by Jude Ayua

Following a request by Kenya’s Capital Markets Authority (CMA), the International Monetary Fund’s Monetary and Capital Markets (MCM) and Legal (LEG) departments (IMF mission) visited Kenya in February 2024 to conduct an analysis of crypto asset activities and the applicable regulatory and legal framework in the country. The IMF mission met with Kenya’s CMA, Central Bank of Kenya (CBK), Kenyan National Treasury, and stakeholders in the private sector, after which the IMF released the Technical Assistance Report in December 2024. The IMF report provides technical support to the CMA for developing a regulatory framework for crypto assets, focusing on prudential and conduct issues while emphasizing financial stability.

Key findings

Regulatory gaps

The IMF report finds that Kenya lacks crypto-specific regulations, as existing frameworks under the CMA Act and CBK Act provide limited applicability, which led to market uncertainty and regulatory gaps. Under the existing frameworks, it is also unclear which types of assets would fall under the purview of the CMA or the CBK, and who should be the competent overseer of those assets.

Crypto asset related crimes

There is prevalent crypto asset related scams and other criminal activity in Kenya. The Kenyan regulatory authorities have issued warnings severally to the public about these crimes. In December 2015, the CBK issued a public notice about the unregulated status of Bitcoin (BTC) and other crypto assets. The CBK has also reissued its warnings occasionally, including specific warnings against dealing with unregulated online foreign exchange dealers. After its first warning in 2018, the CMA issued targeted warnings against fraud in relation to over-the-counter (OTC) transactions involving ‘WorldCoin,’ and the risks associated with initial coin offerings (ICOs). In February 2024, the Directorate of Criminal Investigations (DCI) issued an alert warning about the use of crypto asset platforms for fraud schemes.

Classification of crypto assets

Kenyan courts have considered the classification of dealing in digital tokens by a private actor. In the 2019 case involving Wiseman Talent Ventures and CMA, the court determined if Wiseman Talent Ventures’ offer, issuance, and trading of its digital token, “KeniCoin,” to the Kenyan public constituted a public offer requiring the CMA’s prior authorization under the CMA Act. In deciding the CMA’s jurisdiction as a securities regulator over Wiseman Talent Ventures’ token offering, the court cited the US case, Securities Exchange Commission (SEC) v. W.J Howey Co (the “Howey test”) which defines an “investment contract” to classify the offer and trading of the token. Noting that the US case was only persuasive within Kenyan jurisprudence, the court determined that Wiseman Ventures’ offer was an offer of an investment contract as defined in Howey.

The Kenyan government’s proposed regulations

The Kenyan government intends to regulate the crypto assets market. In November 2023, Kenya’s National Treasury and Economic Planning issued a policy guidance to the Director General of the Financial Reporting Center, Kenyan Financial Intelligence Agency, to develop a framework for crypto assets and crypto asset service providers (CASPs). Factors necessitating the policy guidance’ issuance included the “continued growth in interest and adoption of crypto assets in Kenya [and] recommendations by the Eastern and Southern Africa Anti-Money Laundering Group in its 2022 Mutual Evaluation Report for Kenya.” The National Treasury has decided to develop a regulatory and monitoring framework for virtual assets (VAs) and virtual asset service providers (VASPs) based on findings from the VASP Money Laundering/Terrorist Financing (ML/TF) risk assessment.

Key recommendations

The report recommends a comprehensive market analysis, clearer legal definitions for virtual assets, enhanced consumer protection, and the development of a licensing regime for VASPs. Detailed recommendations include:

Market analysis: The government should conduct a comprehensive empirical market analysis of the current state of the Kenyan crypto asset market. Additionally, assess the risks of the financial sector, market, conduct, and consumer protection based on the market analysis.
Inter-agency collaboration: The government should agree on a cross-agency understanding of the current state of the crypto asset market and the associated risks. The agencies should then define an appropriate policy response based on mutual understanding. Additionally, they should implement an effective cooperation mechanism across the agencies to facilitate comprehensive supervision of the entire crypto asset market.
Risk-based stock taking: Kenyan regulators should conduct a risk-based stock taking exercise of current crypto assets in the Kenyan market to determine if existing regulations cover these assets.
Financial literacy: Regulators should consider further measures to increase financial literacy among potential investors in crypto assets.
Regulatory clarity: The CMA should clarify scope of the CMA Guidelines considering applicable international standards, particularly International Organization of Securities Commissions (IOSCO) Policy Recommendations for Crypto and Digital Asset Markets (FR11/2023).
Implementation mechanisms: The government should ensure adequate technical and human resources are in place for the effective supervision of crypto asset activities; an adequate implementation of a legal framework to ensure a comprehensive and effective regulation and supervision of crypto asset activities. There should be regular review and assessment of the framework against crypto asset market developments in Kenya and the developments of international regulatory standards.
AML/CFT considerations: The report advises aligning the regulatory framework with Financial Action Task Force (FATF) standards, including clear definitions, registration requirements, and risk assessments for VASPs.

Next Steps

The IMF suggests Kenya should implement a phased regulatory framework by 2025. The government should first understand the current state of the Kenyan crypto asset market and be ready before the IMF can provide additional technical assistance to support Kenyan regulators in addressing risks to financial stability, markets, and consumers.

Kenya proposes crypto asset regulations

Kenya’s National Treasury and Economic Planning, through a Multi-Agency Task Force, developed a draft National Policy on Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), December 2024 and the Virtual Assets Service Providers Bill 2025. The policy and bill provide a framework for oversight and development of the VAs ecosystem. The National Treasury and Economic Planning issued a notice inviting the public to submit their views on the policy and the bill on or before 24 January 2025. The National Treasury will also be conducting public forums across nine cities in the country.

Draft National Policy on VAs and VASPs

The draft policy provides recommendations for establishing a coordinated legal framework, ensuring sound risk management, promoting financial innovation, and enhancing financial literacy. It aims to create a comprehensive legal and regulatory framework for VAs and VASPs; to promote market fairness, transparency, financial literacy, risk management, and ensure consumer protection. The policy highlights Kenya’s growing adoption of VAs, with younger demographics showing significant interest. However, the absence of a regulatory framework has led to risks such as money laundering, terrorism financing, and weak consumer protection. It introduces definitions to key concepts including “cryptocurrency,” “virtual asset,” “virtual asset exchanges.” The policy also aligns with recommendations from global standards set by bodies like FATF, IOSCO, and the IMF, emphasizing AML/CFT compliance, financial stability, and responsible innovation.

Key policy interventions

The policy proposes the following for the government:

Provide a comprehensive legal and regulatory framework governing VA activities and VASPs.
Provide a coordination mechanism for effective implementation of the legal and regulatory framework governing VA activities and VASPs.
Ensure sound risk management.
To ensure a fair, transparent and efficient market for VAs and VASPs.
Promote financial innovation and literacy on VAs and VASPs.

It further proposes a structured approach for implementation and monitoring, involving multiple regulatory agencies. The agencies will conduct periodic reviews to stay relevant and effective amid evolving technologies.

The VASPs Bill

This VASPs bill aims to establish a comprehensive regulatory framework for the virtual asset industry in Kenya with a focus on consumer protection, financial stability, and market integrity. The bill aligns with the draft national policy and the recommendations in IMF’s technical assistance report. The bill applies to all virtual asset activities in Kenya, exempting certain non-fungible tokens (NFTs) and closed digital ecosystems.

Key provisions

Licensing and registration: VASPs must obtain a license to operate in Kenya. The relevant regulatory authority can grant, suspend, or revoke a license based on compliance.
Regulatory authorities: The CMA and CBK are designated as the primary regulatory authorities, responsible for licensing, supervision, enforcement, and setting regulatory guidelines VA activities and VASPs in Kenya.
Operational requirements: VASPs must maintain a registered office in Kenya; meet capital, solvency, and insurance requirements, and ensure they have adequate cybersecurity measures in place.
AML/CFT compliance: VASPs must maintain strict measures for anti-money laundering, counter-financing of terrorism and proliferation of weapons. They must also implement mechanisms to prevent misuse of their platforms for illicit activities.
Consumer protection: VASPs must ensure proper handling of customer assets, including holding sufficient reserves and protecting assets from creditors’ claims. There is also a mandatory transparent communication and risk disclosures by VASPs. The bill mandates regular audits and compliance checks on cybersecurity practices by VASPs.
Initial virtual asset offering: Virtual asset issuers must seek approval for any initial virtual asset offerings before marketing or selling to the public. They must comply with disclosure requirements and risk assessments before any issuance.
Enforcement and penalties: The bill outlines penalties for non-compliance, including fines, suspension, and revocation of licenses, which regulatory authorities can enforce.
Confidentiality and record keeping: VASPs must maintain transaction records for a minimum of seven years, and must protect client information with limited exceptions for regulatory purposes.

Kenya’s move to introduce clear regulations for virtual assets is welcome development. The proposed regulations will remove regulatory uncertainty around virtual assets, particularly their classifications and the relevant authorities overseeing virtual assets operations and VASPs in the country. The regulations’ alignment with international standards will ensure effective implementation for a viable virtual assets market in Kenya.

Jude Ayua is a policy analyst at CAB. A lawyer, Jude is an associate at Infusion Lawyers where he is a member of the Blockchain & Virtual Assets Group. He is also a member of the Policy & Regulations Committee of the Stakeholders in Blockchain Technology Association of Nigeria (SiBAN). Jude reports and writes on crypto policy and regulations. jude@infusionlawyers.com

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Kenya seeks consultation on virtual assets regulations following IMF technical assistance report.