Kenya has released a draft national policy that will guide the regulation of cryptocurrencies and digital tokens in a bid to curb tax evasion, fraud and cybercrime amid growing use of the emerging assets.
The National Treasury has issued the Draft National Policy on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), with public input expected to result in a document that will guide the development of the proposed regulation.
A VA is a digital representation of value that can be traded or transferred digitally and used for payment, investment or other purposes as could arise.
“This policy guides the establishment of a sound legal and regulatory framework providing the fundamental foundation of a fair, competitive, and stable market for VAs and VASPs with the aim of fostering innovation, enhancing financial literacy, and ensuring sound risk management,” the draft policy reads in part.
“The principal goal of the policy is to cement Kenya as a major player in the global digital finance ecosystem.”
Treasury notes that VAs have gained traction in the country due to the public’s desire for alternative investment options, the speed and cost-effectiveness of cross-border transactions, and their pseudonymous nature.
However, 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 to govern VAs and VASPs to ensure the safety and integrity of Kenya's financial system,” says John Mbadi, Cabinet Secretary at the Treasury.
“This policy guides the establishment of a sound legal and regulatory framework providing the fundamental foundation of a fair, competitive and stable market for VAs and VASPs… Accordingly, adoption of this policy is a major step towards establishing a secure and well-regulated environment for VAs and VASPs in Kenya.”
The draft borrows from other countries in Africa and beyond, whose policies provide a framework that is adaptable and flexible for domestic and international cooperation, balancing between compliance and promoting financial innovation.
The development of this draft policy signifies Kenya’s shift from trying to ban the use of virtual assets to ensuring their sound use in the economy.
The draft comes days after Kenya received the International Monetary Fund (IMF) backing to regulate crypto-asset activities in the country. IMF, in a technical assistance report prepared at the request of the Capital Markets Authority (CMA), said it stands ready to support Kenya in regulating VAs.
“Once this assessment is complete, the IMF can provide technical assistance to support the Kenyan authorities addressing risks to financial stability, markets, and consumers,” said the IMF in the technical assistance report on crypto regulation and legislation.
Kenya’s regulatory framework, including the implementation of the Financial Action Task Force recommendation, is expected to be enacted by April 2025, according to the IMF.
The country has witnessed increased adoption of VAs for use in payments, remittances, and investments over the years.
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.
A 2020 research report, also cited in the CMA’s policy paper, suggests that Kenya is second in Africa after Nigeria in P2P bitcoin trading, accounting for over 12 percent of Africa’s P2P bitcoin trades.
Another 2017 Citi research note cited in the CMA’s March 2023 draft policy framework on crypto assets and crypto-service providers’ oversight estimates the volume of bitcoin holdings in Kenya to amount approximately 2.3 percent of GDP in 2016.
