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How investment scams forced Kenya to regulate cryptos
Although several studies had shown that Kenya was among the hotbeds for investment in crypto assets in Africa, Kenya did not recognise them, with CBK as early as in 2015 warning against their use.
Kenya is among the countries with fraud factories where young women are forced to scam unsuspecting victims by engaging in what is known as ‘pig butchering,’ a recent study by the International Justice Mission, an NGO, revealed.
The scammer spends weeks or months building trust by posing as a potential friend, business partner or having a romantic interest. The scammer then uses the trust to ‘slaughter’ the victim by introducing them to a fake investment opportunity and later disappearing with the money.
This money is then quickly converted into untraceable cryptocurrency and later exchanged to fiat currencies such as Kenyan shilling, US dollar or euro at crypto exchanges, thus completing the process of making dirty cash clean, or money laundering.
All this happens because Kenya does not have safeguards to curb the use of crypto assets for money laundering, terrorism financing, fraud and other crime, which is partly why Kenya was grey listed in February last year.
Cryptocurrencies or crypto assets are digital forms of money that are not issued or regulated by any particular monetary authority and are traded online.
They include bitcoin and dollar-backed USDT or stable coins.
Keen to come out of the greylist, Kenya has been forced to drop its earlier stance against virtual assets to issue the Draft National Policy on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), which is currently undergoing public participation.
“Priority actions include the completion of a terrorism financing risk assessment and related updating of the national AML/CFT strategies, adopting a supervisory framework for Virtual Asset Providers, and strengthening AML/CFT risk-based supervision of financial institutions and designated non-financial businesses and professions (DNFBPs),” said the Treasury in the 2025 Budget Policy Statement. AML/CFT is an acronym for anti-money laundering/countering the financing of terrorism.
In its first Mutual Evaluation Report (MER) on Kenya’s preparedness in the fight against illicit cash such as from drug trafficking, corruption, tax evasion or terrorism financing, the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) found that Kenya did not have a mechanism that would enable banks to prevent the misuses such as new technological developments as crypto assets.
ESAAMLG is part of the global anti-money laundering body, Finance Action Task Force (FATF).
Although several studies had shown that Kenya was among the hotbeds for investment in crypto assets in Africa, Kenya did not recognise them, with the Central Bank of Kenya (CBK) as early as in 2015 warning against their use.
“Transactions in virtual currencies such as bitcoin are largely untraceable and anonymous, making them susceptible to abuse by criminals in money laundering and financing terrorism,” said the CBK in 2015.
A report by the International Monetary Fund released last year showed that several Kenyan firms were using cryptocurrencies for payments to foreign suppliers whenever there were dollar shortages or a weakening of the shilling.
In ESAAMLG’s second MER in September 2022, Kenya was warned about not implementing curbs to prevent using cryptocurrencies for money laundering and terrorism financing. After one year of observation, a period in which Kenya was allowed to seal the loopholes, Nairobi, a regional financial hub was grey-listed.
Grey listing means Kenya is under heightened surveillance, a feature that is also likely to scare investors from the country’s financial system.
“The country and almost all FIs (financial Institutions) could not provide evidence that they assess risks that may arise due to the development of new products and new business practices, including new delivery mechanisms, and the use of new or developing technologies in relation to new and pre-existing products,” said ESAAMLG.
“Although Kenya is now ranked as a leading adopter of cryptocurrency, there is no legal and institutional framework in Kenya relating to VAs and activities of VASPs and no measures have been undertaken to address requirements relating to VAs and activities of VASPs,” it added.
The Treasury warns that without regulation, the use of VAs poses risks such as money laundering, terrorism financing, proliferation financing, tax evasion, fraud, cybercrime, weak governance and consumer protection issues.
“These risks underscore the urgent need for a comprehensive legal and regulatory framework VAs and VASPs to ensure the safety and integrity of Kenya’s financial system,” said John Mbadi, the Cabinet Secretary for the Treasury.
The 2023 Geography of Cryptocurrency Report by crypto market analysis firm, Chainalysis, ranked Kenya 21 out of 155 countries on the crypto adoption index and ranked it third overall in terms of peer-to-peer(P2P) exchange trade volume.
