Blockchain Regulation in Kenya

Author: Shalom Bright Omondi

Blockchain technology has been making waves globally, and Kenya is no exception. The National Assembly’s Departmental Committee on Finance and National Planning has taken a significant step by directing the Blockchain Association of Kenya (BAK) to prepare the first draft of what could become a Virtual Asset Service Provider's Bill. This move signals a proactive approach to regulating digital assets within the country, but what considerations should Kenya keep in mind as it delves into the world of blockchain regulation? 

Understanding the Crypto-Bill 

The proposed bill, also known as the Crypto Bill, aims to regulate digital assets and virtual asset service providers in Kenya. The Blockchain Association of Kenya (BAK) has been entrusted with the task of drafting the initial framework for this legislation. In a workshop organized by the National Assembly Committee on Finance and National Planning, the BAK team made a presentation to the Committee, covering areas it believes are crucial to developing a favourable and robust regulatory framework. These areas include: 

1. Licensing framework
2. Tax framework
3. Consumer protection framework
4. Anti-Money Laundering & Counter-Terrorism Financing (AMl/CTF)
5. Regulatory Sandbox

Lets take a look at some of these today and see how the BAK can adequately incorporate crypto-regulations to avoid the misgivings of the Finance Act of 2023, where critics have heralded the drafting of the crypto-provisions as deficient and lacking. 

Regulation, Licensing Framework and Taxation: 

Under the current regulatory landscape, cryptocurrency regulation is undertaken through combined multi-efforts from the Capital Markets Authority and the Central Bank of Kenya and albeit Kenya Revenue Authority. 

The Capital Markets Authority is established under Section 5 of the Capital Markets Authority Act and is primarily able to regulate cryptocurrencies through securities regulations. The purpose of this of course is to protect  investors and produce financial security. However, to what extent this works in the crypto world in Kenya is clearly still yet to be effectively seen. 

Licensing 

Licensing is a crucial aspect of ensuring that businesses in the crypto space operate transparently and adhere to established guidelines. As Kenya moves forward with blockchain regulation, maintaining a robust licensing process will be essential to foster a secure and compliant ecosystem. 

The National Payment Systems Act allows the Central Bank of Kenya to regulate payment systems and payment service providers at the moment. However, this has not stopped mobile payment fraud from wreaking havoc across the country. 

According to ConnectingAfrica, in 2021, almost 51% of mobile-based transactions in Kenya were identified as suspect of fraud. One great example of adequate license regulations for Virtual Assets BAK can refer to is Mauritius Virtual Asset Act (VA) Act. 

Mauritius. 

In Mauritius, the Financial Services Commission (FSC) is responsible for regulating and supervising VASPs and issuers of Initial Token Offering (ITOs). It can be compared with the Kenyan Financial Reporting Centre (FRC). The FSC monitors and oversees their business activities. 

The FSC may also issue guidance on the detection of suspicious transactions and the application of anti-money laundering and the financing of terrorism measures. 

Key obligations of Virtual Asset Service Providers (VASP) in Mauritius- 

They are required to maintain a high standard of professional conduct and confidentiality and carry out their business activities with honesty and due diligence in addition to maintaining adequate financial resources and solvency. The applicant for a VASP licence will need to satisfy certain prescribed requirements including: 

• An application for a VASP licence can only be made by a company and must be addressed to the FSC under section 8 of the VA Act. However, where a bank has obtained the written approval of the Bank of Mauritius (BoM), it can apply for a class ‘R’ or ‘I’ licence and can also, through a subsidiary, apply for a class ‘M’, ‘O’ or ‘S’ licence. A licensee, under the National Payment Systems Act 2018, may also, subject to obtaining the written approval of the BoM, apply through a subsidiary, for a licence to carry out the business activities of a VASP.
• Any VASP that conducts one or more of the prescribed business activities will need to apply for the corresponding class of licence.

Note Under the VA Act, there are introduced five classes of licence: • Class M: Virtual Asset Broker-Dealer • Class O: Virtual Asset Wallet Services • Class R: Virtual Asset Custodian • Class I: Virtual Asset Advisory Services • Class S: Virtual Asset Market Place 

• A VASP is required to have a physical office in Mauritius and the business activities of a VASP must be directed and managed from Mauritius.
• A foreign entity looking to provide virtual asset services in Mauritius will need to incorporate a company in Mauritius. • An application for a variation of licence or to remove any limitation imposed may be made to the FSC.
• A VASP is required to ensure that each of its controllers, beneficial owners, associates and officers satisfy the ‘fit and proper’ criteria of the FSC. 9
• The prior approval of the FSC is required for an issue or transfer of shares or legal or beneficial interest in a VASP.
• VASPs are required to maintain a minimum stated unimpaired capital and keep their accounts in respect of virtual assets of clients that they hold separate from accounts kept in respect of any other business.

The Blockchain Association of Kenya can rely on these regulations when determining how to draft regulations for virtual asset service providers in Kenya in the Cryptobill. 

Taxation 

The Finance Act of 2023 introduced the aspect of taxation of cryptocurrency, introducing tax on the income derived from the transfer or exchange of digital assets (such as crypto currency transactions) at a rate of 3%. 

Critics have argued that mainly the Digital Assets Tax requires clear guidelines and comprehensive education. Both taxpayers and tax authorities need a shared understanding of how the tax applies to different aspects of cryptocurrency transactions. 

Furthermore, the complexity of tracking and regulating cryptocurrency transactions poses a challenge for both taxpayers and regulatory authorities. Understanding how to ensure compliance with the tax on digital assets requires the Blockchain Association of Kenya to implement robust monitoring mechanisms and have a thorough understanding of the decentralized nature of cryptocurrencies. 

What Blockchain Association of Kenya Should Watch Out For 

As Kenya progresses in regulating blockchain and cryptocurrencies, several key considerations should be kept in mind by the Blockchain Association of Kenya. 

Firstly, regulations should strike a balance between ensuring consumer protection and fostering innovation. Kenya should be mindful of not stifling technological advancements in the blockchain space while implementing measures to mitigate risks. Blockchain and cryptocurrencies may still be unfamiliar to many. 

There should be more prioritization of public awareness and education initiatives to ensure that individuals and businesses understand the benefits, risks, and proper usage of digital assets. 

The BAK should also consider the global nature of blockchain and cryptocurrency markets, aligning regulations with international standards can enhance interoperability and facilitate international collaboration. In our view, given the dynamic nature of the blockchain industry, regulations should be flexible enough to adapt to technological advancements and changing market dynamics.