Kenya advances cryptocurrency regulation efforts in response to fraud and money laundering incidents

As the cryptocurrency landscape continues to mature in Africa, the Kenyan government has taken a proactive step by establishing a multi-agency technical working group dedicated to overseeing and regulating the burgeoning digital asset sector. This pivotal move arises nearly a year subsequent to an announcement by the Kenya Revenue Authority (KRA), wherein it revealed plans to levy a 3% tax on the revenue generated by Kenyan residents from trading in cryptocurrencies.

The technical working group, which embodies key stakeholders including the Central Bank of Kenya (CBK), has been mandated to devise a comprehensive regulatory framework. This framework is aimed at governing the use of cryptocurrencies, herein referred to as virtual assets (VAs), as well as overseeing operations of digital asset services, known as virtual asset service providers (VASPs).

Speaking on the matter, National Treasury Cabinet Secretary Njuguna Ndung’u highlighted the urgency and necessity of such regulation. He noted the increasing prevalence of virtual assets in online markets and the concurrent rise of potentially fraudulent online investment schemes. To address these concerns, the CBK teamed up with other financial sector regulators to circulate advisories cautioning the public about the risks associated with engaging in unlicensed financial products and services.

The establishment of the technical working group thus represents the Kenyan government’s commitment to creating a secure and transparent environment for cryptocurrency transactions. By introducing appropriate regulations, the intention is to protect consumers, promote stability in the digital finance space, and ensure that the growth of virtual assets contributes positively to Kenya’s broader economic framework.

In light of the evolving cryptocurrency market in Africa, the Kenyan government has been taking measured steps to ensure that the burgeoning sector is effectively regulated. In September 2023, the Financial Reporting Centre (FRC) within the Central Bank of Kenya undertook a meticulous risk assessment pertaining to virtual assets (VAs) and virtual asset service providers (VASPs). This assessment was driven by concerns of potential money laundering and terrorism financing associated with cryptocurrency transactions.

The outcome of the FRC’s assessment underscored the necessity for rigorous regulatory measures to mitigate several identified risks, including but not limited to money laundering, terrorism financing, consumer protection issues, data privacy concerns, and governance challenges.

Kenya’s engagement in the cryptocurrency sphere is notable. It is recognized as the largest cryptocurrency market in East Africa, both in terms of transaction volume and the level of interest within the sub-region. This places Kenya prominently on the map as one of the top cryptocurrency markets on the African continent.

Nonetheless, the government’s decision to impose a 3% tax on digital asset trading was met with considerable pushback from the Kenyan cryptocurrency community. In response, the Blockchain Association of Kenya (BAK) took legal action by filing a petition with the High Court of Kenya, challenging the legality and constitutional validity of such a tax.

Furthering the dialogue around cryptocurrency regulation, in February 2024, at the behest of the Kenyan parliament, the Blockchain Association of Kenya took the initiative to author the first draft of the country’s Virtual Assets Service Provider (VASP) bill. This legislation aims to establish a structured framework for the oversight and regulation of Kenya’s digital asset market.

Parallel to these regulatory advancements, the Directorate of Criminal Investigations (DCI) issued warnings to the public regarding online cryptocurrency fraudulent schemes that have resulted in financial losses for unwary Kenyans.

A significant case in point disclosed by the DCI in 2023 involved a convoluted transaction that allegedly breached the regulations set forth by the Crime and Anti-Money Laundering Act. The operation in question involved the suspicious circulation of at least KSh 2.5 billion (about $18 million) into the Kenyan economy via Mpesa withdrawals. These funds were transferred to individuals who had participated in iris scans conducted by the Worldcoin cryptocurrency prior to its operational halt.

The Kenyan government, in August 2023, took definitive action by suspending the operations of Worldcoin within the country. Despite subsequent pressure from external entities, such as the United States, to reconsider the suspension, the Kenyan authorities have maintained their stance and have not lifted the prohibition.

This series of events underlines Kenya’s cautious yet forward-moving approach to adopting cryptocurrency, emphasizing the need for robust oversight to prevent financial malpractices, protect consumers, and ensure the beneficial integration of digital assets into the nation’s economy.