Why Kenya Should Use Bitcoin as a Reserve Currency

Date Published
June 21, 2021
Written by
Marvin Coleby
Reviewed by

Kenya’s financial ecosystem is inextricably linked to the dollar. Kenya’s Central Bank is in charge of monetary policy, and it holds a substantial amount of the country’s foreign exchange reserves in dollars. This exposes the country to systemic shocks in the economy, as witnessed during the aftermath of COVID-19. For example, between January and December 2020, the level of foreign exchange reserves held by the Central Bank of Kenya fell by $1 billion to $7.75 billion.

A case can therefore be made for allocating a percentage of its reserves to Bitcoin. This argument can be supported by a number of explanations. Kenya’s public debt has been surging out of control, and currently sits above the 50% IMF threshold. There is no surprise, therefore, that a sizeable number of techno-savvy Kenyans have already begun holding Bitcoin. In Africa, Kenya ranks second to Nigeria with regard to Bitcoin activity. Coupled with allegations of currency manipulation to hide the weakness of the Kenya shilling and a fluctuating dollar, it is only prudent that Kenyan policymakers begin to investigate new methods of cushioning Kenya’s currency into the future.

Reasons for Considering Bitcoin as Kenya's Reserve Currency

1. Growing public debt

At the onset of the COVID 19 pandemic, Kenya’s government had opened up to more debt from international institutions. Most recently, the IMF loaned Kenya $2.4 billion in April, leading to a huge uproar from the citizenry. There have been rumors of the country’s port being collateral for Kenya’s debt to China. Currently, Kenya’s debt sits at 65% of its GDP.

2. Bitcoin adoption on the rise in Kenya

Kenya is among the top ten countries in the world with the highest holding of Bitcoin, according to statistics from 2020. A recent report by Citibank also stated that Kenyans had accumulated holdings of bitcoin estimated at more than KSh163 billion. The figure amounted to 2.3% of Kenya's GDP at the time. This is despite official warnings from the Central Bank for Kenyans to desist from engaging in the exchange of virtual currencies.

3. Currency manipulation

The Kenyan government has been put to task on allegations of currency manipulation. A recent country report by the IMF reported that the country’s currency was overvalued by 17.5%. During Kenya’s most recent bilateral trade discussion with the United States, the matter of currency manipulation arose, with the Americans seeking an undertaking that the exchange rate would not be influenced.

4. Weakening of the USD

Kenya stands to lose a lot from the weakening of the dollar since Kenya’s currency was pegged to the dollar in 1971. The dollar holds a central role in global trade and financial architecture. In 2019, 90 percent of all currency trades had a dollar pair, and USD made up 60 percent of global currency reserve holdings. A major slump in the dollar would therefore have a devastating effect on Kenya’s economy.

Conclusion

The Bitcoin model offers interesting solutions for policy makers. Kenya’s current situation offers a perfect case for the allocation of a percentage of the nation’s foreign exchange reserves to Bitcoin. The allocation would enjoy unique protection, since Bitcoin’s deflationary model does not allow for the creation of bitcoins beyond the 21 million cap. Using Bitcoin as a reserve currency will also hedge Kenya against the runaway printing of the dollar, evidenced by the recent printing of cash to issue in the form of stimulus checks. Despite the noble intentions of the American government in protecting its people from the effects of the pandemic, such actions lower the value of other currencies that hold the dollar as their reserve. Using Bitcoin as a reserve currency is also likely to be welcomed by Kenyans, who have shown active involvement in the Bitcoin ecosystem.


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WRITTEN BY
Marvin Coleby
REVIEWED BY

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