Kenya has one of the most thriving cryptocurrency ecosystems in the African continent, and is one of the leading countries in the world in crypto holdings per capita. Cryptocurrency trade offers great promises and opportunities, alongside major challenges. Cryptocurrency exchange offers high degrees of freedom and ease of trade, yet it entails risk of bad actors taking advantage of it for committing crimes, fraud, evade taxes and fund terrorism acts.
To establish necessary safeguards, Kenyan authorities are advancing in the development and implementation of regulatory frameworks. These are intended to protect consumers and businesses from the inherent risks of cryptocurrency trading. As in many cases where regulators are challenged with catching up with technology and market developments, Kenyan regulatory frameworks are still in the making, with a lot of uncertainty related to future regulation on cryptocurrency in Kenya.
This article provides a brief update on the current rules being discussed for cryptocurrency. Everyone, especially financial institutions, should pay attention because these upcoming rules will impact all players in the cryptocurrency field. The better you understand what regulations are coming, the more effectively you can get your organization ready for what's ahead
• Increasing market adoption: Crypto payments are revolutionizing e-commerce and remittances, offering efficient, cost-effective cross-border transactions for businesses and individuals.
• Regulators have set up a sandbox environment in place to test fintech solutions that can also be used by blockchain companies: There are Blockchain solutions being tested for innovation within the regulatory sandbox test environment set up by CMA in 2019, but limited or no significant regulatory changes have been implemented yet.
• Emphasis on consumer protection: In its recent publications, the Central Bank of Kenya (CBK) highlighted the importance of regulations to protect users from financial and other risks, such as policies to regulate privacy and cybersecurity if crypto is to be adopted in Kenya.
• Ongoing discussions: The government and relevant stakeholders are engaged in active discussions to determine appropriate regulatory frameworks for cryptocurrency regulation.
2. Current trends of Cryptocurrency trade and holdings in Kenya
- Crypto trade in Kenya has reached high volumes:
o Kenya has an estimated 2.7 to 4 million cryptocurrency holders, representing around 5% to 9% of the Kenyan population. During 2023 the volume of transactions via cryptocurrency in Kenya was over $18bn.
- Current regulations are still at an early stage:
o Low Maturity of regulation: The Blockchain Regulatory Assessment Framework (BRAF) has rated Kenya 40.63 out of 100, implying a developing regulatory environment in the country.
o Allowed but not recognized: Cryptocurrencies are not restricted in Kenya, which allows its citizens to possess and use them. However, it is not considered to be legal tender.
o Financial institutions are not allowed to provide services to crypto trading businesses - The Central Bank of Kenya (CBK) has specified penalties and forbade financial institutions/payment service providers to do business with establishments that trade cryptos.
o No specific clear tax guidelines exist concerning crypto trading. Also, blockchain startups have no specific tax incentives from the government.
o Web3 – allowed but with little support: Web3 businesses have little support from the Kenyan banking system. However, there is no prohibition in accepting cryptos as a few banks have partnered with blockchain-based companies.
o Regulation for ICOs (Initial Coin Offerings), and cryptocurrency trade is still in the making.
The rise of cryptocurrency has sparked a significant dialogue around several critical concerns, vital for both the integrity of financial systems and the protection of its citizens. These include:
Some of the main concerns of the use of cryptocurrencies is the lack of a well-defined and regulated consumer protection guarantee. Secondly, the absence of proper regulation provides an openning for tax evasion, money laundering, corruption, and funding illegal activities through cryptos. Therefore, a regulatory system is essential to protect consumer rights and the adherence to the rule of law and the stability of the financial sector.
Three of Kenyas regulatory institutions govern cryptocurrency regulation in Kenya through specifically formulated laws and acts.
1. CBK governs the National Payments System Act (NPSA). The NPSA authorizes CBK to oversee and regulate payment systems and service providers within Kenya. CBK is also responsible for ensuring the platforms are safe for investors.
2. CMA (Capital Markets Authority) oversees the Capital Markets Act, regulating the trade of securities in order to protect investors and financial institutions.
3. CA (Communications Authority) handles the Kenya Information and Communication Act (KICA), ensuring the safety and integrity of Kenya’s ICT infrastructure.
The current evolving stage of the cryprocurrency regulation scene in Kenya is reflected in a few of the following examples:
- Currently, cryptocurrency organizations must obtain specific licenses to offer transaction services, without which the penalties would be heavy. For instance, Safaricom suspended the M-Pesa services to two prominent organizations due to unauthorized crypto transactions.
- CMA can currently regulate cryptocurrency trade through securities regulation by classifying specific cryptocurrencies as securities on a case-by-case basis. The objective is to protect the investor and ensure financial stability- Kenya recently introduced a digital service tax of 1.5% that could potentially apply to cryptocurrency transactions.
Cryptocurrency regulation in Kenya has been evolving over the past decade. These were the main milestones in the emergence of cryptocurrency trade to date:
December 2015: CBK warned against crypto trading but did not prohibit it. It issued a public notice against cryptocurrencies, citing volatility risk, fraud, and lack of proper regulation.
2015 – 2018: Increase of the volume of cryptocurrency trade and emergence of blockchain startups focusing on mobile money trade and remittance solutions.
2018: The Kenyan Government formed a Blockchain and AI task force to explore the potential benefits of blockchain technology. The objective was to understand how these technologies could contribute to national development.
2019: A formal report suggested adopting a multi-pronged approach to regulating cryptocurrency trade transactions.
2018 to 2023: The process has been evolving continuously with the formal recognition and development of regulation of cryptocurrencies. This approach does not fully embrace cryptos but creates progress toward a proper regulatory framework. Over these five years the CMA launched a regulatory Sandbox that allowed the testing of blockchain-based products and services in a controlled environment.
2021: The KRA introduced the digital services tax that may apply to crypto transactions in January 2021.
Kenya is adopting a cautious approach regarding crypto regulation, balancing innovation with financial stability, as it is a delicate subject. Kenya hasn't explicitly prohibited cryptocurrency trading, but official warnings and subjectivity in regulations create business uncertainty. It is expected that Kenya will adopt a prudent strategy by balancing financial stability with innovation. Some possible advancements that may take place are:
Specific crypto regulations – As part of this approach, there are indications that the country may implement specific regulations around cryptocurrency, including defining crypto and outlining permissible activities.
Licensing requirements – Additionally, licensing requirements for exchanges, platforms, and service providers could be introduced to offer more clarity to businesses. The United Nations Conference on Trade and Development (UNCTAD) recently recommended mandatory registration of crypto exchanges and digital wallets and imposing entry fees or taxes on cryptocurrency trading. It will be interesting to see how this proposal is received and whether it will be implemented.
AML and KYC rules – Stringent KYC (Know Your Customer) and AML (Anti-Money Laundering) policies and rules may be required to detect money laundering, and funding of any potential illicit activities.
The rate and scope of regulations are may vary, considering global patterns in technology and innovation, as well as in regulation and international policy. This is, of course, a wide overview and should not be seen as specific legal advice.
Cryptocurrency transactions introduce many challenges and opportunities.
Firstly, there is a critical need for maintaining the right balance between regulation and innovation.
A second challenge is ensuring the integrity and security of crypto transactions.
A third and major challenge is for the KRA, as the Kenyan tax collection rate has a major need to increase, the KRA must have efficient methods of assessing and collecting taxes from revenues generated in cryptocurrencies without hampering growth of this ecosystem.
There are great opportunities in positioning Kenya as a regional crypto and blockchain hub, with a concentration of crytpo users and technology talent. A favorable regulatory environment can support blockchain and crypto startups and attract significant foreign investment and expertise.
About Plena Solutions:
Plena Solutions Ltd. is a Cybersecurity solutions provider, with a primary focus on addressing the needs and challenges of organizations from the private and public sectors in Eastern and Southern Africa. With offices in Kenya and Israel and activity across East and Southern Africa, we combine deep local insights, experience, expertise, and global top-notch cybersecurity technologies & solutions. We serve as our clients’ trusted advisor and implementation partner on risk and cybersecurity topics, helping them keep safe and ahead of any cyber threat.