SCOPE OF REGULATION IN KENYA

Kenya’s financial landscape has long been dominated by traditional banking institutions. However, with the rise of cryptocurrencies, regulatory bodies have gradually shifted their stance. In 2015, the Central Bank of Kenya (CBK) issued a public notice warning against the use of virtual currencies, citing their unregulated status and lack of government backing. This position was echoed by the Capital Markets Authority (CMA) in 2018, which cautioned against participating in initial coin offerings (ICOs) due to the high risk of fraud and lack of investor protection. The CBK reaffirmed its position in a further notice issued in 2020.

Despite these warnings, cryptocurrency adoption among Kenyans has grown. The Kenya Revenue Authority (KRA) reported that between 2021 and 2022, cryptocurrency transactions amounted to approximately KES2,4 trillion – nearly 20% of the country’s GDP – demonstrating widespread public engagement with cryptocurrencies. The government’s recognition and acceptance of virtual currencies followed suit in 2023 when it introduced the Digital Asset Tax (DAT), imposing a 3% tax on income derived from the transfer or exchange of digital assets. This marked Kenya’s first formal approach to regulation, signalling a shift from caution to structured oversight.

However, the regulatory framework for crypto assets in Kenya remains uncertain due to the absence of specific definitions or classifications of digital assets. The CMA provides the legal foundation for securities regulation, but its definition of securities does not explicitly cover cryptocurrencies. Kenyan courts have interpreted the law more broadly in the Wiseman Talent Ventures case, where Wiseman attempted to conduct an initial coin offering of its token, KeniCoin. The court applied the U.S.-developed ‘Howey Test’ ¹ to classify the offering as an investment contract, thus bringing it under the jurisdiction of the CMA. The decision emphasised consumer protection and recognised the potential mandate for the CMA to regulate the digital asset space in the absence of a legal regime.

Despite this, the Wiseman ruling did not establish a definitive classification framework for cryptocurrencies, as the court refrained from providing abstract criteria for determining when a digital token should be regulated under the CMA Act. The court also noted that the KeniCoin token bore characteristics of a currency, which would ordinarily fall under the purview of the CBK, which has an exclusive mandate over issues related to currency and payment systems. This overlapping consideration further illustrated the lack of clear boundaries between the CMA and CBK’s regulatory mandates in relation to cryptocurrency. While the judgment highlighted the court’s prioritisation of consumer protection, it also highlighted the urgent need for a clear regulatory framework for digital assets in Kenya.

IMF MARKET ANALYSIS

In December 2024, at the request of the CMA, the International Monetary Fund (IMF) conducted an analysis of cryptocurrency activity in Kenya. It highlighted the absence of cryptocurrency specific regulations, with oversight based on existing CBK and CMA mandates – an approach that was limited and not legally binding, as outlined in the Wiseman case. This regulatory gap has contributed to the rise of crypto-related scams and criminal activity. The IMF gave various recommendations, including:

• Conduct a comprehensive market analysis on the state of Kenya’s crypto market and identify financial, market and consumer protection risks;
• Develop crypto-specific regulations aligned with international standards through collaboration with foreign regulators, to manage risks associated with international exchanges while accommodating Kenya’s unique context to maintain financial stability; and
• Strengthen cooperation across the relevant authorities, and invest in adequate technical and human resources to ensure effective oversight.

VIRTUAL ASSET SERVICE PROVIDER BILL 2025 (VASP BILL)

The Kenyan government has since embraced the sector, as seen in the draft National Policy on Virtual Assets and the VASP Bill, introduced by the Blockchain Association of Kenya in March 2024.

The VASP Bill proposes a comprehensive regulatory framework to promote financial stability, market integrity and consumer protection while addressing anti-money laundering (AML) / combating the financing of terrorism (CFT) risks. It designates the CBK and CMA as the key regulators responsible for the licensing and oversight of VASPs. Key provisions include licensing based on eligibility, financial health, cybersecurity and public interest; mandatory Know Your Client (KYC) procedures, reporting of suspicious transactions, a local presence, robust governance structures; and severe penalties for non-compliance, including up to KES10,000,000 for individuals and KES20,000,000 for entities, or ten (10) years imprisonment.

Public participation concluded on 29 January 2025, with the following feedback:

• The 3% tax on the transaction amount should instead be on gains or transfer fees;
• Introduce tiered licensing to accommodate multi-service providers and eliminate regulatory duplication; and
• Harmonisation with international standards is required, to support cross border transactions and global competitiveness.

THE BENEFITS OF CRYPTOCURRENCY ADOPTION AND REGULATION

Regulatory oversight plays a key role in protecting investors and ensuring market integrity. The VASP Bill aims to enhance consumer protection, prevent fraud, and align Kenya with international standards. If effectively enforced, the framework could boost investor confidence, attract innovation, and position Kenya as a leading crypto investment hub.

The VASP Bill will formalise tax compliance by requiring licensed entities to report and remit the DAT, replacing the current reliance on voluntary contributions. In the financial year ending June 2024, the KRA collected KES10 billion in DAT from just 384 cryptocurrency users, highlighting the significant capacity for revenue generation for the government.

In 2024, Kenya was grey-listed by the Financial Action Task Force for inadequate measures against money laundering, terrorist financing, and unaddressed crypto-related risks. The implementation of the VASP Bill demonstrates Kenya’s commitment to strengthening its AML/CFT framework, as it provides comprehensive provisions to address these concerns.

Stablecoins are cryptocurrencies pegged to fiat currencies or commodities and offer price stability compared to traditional cryptocurrencies. A survey by Emurgo Africa revealed the growing adoption of stablecoins in sub-Saharan Africa, driven by local currency volatility and limited banking access. In Kenya, factors like inflation, currency depreciation, a strong fintech ecosystem, and widespread internet access have accelerated stablecoin use. Platforms like Binance have leveraged M-Pesa to enable stablecoin-fiat exchanges, expanding financial access in remote areas. Stablecoins are increasingly viewed as a cost-effective, reliable alternative for value storage and currency conversion, offering protection against inflation and currency instability.

IN SUMMARY

Just as M-Pesa transformed the way in which Kenyans interact with money, cryptocurrencies are set to further revolutionise the financial sector by offering decentralised, borderless and digital alternatives. With Kenya’s history of embracing technological advancements and its large, digitally literate population, the country is well-positioned to become a key player in the global cryptocurrency market. As fintech startups focused on cryptocurrency continue to penetrate the market, future collaborations between traditional banks and blockchain companies are likely, fostering a more inclusive and efficient financial ecosystem.

1.A contract which involves the investment of money or other property with the expectation of profit or gain based on the expertise, management or effort of others.

Njeri Wagacha is a Director and Wambui Kimamo a Trainee Lawyer | CDH Kenya

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
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