RECAP: BitKE Hosts Regulatory Experts and Industry Stakeholders to Discuss Crypto Policy & Regulation in Kenya

The event shed light on various perspectives, ranging from the recently proposed CMA Amendment Bill 2023 & the Finance Bill 2023, as well as concerns around fraud and money laundering risks, and the importance of compliance to the necessity of bridging the gap between regulators and crypto startups. 

CryptoGuru··10 min read

On May 22 2023, popularly referred to as the Bitcoin Pizza Day in the crypto space, BitKE hosted a Crypto Policy & Regulation Event which brought together speakers from various organizations, most notably:

 

  • Central Bank of Kenya (CBK)
  • Capital Markets Authority (CMA Kenya)
  • Kenya Bankers Association (KBA)
  • Bowmans Law
  • Binance
  • Kotani Pay
  • Kanga Labs 

 

among other founders and community members, to discuss the pressing need for effective regulation in the crypto industry in the country.

The event shed light on various perspectives, ranging from the recently proposed CMA Amendment Bill 2023 & the Finance Bill 2023, as well as concerns around fraud and money laundering risks, and the importance of compliance to the necessity of bridging the gap between regulators and crypto startups. 

Here are the key takeaways from the event which provided valuable insights into the evolving regulatory landscape.

 

  • Regulatory Efficacies and Government Support (Capital Markets Authority of Kenya – CMA Kenya)

A representative of the CMA Regulatory Sandbox delivered a talk on regulatory efficacies in the crypto space emphasizing the effectiveness and efficiency of regulatory measures. She highlighted that the primary objectives of key regulators such as the CMA & CBK in the crypto industry are to maintain market stability and protect retail investors.

Ensuring market stability is a paramount objective for regulators in the crypto space as it fosters a secure and transparent environment for conducting cryptocurrency transactions. To achieve this, CMA and CBK are more inclined to push for regulations that effectively address various risks including fraud, market manipulation, money laundering, and particularly, considerations for the stability of the Kenyan Shilling and the interests of conventional financial institutions like banks.

She further noted that regulators recognize the difference between institutional investors and retail investors.

Institutional investors are presumed to have the necessary skills, expertise, and resources to engage in high-risk and complex investment ventures. On the other hand, retail investors, often referred to as the ‘ordinary mwananchi’ with limited resources, require additional protection. Regulators prioritize safeguarding the interests of retail investors by implementing regulations that provide them with a safe and conducive investment environment.

The CMA Regulatory Sandbox has demonstrated a proactive approach in engaging with crypto products. However, the Sandbox is yet to officially onboard a crypto product and fully guide it through the program.

The CMA rep attributed this to four main challenges:

   1.) Novelty and Complexity of the Crypto Industry: The crypto industry is characterized by constant innovation and evolving use cases. This rapid pace makes it challenging to quickly define and classify new crypto products and services. Regulators need to stay updated and adapt to the emerging complexities in order to effectively regulate and provide guidance.

   2.) Insufficient Information Regarding the Risk Universe: The crypto industry presents a unique set of risks and regulators require comprehensive information to assess and address these risks adequately. The evolving nature of the industry makes it difficult to have a complete understanding of the entire risk universe associated with crypto assets and activities. Gathering sufficient information to develop appropriate regulatory frameworks is an ongoing challenge.

   3.) Lack of Internal Capacity: Reviewing and evaluating applications related to crypto products and services requires specialized expertise. The novelty of the crypto industry means that regulators may lack the internal capacity to thoroughly assess these applications. Building the necessary expertise within regulatory bodies takes time and requires concerted efforts to enhance skills and knowledge in this emerging field.

   4.) Fears Around Volatility Affecting Local Currency: One of the concerns raised is the potential impact of crypto volatility on the stability of the Kenyan shilling. Regulators must carefully consider how the integration of crypto assets and activities may affect the stability of the Kenyan shilling. 

In her concluding remarks, the representative emphasized the importance of builders in the crypto space gaining a deeper understanding of the motivations and driving factors of regulators. By comprehending the underlying reasons behind regulatory actions, industry stakeholders can provide the necessary incentives to encourage regulators to actively listen to and engage with them.

 

  • Fraud Risks and Banking Sector Concerns (Kenya Bankers Association – KBA)

Edwin Sikini, the Chairperson of the Cryptocurrency Taskforce within the Kenya Bankers Association (KBA), identified fraud as the primary risk associated with cryptocurrencies. The concerns raised by bank customers regarding the potential for falling victim to crypto scams have led the banking sector to adopt a cautious approach towards cryptocurrencies.

To address these concerns and protect consumers while mitigating fraud risks, the KBA established the Cryptocurrency Taskforce under the Fraud & Money Laundering Committee.

The establishment of the crypto taskforce highlights the banking sector’s proactive approach in tackling fraud and associated risks in the crypto industry. By focusing on assessing fraud and related risks in the crypto space, the taskforce aims to develop strategies and measures to navigate these challenges effectively. 

 

  • Let’s Be Cautious and Vigilant (Central Bank of Kenya – CBK)

The representative from the Central Bank of Kenya (CBK) echoed the cautious perspective shared by the Kenya Bankers Association (KBA). The CBK representative emphasized the need for caution and vigilance in regulating the crypto industry due to the prevalence of fraud and scams within the sector.

This cautious approach reflects the regulators’ concerns regarding the potential risks and challenges associated with cryptocurrencies.

The CBK’s cautious stance is likely influenced by the need to protect consumers and maintain the stability of the financial system. Regulators are responsible for safeguarding the interests of individuals and ensuring the integrity of the financial market. The history of fraud and scams in the crypto industry has likely made the CBK more inclined to approach regulation with scrutiny and stringent measures to mitigate risks.

 

  • Industry Compliance and Collaboration (Binance)

Nadeem Anjarwalla, the Director of Binance EA, emphasized the commitment of Binance to compliance with regulatory requirements.

He mentioned that Binance has a dedicated compliance department that is prepared to engage with regulatory bodies such as the CBK & CMA. This dedication to compliance reflects Binance’s proactive approach in addressing potential risks related to fraud, Know Your Customer (KYC) protocols, Combating the Financing of Terrorism (CFT), and money laundering (ML).

Nadeem further acknowledged the existing regulation gap in law enforcement and the investigation processes related to scams and fraud within the crypto ecosystem. To address this gap, he outlined Binance’s efforts to develop internal mechanisms aimed at enhancing collaboration with relevant authorities such as the Directorate of Criminal Investigations (DCI).

By working closely with law enforcement agencies, Binance aims to tackle scams and fraudulent activities effectively. 

 

  • Striking a balance between regulations and industry specific standards (Kotani Pay)

Felix Macharia, the CEO of Kotani Pay, emphasized the importance of compliance in the context of a Web3 business operating in the business-to-business (B2B) space.

He highlighted that adhering to industry standards is crucial, particularly for B2B players in the crypto industry. Felix mentioned that many of his fintech business partners require him to demonstrate compliance not only with government regulations but also with industry-specific standards.

Examples of industry standards include: 

  • Payment Card Industry Data Security Standard (PCI DSS) – a widely recognized standard for organizations that handle credit card information. It sets requirements for securely processing, storing, and transmitting cardholder data to protect against data breaches and fraud
  • ISO 27001 –  an international standard that specifies requirements for establishing, implementing, maintaining, and continuously improving an information security management system (ISMS). It provides a framework for identifying, assessing, and managing information security risks within an organization

 

  • Do Degens care about regulation? (Kanga Labs)

During the discussion, Alex Matu, Co-Founder of Kanga Labs and partner at BitKE, presented a viewpoint that represents those operating under the radar in the crypto industry. He noted that veteran individuals, known as Degens, who have been involved in the industry for a long time, do not see regulation as a positive development.

According to this perspective, they prefer to be left alone and operate freely without regulatory interference.

 

TakeOuts from the Finance Bill 2023 (Bowmans Law)

Fred Ogutu, a Senior Associate at Bowmans Law, highlighted 4 key takeouts from the proposed Digital Asset Tax (DAT) under the Finance Bill 2023.

They are:

 

   1.) The Digital Asst Tax  should be levied on net gain as opposed to gross transaction value

The  proposal, as currently worded, would pose various challenges.

The proposed tax is on the gross amount of the sale. In the past, tax on the gross amount has been held to be unconstitutional on the basis that it does not tax income. For example, minimum tax which was held to be unconstitutional by the High Court and Court of Appeal. One of the reasons for this decision was that the proposal to tax gross revenue would tax loss making traders similar to those who were making a profit. India, for example, levies 1% Tax Deducted at Source (TDS) on the transfer of crypto assets from July 1 2022.

The requirement to deduct 1% of the consideration applies irrespective of whether the consideration is in cash, partly in cash, and partly in consideration for another Virtual Digit Asset (VDA), or in consideration for only another VDA. The imposition of the 1% tax on VDAs has discouraged investors from investing in cryptocurrencies and NFTs and crippled the industry in India despite of only being 1% rather than 3% as proposed.

 

   2.) Transfer of some of the digital assets included in the definition are not ordinarily taxable

The definition of digital asset is wide and captures digital assets that are not ordinarily tradable or transferable such as utility tokens and governance tokens.

Utility tokens are not transferrable and are only used for specified purposes within the application in which they are developed. On the other hand, governance tokens are used by investors to vote on proposed changes within the relevant application. Consequently, utility and governance tokens will not typically be transferred in order to realize a taxable gain.

See also

Additionally, NFTs have variable use cases including tracing origination of goods to combat counterfeits. Such a wide application to NFTs is not workable.

 

   3.) What constitutes a transfer needs to be defined

What constitutes a transfer for purpose of the proposed tax should be defined. This is because there are various activities in relation to movement of digital assets that would not necessarily amount to a gain.

These activities include:

  • Generation of new assets through mining
  • Validation of transactions on the blockchain through staking and delivery of assets to the wallets of traders through airdropping

among others.

In addition, use of digital assets to pay for goods and services, and transfer of assets by the same person from one wallet to another, should not amount to a taxable gain. 

 

   4.) Potential for double taxation

Another problematic issue that arises from the Digital Asset Tax is the potential for double taxation.

In the case of a company routinely involved in the buying and selling of digital assets like cryptocurrencies, such income would first be subjected to Digital Asset Tax, and further, corporate income tax. This would be subjecting the same income to double taxation.

One of the ways to avert the possible double taxation would be to exclude transactions where a cash consideration is paid in relation to transfer of the digital assets as this should be taxable under the normal income tax regime.

The proposal for the tax to be paid within 24 hours is also onerous and would burden the sector with compliance obligations such as the requirement for fulltime personnel dedicated to accounting and tax payment.

 

Takeaways:

  • We Want More!

The community response to the event was overwhelmingly positive highlighting the growing awareness of the significance of crypto regulation.

Attendees expressed the need for more conversations and discussions surrounding regulatory frameworks in the crypto industry indicating a desire for increased clarity and understanding.

 

  • Call for Regulatory Capacity Building Initiatives

One key aspect emphasized by the community was the importance of grassroots-level understanding of cryptocurrencies. The community highlighted the need for government officials and regulators to have a solid understanding of the technology and its implications in order to effectively regulate the industry.

Capacity building initiatives were also seen as crucial for government officials to stay updated and knowledgeable about the evolving crypto landscape.

 

  • Dear CMA Regulatory Sandbox, Please Adopt a Use Case

Founders and entrepreneurs in the crypto space expressed their eagerness to see the Capital Markets Authority (CMA) onboard crypto startups. This suggests that there is a belief that continued innovation and development within the industry will eventually align with regulatory measures.

Founders are optimistic that as the industry progresses and matures, regulators will adapt and provide a supportive environment for crypto startups to thrive while ensuring necessary compliance measures.

 

  • Keep the Building

Builders in the house were encouraged to keep building despite the regulatory uncertainty.

 

The key takeaways demonstrate the growing importance of engaging in dialogue to shape a balanced regulatory framework that fosters innovation while ensuring consumer protection and mitigating fraud risks.

 

 

This article was contributed by Allan Kakai.

 

 

 

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