The Worldcoin Project, a controversial biometric-based cryptocurrency, has sparked a debate on how to balance innovation and regulation in Kenya.

Worldcoin Project: A Case for Regulatory Sandbox in Kenya Their Role and Opportunities

By John Walubengo

The recent and ongoing debate about the Worldcoin Project brings into sharp focus the traditional conflict between existing regulatory provisions and prevailing risks that are inherent within innovations. 

On the one hand, regulations are traditionally and by design very cautious and risk-averse, while new products and innovations thrive on causing disruptions around the status quo.

Indeed, the tensions between innovations and regulations are not occurring for the first time in Kenya.

Several studies have documented similar tensions between traditional banks and M-PESA during its piloting stage fifteen years ago.

At that time, the traditional banks lobbied the financial regulator, the Central Bank of Kenya and the communications regulator to drop the idea of piloting the mobile money innovation since it was akin to a ‘Ponzi scheme’ and likely to collapse the Kenyan financial system.

This is the natural reaction one would expect from the established actors facing the challenge of a new product or innovation, especially where the risks and opportunities of the innovations are then very unpredictable and unknown.

A decision had to be made on whether to proceed with the mobile money experiment or kill it at its infancy stages.  

The story continues to say that the then Permanent Secretary in the Ministry of Information and Communication Prof Bitange Ndemo and CBK Governor Prof Njunguna Ndungu placed their jobs online by opting to ignore the traditional banks’ advice and instead bet on approving the mobile money pilot to proceed.

This turned out to be a wise decision, as M-PESA became a success story and a catalyst for financial inclusion in Kenya. 

However, it could have also gone wrong, as the outcome of the mobile money innovation was uncertain at the time.

Fast forward fifteen years later.

What is a Regulatory Sandbox?

Regulatory frameworks have advanced to the point where life-changing socio-economic decisions around innovations are no longer left in the hands of individuals. 

Under a scheme known as Regulatory Sandbox, innovations can be incubated in a very controlled, regulatory lab environment.

The International Telecommunications Union (ITU) states as follows about Regulatory Sandboxes:

Regulators have evolved from traditional regulation of telecommunications towards regulating Artificial Intelligence, Internet of Things (IoT), Blockchain, Big Data, Neurotechnology, Quantum technologies as well as Virtual or Augmented realities.

Policymakers and regulators are increasingly adopting new and agile regulatory tools and frameworks which facilitate a dynamic, evidence-based regulatory environment to test new products, services, and technologies for which existing regulatory frameworks across varied sectors need to be tested.

Simply put, the ITU recognises and appreciates that laws and regulations will always play catch up to the fast-changing pace of emerging technologies. 

Essentially, regulators have a choice between adopting a ‘heavy’ or a ‘light’ regulatory approach concerning emergent tech or innovations.

In the heavy regulatory approach, the regulator takes a less risky approach by discouraging or explicitly prohibiting the deployment of innovations. 

Whereas this tends to reduce the potential risk or exposure that the innovation would otherwise visit on the citizens, it also means that the potential socio-economic gains that the innovation may offer to the first movers would not be realized.

Benefits of Regulatory Sandbox

A regulatory sandbox tends to offer a middle ground to the question of how to balance the risks and benefits of innovations.

It does this by providing a controlled regulatory environment or testbed for conducting live tests of the innovative product under restricted scope, scale and time. 

In other words, the innovation is piloted in a regulatory lab, with a limited number of users, restricted features and restricted time spans to fully understand the innovation, while simultaneously containing the scale and impact of potential risks.

In Kenya, the Capital Market Authority has had a regulatory sandbox regime since 2019 where it has hosted several innovations in its test bed that touch on emerging fintech technologies including but not limited to Blockchain, AI and Digital Assets. 

More recently, the Communication Authority of Kenya also published its draft Regulatory Sandbox guidelines and invited stakeholders’ input.   

This shows that indeed Kenya’s regulatory environment has matured and recognises the need to strike a balance between encouraging innovations, while at the same time, minimising potential risks and harms that may arise from uncontrolled, mass deployment of innovations.

It is indeed time for embracing and operationalizing the regulatory sandboxes as safe spaces to understudy innovations to better address both the conflicting characteristics of risky innovations versus the potential opportunities and benefits they may promise.  

John Walubengo is an ICT Lecturer and Consultant. @jwalu.


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