Kenya is moving to tighten its grip on cryptocurrency regulation in the wake of the controversy surrounding Worldcoin. Last August, the country suspended the iris-scanning cryptocurrency project, launched by OpenAI CEO Sam Altman, citing concerns over data security and protection. This suspension, coupled with ongoing investigations by European regulators in France and Germany, has spurred Kenya to develop a more robust legal framework for virtual assets. While Kenya has embraced technological innovation in the past, notably with its mobile money revolution, the government is now taking a cautious approach to the largely unregulated crypto market. A proposed National Policy on Virtual Assets and Virtual Asset Service Providers (VASPs) aims to bring order to this “digital Serengeti,” marking a significant shift from official warnings to active regulation in response to the rise of crypto adoption among tech-savvy Kenyans.

The policy aims to establish a “fair, competitive, and stable market” for virtual assets (VAs), a term encompassing cryptocurrencies and digital tokens. This ambition reflects a dual recognition: the potential of VAs to drive digital finance and the accompanying risks of money laundering, terrorism financing, and the ever-present specter of scams. It’s a bit like trying to domesticate a wildcat — potentially rewarding, but also likely to result in some scratches.

What exactly does this regulatory blueprint entail? The key provisions can be broadly categorised as follows:

1. Taming the VASPs: Licensing and Registration: At the heart of the proposed framework is the mandatory licensing or registration of VASPs operating in Kenya. This is intended to bring these previously unregulated entities under official scrutiny, ensuring compliance with anti-money laundering (AML), counter-terrorism financing (CFT), and other essential regulations. This move aligns with recommendations from the Financial Action Task Force (FATF), the global AML/CFT watchdog. The policy casts a wide net, defining VASPs as entities engaged in a range of activities, including:

• Exchanging virtual assets for fiat currencies (and vice versa).
• Trading one type of virtual asset for another.
• Transferring virtual assets.
• Safekeeping and managing virtual assets.
• Providing financial services related to the issuance or sale of virtual assets.

This comprehensive definition suggests a desire to capture the full spectrum of crypto-related businesses, leaving little room for digital cowboys to roam free.

2. AML/CFT: Unsurprisingly, the policy places significant emphasis on AML/CFT compliance. VASPs will be required to implement measures such as customer due diligence (CDD), transaction monitoring, and suspicious activity reporting (SAR). These are standard procedures in traditional finance, now being applied to the digital realm. Given the pseudonymous and borderless nature of crypto transactions, this focus is understandable, if not exactly groundbreaking.

3. Consumer Protection: A Nod to the Vulnerable Investor: Recognizing that the crypto market can be a minefield for inexperienced investors, the policy stresses the importance of consumer protection. While specifics are still hazy, this suggests a focus on:

• Clearly disclosing the risks associated with virtual asset investments (because everyone reads the fine print, right?).
• Safeguarding customer funds and assets (hopefully preventing another FTX-style debacle).
• Establishing clear channels for complaints and dispute resolution (because dealing with customer service is never fun, especially in the crypto world).

This emphasis is particularly pertinent given recent events like the Worldcoin saga, which raised serious concerns about data privacy.

4. Financial Stability: The policy acknowledges the potential for VAs to destabilize the broader financial system, a concern echoed by the Financial Stability Board (FSB). While concrete measures are yet to be defined, the policy signals a commitment to monitoring and mitigating systemic risks. This suggests a desire to prevent crypto volatility from spilling over into traditional financial markets.

5. Taxation: While Kenya’s Finance Act 2023 already introduced a 3 percent Digital Asset Tax, the policy reinforces the intention to integrate virtual asset activities into the existing tax framework. This is hardly surprising; governments rarely miss an opportunity to collect revenue.

6. Regulatory Sandbox: The policy mentions a “joint VA regulatory sandbox,” a controlled environment for testing new virtual asset products and services. This allows regulators to observe these innovations firsthand while giving businesses a space to experiment under supervision. 

7. Interagency Harmony: The policy stresses the need for collaboration among various regulatory bodies and government agencies, exemplified by the formation of the Multi-Agency Technical Working Group. This is essential for effective oversight of a complex and rapidly changing sector. Whether these agencies can truly work in harmony remains to be seen; bureaucratic turf wars are a universal phenomenon.

8. Central Bank Oversight: The Central Bank of Kenya (CBK) is tasked with overseeing stablecoins and other crypto assets pegged to fiat currencies. This move underscores the government’s intent to maintain monetary stability in the face of digital disruption.

The Bottom Line

The draft policy represents a significant step towards regulating Kenya ’s crypto landscape. However, many crucial details remain to be ironed out. The effectiveness of this framework will depend on how well the government translates these broad principles into concrete regulations and, crucially, how effectively they are enforced. Whether Kenya can successfully balance innovation with risk mitigation is the million-dollar (or perhaps Bitcoin) question. For now, the crypto world in Kenya waits with bated breath, wondering if this new law will be a gentle hand on the reins or a heavy-handed crackdown.

The Kenyan National Treasury and Economic Planning has requested public input by January 24, 2025, and will hold public forums nationwide between January 20 and 29.