Kenya moves to regulate Bitcoin trade on grey listing risk

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Director General Financial Reporting Centre (FRC) Saitoti Maika. FILE PHOTO | DENNIS ONSONGO | NMG

Kenya is working on new regulations to police trading in cryptocurrencies such as Bitcoin on growing fears that the increased transactions in virtual assets in the country could increase risks of money laundering and terrorism financing.

A technical working group set up to advise the Treasury on cryptocurrency is currently preparing the draft regulations to be forwarded to the Cabinet for adoption, marking one of the key interventions in addressing weaknesses in its financial system.

“Right now, there is a sectoral working group that is working on developing a policy document to guide on developing a legal framework which will prescribe what needs to be done and who will be the regulator for digital assets providers,” said the Financial Reporting Centre (FRC) director-general, Saitoti Maika.

“Probably, we may end up with a stand-alone regulator for virtual assets. We can’t bury our heads in the sand. The more we fail to regulate, the more we risk being punished.”

The country currently lacks regulations for trading in cryptocurrencies despite various reports including Chainalysis—a blockchain analytics firm which rates countries on crypto adoption— ranked Kenya among top dealers in peer-to-peer cryptocurrency platforms.

The platforms allow traders to transact directly with one another without the need for a centralised third party to facilitate the transactions.

Mr Maika was speaking in reference to the issues the country is prioritising to improve the standing of its financial system before the Financial Action Task Force (FATF)— the global money laundering and terrorist financing watchdog.

Kenya aligns with FATF through the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) which is an associate member of FATF. The body requires every country to have a financial intelligence unit, which is FRC, in the case of Kenya.

Interventions such as regulating cryptocurrencies will help Kenya improve the integrity of its financial system and avoid the risk of getting put under the FATF grey list—a group of countries under increased monitoring when it comes to risks such as money laundering and terrorism financing.

The country has been put on the spot over the growing use of cryptocurrencies yet there are no regulations—a lacuna that can be exploited for money laundering and terrorism.

“The concern has been that Kenyans are trading and yet we don’t know, as a country, to what extent the proceeds that flow in this space are likely to get into the financial system. We are being reminded that as we become more sophisticated as a country, we have to deal with the risks,” said Mr Maika.

Kenya’s counterparts in the East African Community —Uganda, South Sudan and Tanzania— are all on FATF’s ‘grey list,’ meaning they are under increased monitoring when it comes to risks of money laundering and terrorism financing.

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Kenya is a key regional business and travel hub as well as a gateway to the neighbouring East African economies and has well-developed trade links to the rest of the world.

A 2021 report of the task force on the national risk assessment on money laundering and terrorism financing said this geo-positioning, trade inter-connectedness and high fintech use had increased the country’s vulnerability to money laundering and terrorism financing.

Kenya’s financial sector has seen a heightened pace of sophistication with developments such as mobile money banking, online betting, digital credit, online foreign exchange trading and the use of cryptocurrencies, all rendering the traditional financial sector regulations inadequate in safeguarding the integrity of financial transactions.

FATF plenary and working group meetings are happening this week in Paris, France, in which Kenya will know how the body feels about the progress the country has made in improving the integrity of its financial system.

ESAAMLG completed its assessment of Kenya’s anti-money laundering and counter-terrorist and proliferation financing (AML/CFT) system and published a mutual evaluation report in September 2022, highlighting the level of compliance with the FATF recommendations.

FATF recommended a number of actions based on the deficiencies and gave Kenya 12 months to address them. The country exited the observation period in October last year and filed a post-observation report in November.

The body will this week be evaluating what Kenya has done over the one-year period. If FATF is convinced that there are remaining strategic gaps that Kenya needs to address, the country may be placed under greylisting and given fresh deadlines.

Kenya last year made progress after it passed the Proceeds of Crime and Anti-Money Laundering Regulations, 2023 as well as the Prevention of Terrorism (Implementation of the UN Security Council Resolutions on Suppression of Terrorism) Regulations, 2023. It also passed a similar regulation on suppression and disruption of proliferation financing.

Some of the areas of concern facing Kenya include the mismatch between the number of investigations and the number of prosecutions and the increased instances of cases of corruption being dropped.

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