Kenya is a leading financial giant in Africa, competing with Nigeria and South Africa. It has leading tech innovations like the much-vaunted MPESA money transfer technology. Unlike many countries in the developing world, Kenya’s crypto adoption has been quite massive.
According to the Chainalysis 2021 Global Crypto Adoption Index, Kenya ranks fifth in cryptocurrency adoption globally.
The cryptocurrency market in Kenya is largely unregulated. However, despite the frenzy of cryptocurrency investment, questions emerge on regulatory risk in light of the future value of the fiat currency, borderless nature, anonymity of crypto transactions, and price volatility.
The regulators have a hard time creating regulations that strike a balance between managing the risk and being a hurdle to the market innovations.
Government Position on Cryptocurrency
While the government of Kenya does not prohibit cryptocurrency adoption, it does not receive it either.
In December 2015, the Central Bank of Kenya cautioned the public against trading in bitcoin and cryptocurrencies. According to the statement, the CBK reiterated that bitcoin was not a legal tender, and there is no protection in place should the business go under. However, it did not prohibit cryptocurrency trading, meaning Kenyans can legally sell and buy bitcoins.
In 2018, Kenyans held bitcoins worth approximately $1.5 billion, equating to 2.3% of the country’s GDP as per Africa Legal Network.
Despite the government warning, these figures show massive acceptance of cryptocurrencies by the public. The second and third most popular cryptocurrencies after bitcoin in Kenya is Ethereum and Cardano. According to TradingBeasts’ Cardano predictions for 2022, there is a high chance that ADA will reach a new all-time-high in 2022 and will claim some of the money pool that Kenyan investors invested in BTC and ETH.
Similarly, in February 2018, the Central Market Authority (CMA), the body mandated with regulating the financial markets in the country, warned investors against participation in the Initial Coin Offerings (ICOs). This was after KENICOIN sought to raise money from the general public by issuing digital coins.
Cryptocurrency Laws in Kenya
Currently, there are no cryptocurrency regulations. Technological innovations are regulations that are regulated according to their nature.
The Central Bank of Kenya (CBK) regulates the crypto sector through legal avenues and broad discretion. The major laws that govern cryptocurrency trading are the Kenya Money Remittance regulations and National Payments Systems Act (NPSA).
Additionally, the cryptocurrency regulation falls under three acts:
The Capital Markets Acts – Administered by the Capital markets Authority (CMA)
The national payments Systems Act – Administered by the Central bank of Kenya (CBK)
The Kenya Information and Communication Act – Administered by the Communication Authority
Money remittance regulations require companies dealing with the transmission of money or its representation to acquire licensing from Kenyan authorities. Therefore, cryptocurrency providers must virtually get a license to operate in Kenya; otherwise they risk suspension.
A case in point is Bitpesa, a company dealing with bitcoins in Kenya. Bitpesa had its services suspended by Safaricom due to a lack of authorization from CBK, as reported by Freeman Law.
Cryptocurrencies as Securities
While cryptocurrencies are not yet classified as securities, CMA is empowered by the regulations with broad discretion to classify certain cryptocurrencies as securities. For instance, in a case involving a Capital venture and CMA, the court ruled ICO tokens constituted securities. The firm was trying to raise funds for the initial coin offering.
Digital Service Tax
Kenya Revenue Authority (KRA) has also declared that cryptocurrency falls under the category of the digital marketplaces, as reported by Global Insights. Therefore, digital tokens should be subjected to digital service tax at a rate of 1.5% on gross transaction value.
The Finance Act established a 1.5% tax for goods supplied in the digital marketplace. For instance, mining is not regulated or prohibited, for that matter. Since cryptocurrency supplies virtual currencies into the market, the activity is subject to existing laws. It, therefore, attracts the digital service tax.
KYC and AML Regulations
With anonymity being the biggest hurdle for cryptocurrency transactions, there is the risk of criminals using crypto for money laundering and terrorist activities. Luckily, Kenya has made bold steps to address these issues by working in conjunction with other countries.
As per Global Insights, the Eastern African country adheres to global anti-money laundering and combating the financing of terrorism (AML/CFT). It is also a member of the Financial Action Task Force that works under the umbrella of the Eastern and Southern Africa Money Laundering Group. Also, the International Organization of Securities Commissions, of which Kenya is a member, is prioritizing crypto assets regulations.
Kenya has set KYC regulations depending on the amount of the transaction. For instance, respective banks should approve transactions amounting to $10, 000 and regional banks for higher amounts. Therefore, money transfer and fintech services are required to report suspicious activities under this law.
The Kenyan government is gradually drafting broad and inclusive regulations that encompass cryptocurrencies and other technological innovations. Luckily, crypto regulations are notable in many jurisdictions across the continent, especially in South Africa.
Kenya will probably borrow a leaf from South Africa in a bid to enhance its regulations.
Despite cautioning investors against crypto trading, CMA revealed that it planned to accommodate blockchain fintech companies into a regulatory sandbox. This means they would be allowed to test their products without necessarily following all legal requirements. In addition, CMA made the following declarations:
There was a need for regulators to develop cryptocurrency regulation using a common approach
They proposed a joint group of financial regulators for this task or the creation of a special arm
The regulators should show willingness in accommodating fintech
Implementation of blockchain technology in the public service sectors
Creating a fintech legal and regulatory sandbox
The CMA sandbox majorly deals with live testing and new innovation visibility. The aim is to reduce the risk of financial products and services to consumers. This sandbox accommodates crypto startups, provided they get a recommendation letter from the central bank of Kenya. In fact, two blockchain projects are incubated under these projects.
Central Bank Digital Currencies
During the Georgetown DC Fintech week in 2020, the Central Bank governor said they were engaging with market players globally to develop Central bank digital currencies.
According to the Mastercard New Payments Index, about 43% of Kenyans plan to use cryptocurrencies next year. Moreover, 69% of the survey respondents said they are more receptive to using crypto than a year ago.
There is no law obligation for declaring crypto holdings. This would naturally fall under existing laws where the law expects such declarations. Essentially, the government does not support cryptocurrency, and there are no solid regulations in place.
With the recent developments in countries like South Africa, we expect Kenya to follow suit and develop suitable regulations for all crypto stakeholders.