The Kenyan government is taking a firmer position on cryptocurrencies with the introduction of the Virtual Asset Service Providers Bill, 2025.

This draft legislation mandates that crypto companies operating within the country must establish a physical presence and appoint locally approved CEOs. This move comes amid a growing interest in cryptocurrencies among Kenyans, with over 700,000 individuals estimated to be involved in the market.

The proposed policy outlines a broad approach to regulating the crypto space. Key highlights include:

1. Legal Framework Development: A substantial budget of KSh 1 billion has been allocated for the formulation of a comprehensive legal framework. This will likely involve defining key terms, establishing licensing requirements for crypto businesses, and outlining consumer protection measures.
2. Promoting Innovation and Literacy: Recognising the potential of cryptocurrencies to drive financial inclusion, the government has earmarked KSh 400 million to promote innovation and enhance financial literacy within the virtual asset market. This could involve supporting blockchain technology development, educating the public on cryptocurrencies, and promoting responsible investment practices.
3. Consumer Protection and Market Integrity: To safeguard consumers and ensure the integrity of the crypto market, KSh 120 million has been allocated for developing mechanisms to protect investors from scams, market manipulation, and other risks. This could include establishing a regulatory body to oversee crypto exchanges and enforce compliance with regulations.
4. Mitigating Risks: The policy acknowledges the inherent risks associated with cryptocurrencies, such as cybersecurity threats and data privacy violations. To address these concerns, KSh 300 million has been allocated to implement measures to enhance cybersecurity and protect user data.

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Key Provisions of the Bill:

• Physical Presence: Crypto companies will be required to set up physical offices within Kenya.
• Local Leadership: Companies must appoint Kenyan CEOs who will need approval from either the Central Bank of Kenya or the Capital Markets Authority.
• Regulatory Oversight: The bill aims to regulate the crypto market, mitigating risks associated with money laundering and tax evasion.
• Financial Commitment: The government has allocated KSh 1.82 billion for the implementation of the draft policy on digital assets.

Rationale Behind the Bill:

The government’s primary objective is to protect consumers and ensure financial stability within the crypto market. By establishing a physical presence and appointing local CEOs, authorities believe they can better monitor and regulate crypto activities, reducing the potential for illicit activities.

Industry Impact:

The new regulations are likely to impact the operations of many crypto companies currently operating in Kenya. Many of these companies are currently operating remotely, and the requirement for physical offices and locally approved CEOs could pose significant challenges.

A Balanced Approach:

The proposed policy emphasises a balanced approach, taking into account regulatory frameworks from other jurisdictions while ensuring flexibility to adapt to the evolving nature of the crypto market. This approach aims to foster innovation while mitigating risks and protecting consumers.

A Shift Towards Regulation:

Recognising the growing influence of cryptocurrencies, the Kenyan government began to explore avenues for regulation. In 2023, the CMA amended legislation to include ‘digital currencies’ within the definition of securities, bringing them under its purview. This move paved the way for potential taxation of crypto exchanges by the Kenya Revenue Authority (KRA).

Taxation Takes Hold:

In November 2024, KRA announced that it had collected a significant KSh 10 billion from crypto dealers in the financial year ending June 2024.

This substantial revenue stream was attributed to the 3% tax on the transfer and exchange of digital assets, introduced in the Financial Act 2023. This marked a significant step towards integrating cryptocurrencies into the mainstream financial system.

The Push for a Comprehensive Framework:

Efforts to establish a robust regulatory framework for the crypto market have been spearheaded by the Blockchain Association of Kenya (BAK).

Collaborating with various stakeholders, BAK drafted the Virtual Assets Service Provider (VASP) Bill, 2024. This bill, presented to the National Assembly in March 2024, aims to create a dedicated regulatory body to oversee the entire crypto market in Kenya.

Addressing the Risks:

The cross-border nature of cryptocurrencies and the associated risks of money laundering and terrorism financing have been acknowledged by the Kenyan government.

The VAs/VASPs ML/TF National Risk Assessment Report for Kenya, finalised in September 2023, highlighted the urgent need for a comprehensive regulatory framework to safeguard the integrity of the Kenyan financial system.

A Global Perspective:

The Kenyan government is wisely looking towards established jurisdictions for guidance. By studying the regulatory frameworks of countries like the US, Singapore, UK, Mauritius, France, and South Africa, Kenya aims to learn from their successes and avoid pitfalls. This “best practices” approach is crucial in navigating the complexities of the crypto market.

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A Call for Collaboration:

Crucially, Treasury has invited stakeholders to provide feedback on the draft policy before January 29th, 2025. This inclusive approach ensures that the final policy reflects the diverse perspectives of industry players, consumers, and other relevant stakeholders.

Conclusion:

The Virtual Asset Service Providers Bill, 2025, marks a significant step in Kenya’s efforts to regulate the crypto market. While the bill aims to protect consumers and ensure financial stability, it also raises concerns about the potential impact on the crypto industry.

As the bill moves through the legislative process, it will be interesting to see how the government balances its regulatory objectives with the need to foster innovation within the crypto space.