The Status of Crypto Regulation in Kenya

It is evident that blockchain is the future and it is here to stay! In the previous article published in Wakili Magazine, I highlighted briefly how blockchain applications can be used. The recently proposed regulation of cryptocurrency in Kenya has sparked conversation in the financial sector.

In Kenya, legislators are currently contemplating introducing taxation on Crypto Exchanges and Digital Wallets. The proposals have been introduced through the Capital Markets (Amendment) Bill, 2022. The Bill further imposes transaction taxes similar to excise duty charged on bank transactions. This is the first Bill that will clearly acknowledge the use of cryptocurrencies and regulations on digital currencies in Kenya.

In a nutshell, some of the salient features of the Bill include;

1. There is a requirement to provide the Capital Markets Authority (CMA) with some specific information if you engage or own digital currencies;
2. Owners of digital currencies will be required to declare the value in Kenya Shillings, the type of currency owned, the date of acquisition, and the date of sale;
3. The requirement to maintain proper records of transactions using digital currency. Such records should contain details of sales and purchases, and paid taxes on the gains, that is Capital Gains Tax;
4. The requirement to provide details related to the digital currency transactions in terms of costs incurred and profits/losses arising from the same; 
5. The Bill will provide the definition of digital currencies, crypto mining, and regulations on crypto trading;
6. Person trading in digital currencies can apply to CMA for a trading license within 6 months of the enactment of the Bill, as the CMA has been given the power to issue licenses under the amendment;
7. There will be an electronic centralized register of all transactions in digital currencies, maintained by the CMA; and 
8. Digital currency will now be considered a security in the proposed amended definition of securities.

The amendments can be considered timely as many Kenyans have suffered financial loss through unregulated crypto trading. The amendments follow UNCTAD Policy Brief No. 100 issued in June 2022, which urges governments to formulate comprehensive financial regulations that cover digital currencies to curb the risks associated with the use of cryptocurrencies and stable coins. The Policy Brief shows that the use of cryptocurrencies increased during the pandemic, which if left unregulated, could affect the capital controls of a country. These amendments reflect key policy interventions highlighted in the Policy Brief.  Additionally, in the United States, the Security and Exchange Commission (SEC) regulates stocks and securities. The SEC considers some cryptocurrencies as securities, therefore, it has powers to regulate them. The SEC is the equivalent of the CMA in Kenya. The US applies the Howey Test which emanated from SEC v. W.J. Howey Co. that set out four elements that need to be met for a transaction to qualify as a security. Therefore, if the cryptocurrency meets the four elements, the same is registered with SEC as a security. It should be noted that not all cryptocurrencies are securities, more details on this will be shared in the next article.

Further, Uzbekistan Government has recently formulated comprehensive regulations on cryptocurrencies. The country also licensed two companies to operate as crypto exchanges. Countries are beginning to embrace the use of cryptocurrencies both as a form of payment and security. It will be interesting to follow the policy developments in Kenya and the protection measures put in place to guard monetary sovereignty and eventually create our own Central Bank Digital Currency (CBDC) like Nigeria.

For more information or clarification kindly contact: 

Wendy Muganda

Managing Partner, Kijala & Muganda Advocates

muganda@kmadvocates.net 

Disclaimer: This article is meant for general use only and should not be relied upon solely without seeking legal advice first. The author does not currently hold value in any digital currencies or projects. Photo credit: Getty Images