By Derek Mutiso
The Evolving Landscape of Crypto Regulation in Kenya
Cryptocurrencies are transforming the financial ecosystem globally, and Kenya is no exception. As one of the leading African countries in the adoption of cryptocurrencies, Kenya is at a crossroads where important decisions need to be made on how to regulate and manage this rapidly changing sector. Considering the dangers of fraud, money laundering, and volatility, as well as the prospects for financial inclusion, innovation, and economic progress, the Kenyan government has been compelled to create a comprehensive regulatory framework for cryptocurrencies.
Kenya was ranked third in the volume of peer-to-peer (P2P) exchange trade and 21st out of 155 nations on the crypto adoption index in the 2023 Geography of Cryptocurrency Report by crypto industry intelligence firm Chainalysis. The use of cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), and stablecoins such as Tether (USDT) has gained traction for investments, remittances, and as a hedge against currency devaluations. According to research from Statista, over 700,000 Kenyans use cryptocurrency, and the value of the market is set to hit US$40 million in 2025. However, this growth has occurred in an environment characterized by legal ambiguity and limited regulatory oversight.
In the past, the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA) were sceptical of the crypto wave. In 2015, the CBK explicitly warned financial institutions against facilitating crypto transactions, effectively cutting off crypto activities from the formal financial sector. Despite these restrictions, Kenyans continued to participate in P2P crypto trading, highlighting the need for a balanced regulatory approach that addresses risk while encouraging innovation.
This was echoed in a paper by the World Economic Forum titled “Pathways to the Regulation of Crypto-Assets: A Global Approach” – where international alignment on certain cryptocurrency rules was described as “not just desirable but necessary”. “A global approach is needed to maximize the advantages from the underlying technology and to manage the risks,” the paper said. “However, given the different stages of market maturity, the development of regional hubs, and the varying capacity of regulators, it is prudent to holistically focus also on the important role that international organizations and national/regional regulators as well as industry actors can play in ensuring responsible regulatory evolution.”
What progress has been made so far?
More recently, Kenya’s regulatory environment appears to be slowly shifting from an unfavourable stance on cryptocurrency to a more receptive and supportive approach. At the invitation of Kenya’s Capital Markets Authority (CMA), representatives from the Monetary and Capital Markets Department (MCM) and the Legal Department (LEG) of the International Monetary Fund (IMF) visited Nairobi to provide support primarily on prudential and conduct-related aspects of a proposed regulatory framework for crypto assets. During the mission, they conducted in-person discussions with the CMA, the CBK, and the National Treasury to gain insights into the authorities’ approach and challenges in developing the framework. The IMF subsequently prepared a technical assistance report for crypto regulation and legislation in Kenya.
The “Draft National Policy on Virtual Assets and Virtual Asset Service Providers,” published in December 2024, marks a significant step toward creating a sound legal and regulatory framework. This policy aims to promote financial innovation, ensure sound risk management, and enhance financial literacy.
“The policy takes account of regulatory approaches from various jurisdictions and provides a framework that is adaptive and flexible for domestic and international cooperation, compliance, consumer protection, financial innovations, and management of risks,” Treasury CS John Mbadi said.
The Treasury added that the policy framework would be developed based on how other jurisdictions have set safeguards in the crypto market. Kenya identifies a combination of systemic functionalities drawn from the US, Singapore, the UK, Mauritius, France, and South Africa – which are so far ahead in advancing their regulation capacities in the sector.
Key focus areas of the policy include:
- Defining Crypto Assets: Establishing clear definitions and classifications to differentiate between securities, payment instruments, and other asset types.
- Licensing Regimes: Introducing a system to license VASPs and enforce compliance with anti-money laundering (AML) and combating the financing of terrorism (CFT) standards.
- Consumer Education: Enhancing financial literacy to reduce vulnerability to scams and promote informed decision-making.
What does Kenya stand to gain from crypto regulation?
A well-regulated crypto market offers significant benefits for Kenya:
1. Financial Inclusion
Cryptocurrencies can provide unbanked populations with access to financial services, enabling them to participate in the global economy. By regulating the sector, Kenya can ensure these opportunities are safe and accessible.
2. Economic Growth
A clear regulatory framework can attract international investors and fintech companies, boosting Kenya’s position as a regional technology hub.
3. Innovation
Regulation can encourage innovation by providing a predictable environment for startups and entrepreneurs to develop blockchain-based solutions.
4. Revenue Generation
Taxing crypto transactions can provide an additional revenue stream for the government, supporting economic development initiatives.
Crypto Currency Regulatory Challenges in Kenya
- Lack of Legal Clarity
The current regulatory framework in Kenya relies on existing laws like the Capital Markets Act and the Central Bank of Kenya Act, which were not designed to address the complexities of digital assets. This has resulted in significant uncertainty regarding the classification and regulation of cryptocurrencies, leaving questions about jurisdiction and enforcement unanswered.
- Consumer Protection Risks
The absence of a licensing or registration regime for crypto asset service providers (CASPs) has exposed consumers to scams and fraudulent schemes. A survey conducted in 2023 by a Technical Working Group (TWG) led by the Financial Reporting Centre (FRC) and comprising the public sector (including the Central Bank of Kenya, Capital Markets Authority, and law enforcement agencies), private sector (financial sector reporting entities) and VASPs. found that 38% of respondents knew someone affected by crypto-related fraud, further emphasizing the need for a robust framework.
- Taxation Issues
The Finance Act 2023 introduced a digital asset tax of 3% on gross income derived from crypto transactions. However, the implementation of this tax faces legal challenges, adding another layer of complexity to Kenya’s regulatory environment.
- Interagency Coordination
Effective regulation of crypto assets requires collaboration among multiple stakeholders, including the CMA, CBK, National Treasury, and law enforcement agencies. The lack of a cohesive strategy has hindered progress in developing a comprehensive framework.
Mitigation Strategies
Despite its potential, crypto regulation comes with challenges. Policymakers must strike a balance between encouraging innovation and mitigating risks such as fraud and market volatility. Key strategies include:
- Enhanced Surveillance
Equipping regulators with the tools and expertise to monitor market activities and detect suspicious transactions.
- Public Awareness Campaigns
Educating citizens online and in person about the risks and benefits of crypto assets to promote responsible usage.
- Collaborative Governance
Establishing a unified regulatory framework that aligns the efforts of the CMA, CBK, and other stakeholders.
- International Cooperation
Engaging with global bodies like the Financial Action Task Force (FATF) to ensure Kenya’s regulations meet international standards.
Lessons from Global Leaders
Kenya can learn valuable lessons from countries with advanced crypto regulations to shape its own regulatory framework. Japan, for instance, has established a robust system through its Financial Services Agency (FSA). The FSA enforces strict licensing requirements for cryptocurrency exchanges, mandates compliance with Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) standards. By adopting a similar approach, Kenya could require Virtual Asset Service Providers (VASPs) to register and meet high operational standards, creating a safer and more regulated crypto environment.
The European Union (EU) offers another compelling example with its Markets in Crypto-Assets (MiCA) regulation, which provides a unified legal framework for crypto activities across member states. MiCA includes clear guidelines for stablecoins and defines the roles of supervisory authorities. Kenya could benefit from adopting a harmonized regulatory approach like MiCA to bolster investor confidence and attract global players to its crypto market.
In the United States, a multi-agency approach divides regulatory oversight among the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN). Cryptocurrency exchanges in the US are required to register with FinCEN, implement AML/CFT programs, and comply with the Bank Secrecy Act (BSA). US regulations also include the “Travel Rule,” which mandates exchanges to collect and share information about the originators and beneficiaries of transactions.
Suspicious Activity Reports (SARs) are required for transactions exceeding $10,000, while wallet owners must verify their identities for transactions over $3,000. These measures ensure robust oversight and transparency, providing a model for Kenya to consider in its regulatory development. By studying these frameworks, Kenya can craft a balanced regulatory system that encourages innovation, protects consumers, and aligns with international standards.
As Winston Churchill aptly noted, “If you make 10,000 regulations, you destroy all respect for the law.” As Kenyan law makers attempt to regulate crypto, they have to take great care not to over -regulate. Too many rules can stifle creativity, and scare off investors. The high cost of compliance and constant changes in regulations could push businesses and talent to countries with more favourable environments. Worse still, overly strict regulations might drive people to the black market, undermining the very intentions of regulation.
Lawmakers need to adopt a balanced, adaptable, and reasonable approach to regulation. This will not only reduce risks but also empower the country to leverage digital currencies for economic growth and financial inclusion. If Kenya embraces this approach, it could set the stage for a thriving digital financial future, and lead the way for other nations in Africa.
The author is a business writer and project coordinator, Omeriye Foundation.
