Kenya is set to legalise virtual assets (cryptocurrencies) with the introduction of a new regulatory framework.
The move, announced by Treasury Cabinet Secretary John Mbadi, aims to harness the potential of digital assets while mitigating associated risks.
Balancing Innovation and Oversight
The draft National Policy on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) seeks to establish a “fair, competitive, and stable market” for cryptocurrencies.
“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 document reads.
This framework will address concerns like money laundering, terrorism financing, and consumer fraud while fostering innovation in the financial sector.
“The emergence and growth of VAs and VASPs have created dynamic opportunities and challenges,” Mbadi stated, emphasizing the need to balance innovation with regulatory oversight.
Learning from Past Success
Kenya’s successful implementation of mobile money services, particularly M-PESA, serves as a model for its approach to cryptocurrencies.
The government aims to leverage blockchain technology and digital currencies to drive economic growth and further financial inclusion.
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Addressing Risks and Enhancing Consumer Protection
The draft policy incorporates recommendations from the Financial Action Task Force to address vulnerabilities identified in the 2023 National Risk Assessment, including tax evasion, cybercrime, and weak governance.
“The cross-border nature of Virtual Assets and Virtual Assets Service Providers further compounds the risk, as noted in the VAs/VASPs ML/TF National Risk Assessment Report for Kenya, which was finalised in September 2023. 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,” CS Mbadi said.
The Finance Act of 2023 introduced the Digital Assets Tax (DAT), a new income tax specifically for cryptocurrencies, which took effect on 1 September 2023. Under this framework, all cryptocurrency transactions are subject to a fixed tax rate of 3%.
The DAT encompasses various types of cryptocurrency transactions, including airdropped tokens, sales of tokens for stablecoins, exchanges between different tokens, and the purchase or sale of nonfungible tokens (NFTs).
However, the Blockchain Association of Kenya (BAK) filed a petition before the High Court of Kenya challenging the legality and constitutionality of the DAT.
Growing Adoption and Global Trends
Cryptocurrencies have gained significant traction in Kenya, particularly among younger demographics, driven by their efficiency in cross-border transactions and investment appeal.
Kenya joins other African nations like Morocco and South Africa in exploring cryptocurrency regulations. This move reflects the growing global trend towards establishing legal frameworks for digital assets.
