockchain in this area can be pushed to make some improvement, that will be very fine for the whole world. Yeah.
And thank you so much for sharing your insights and experience with us today. And to our listeners, thank you for tuning into the Web3 Accountant Radio. If you enjoyed this radio, please subscribe us and leave a review.
Now it’s turn to the end of our podcast. Do you have anything else to our listeners?
James and Wei Xiang, Nope.
So this is the end of our today’s podcast.
Thanks you so much James and Wei Xiang
Thanks Diana
Thanks Winston.