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Kenya is preparing legislation to legalice cryptocurrencies, the Treasury Cabinet Secretary John Mbadi, said on Friday, marking a significant shift in the government's stance.
Cryptocurrencies have been banned in Kenya, but widespread public use has continued underground, circumventing restrictions.
"Kenya's financial sector is a beacon of innovation and growth in Africa," Mbadi said in a statement outlining the new policy. "The emergence and growth of Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) have given rise to innovations in the local and international financial system with dynamic opportunities and challenges."
The Treasury CS acknowledged the risks associated with cryptocurrencies, including money laundering, terrorism financing, and fraud, but emphasized the need for a regulatory framework to harness the potential benefits while mitigating these risks.
"The Government of Kenya is committed to creating the necessary legal and regulatory framework in order to leverage opportunities presented by VAs and VASPs while managing the resultant risks," Mbadi stated.
The new draft policy aims to establish a "fair, competitive, and stable market for VAs and VASPs" while fostering innovation and enhancing financial literacy, said Mbadi.
Kenya's move to legalise cryptocurrencies follows a growing global trend. Many countries are exploring ways to regulate the nascent industry, recognizing its potential to transform financial systems while addressing the associated challenges.
They include Morrocco, the United States and Russia.
While making the announcement, Mbadi highlighted Kenya's pioneering role in mobile money Safaricom’s M-pesa in 2007 highlighting the country's history of financial innovation.
“From the groundbreaking mobile money revolution pioneered by the launch of mobile based financial services in 2007 to robust financial system, the country has consistently pushed the boundaries of financial inclusion through technological advancements,” said Mbadi.
“This dynamic sector has fostered economic growth and empowered individuals, solidifying Kenya's position as a regional financial hub.”
Mbadi said the emergence and growth of Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs) have given rise to innovations in the local and international financial system with dynamic opportunities and challenges.
“VAs have gained traction due to the desire for alternative investment avenues, the speed and cost-effectiveness of cross-border transactions and their pseudonymous nature,” he said.
“Conversely, the use of VAs has presented risks such as Money Laundering (ML), Terrorism Financing (TF), Proliferation Financing (PF), tax evasion, fraud, cybercrime, weak governance, and consumer protection issues. The cross-border nature of VAs and VASPs further compounds the risks, as noted in the VAs/VASPs ML/TF National Risk Assessment Report for Kenya, which was finalised in September 2023.”
The added the principal goal of the policy is to cement Kenya as a major player in the global digital finance ecosystem.
“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 innovation and management of risks,” he said.
“Accordingly, adoption of this policy is a major step towards establishing a secure and well-regulated environment for VAs and VASPs in Kenya. In addition, it provides guidance for regulators, competent authorities and other industry stakeholders to navigate the complexities of the digital space so that the country harnesses opportunities offered by VAs in a responsible manner.”
Virtual assets have evolved over the last decade, transforming how financial transactions are conducted and creating new opportunities for innovation. A VA is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes or for other purposes as could arise.
However, the decentralized and often anonymous nature of these assets poses significant regulatory challenges. Jurisdictions around the world are grappling with how to balance the promotion of innovation with the need to protect consumers, maintain financial stability, and prevent illicit activities like Money Laundering (ML), Terrorism Financing (TF), Proliferation Financing (PF) and tax evasion.
For the last 20 years, Distributed Ledger Technology (DLT) such as blockchain technology have inspired the emergence of various types of cryptocurrencies. Bitcoin, the first and most widely used cryptocurrency, was launched in 2009.
One of the major driver for the exploration and adoption of cryptocurrencies was the loss of confidence and trust that followed the 2007/2008 Global Financial Crisis which resulted in the collapse of major financial institutions and the loss of value of sovereign-backed fiat currencies.
The world has since seen significant proliferation of various types of virtual assets.
There have also been attempts by private sector to launch their own versions of cryptocurrencies, such as the attempt by a consortium that included Facebook under the auspices of the Libra Association (later named Diem) to create a stablecoin backed by major world fiat currencies.
Overall, the global crypto industry has witnessed rapid changes, volatility and risks, evidenced for example by the
collapse of FTX Trading Ltd (the third largest crypto exchange at the time) in November 2022, underscoring the need for effective policy and regulation of VA and VASPs.
Adoption of VAs in Africa has grown exponentially in the recent past, as evidenced by the increasing number of countries with regulatory frameworks for VAs and VASPs.
Kenyans are increasingly adopting VAs as an alternative form of investment and transfer of value, due to their fast speed, cost, cross border nature, convenience, and anonymity.
The VAs and Virtual Asset Service Providers (VASPs) ML and TF National Risk Assessment (NRA) conducted in Kenya in 2023 revealed that the population aged between 18 and 40 years showed a greater interest in VAs.
The growing interest in VAs comes with challenges and risks associated with an unregulated market, including but not limited to uncontrolled capital flight, ML, TF, weak governance structures, cybercrime, fraud, and consumer protection issues. These risks have been compounded by the absence of a legal and regulatory framework for VAs and VASPs.
“Accordingly, this policy Draft National Policy on Virtual Assets and Virtual Asset Service Providers, December 2024 has been developed to guide the establishment of a sound legal and regulatory framework to enable the country to harness the benefits while addressing the risks presented by VAs and VASPs,” said Mbadi.
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