Kenyan Regulators’ Response to Growing Blockchain & Crypto Adoption

Kevin Imani
February 21, 2019

Here is a summary of the legal status of cryptocurrencies and blockchain solutions in Kenya:

  1. Cryptocurrencies are currently neither a legal tender nor regulated in Kenya.
  2. The Kenyan government regularly warns the public of the risks associated with the use, holding and trading of virtual currencies.
  3. Cryptocurrencies are not prohibited in Kenya. However, depending on their nature, various elements of cryptocurrencies may be restricted by existing regulations.
  4. The government-established Blockchain and Artificial Intelligence task force recommended the adoption of cryptocurrency.
  5. Kenya is investigating the possibilities of a Central Bank Digital Currency.

Who are the Regulators of Cryptocurrency in Kenya?

In Kenya, cryptocurrency and blockchain, as well as fintech innovations in general, are regulated by the following acts¹¹ ¹⁷:

(1) The National Payments Systems Act (NPSA), administered by the Central Bank of Kenya (CBK);

(2) The Capital Markets Act (CMA), administered by the Capital Markets Authority (CMA); and

(3) The Kenya Information and Communication Act (KICA), administered by the Communications Authority.


The Central Bank of Kenya (CBK)

Under the NPSA, the CBK is responsible for overseeing and regulating payment systems and payment service providers within Kenya. The CBK is authorised to oversee payment service providers (including mobile phone service providers) and ensure that platforms for financial transactions are safe for investors.

The CBK is also authorized to regulate cryptocurrencies either through the NPSA or through Kenya’s Money Remittance regulations². Licensing is required whenever a company offers a service for the transmission of money or any representation of monetary value without any payment accounts being created in the name of the payer or the payee. Therefore, virtually all cryptocurrency providers must be licensed in Kenya to legally operate within the country.

Consequently, the CBK is empowered with broad discretion and several legal avenues for the regulation of cryptocurrencies.

December 2015: The CBK warns the public of the risks associated with virtual currencies

In December 2015 the CBK issued a public notice³ informing Kenyans of the risks associated with holding, trading, and otherwise using cryptocurrencies. Further, the CBK used its notice to emphasise that cryptocurrency is volatile and lacks specific regulation.

Specifically, the CBK informed the public that virtual currencies are not legal tender in Kenya and therefore no protection exists in the event of a platform that exchanges or holds the virtual currency going out of business or otherwise failing.

This is to inform the public that virtual currencies such as Bitcoin are not legal tender in Kenya and therefore no protection exists in the event that the platform that exchanges or holds the virtual currency fails or goes out of business. The public should therefore desist from transacting in Bitcoin and similar products.’

Despite the warning by the CBK, there is no law prohibiting their use. However, depending on their nature, various elements of cryptocurrencies may be restricted by existing regulations.

April 2018: The CBK Cautions commercial banks in Kenya against dealing with virtual currencies

In April 2018 the Central Bank of Kenya (CBK) warned⁴ commercial banks and other financial institutions against dealing with virtual currencies or entities dealing in digital currencies such as Bitcoin.

During a speech before the National Assembly Committee on Finance in Kenya’s Parliament Buildings, on April 11, 2018, Dr Njoroge, the CBK Governor, said that cryptocurrencies are anonymous and lack central oversight which makes them prone to money laundering and terrorist financing.

“A banking circular was also issued to all banks by CBK cautioning them against dealing in virtual currencies or transacting with entities that are engaged in virtual currencies,” said Dr Njoroge.

He added:

“There are risks associated with cryptocurrency particularly on consumer protection, fraud, hacking and loss of data and they are prone to be used as pyramid schemes.”

Despite these warnings by the CBK, the adoption of cryptocurrencies has not slowed as the world, including Kenya, uses virtual currencies and associated blockchain solutions to increase convenience and security and decrease transaction costs.

October 2020: The CBK investigates CBDCs due to the rapid growth of private crypto

In an online interview with the US media, on the sidelines of Georgetown’s DC Fintech Week (Oct. 19–22, 2020)⁵, Dr Patrick Njoroge, CBK Governor, said that the CBK had entered into discussions with other central banks on the possibilities of entering the digital currency space.⁶ He said:

”We are already having discussions with other global players, in various ways, around the introduction of Central Bank Digital Currencies. The push comes as a result of mushrooming of private cryptocurrencies and we are already feeling left out and need to create our own space.”

He continued:

“The space for cryptocurrencies needs to be well mapped out so as to address such concerns as money laundering and financing of illicit activities.”

This updated stance makes Kenya one of the 81 states considering whether to launch their own digital currencies, as reported by the Atlantic Council’s Central Bank Digital Currency Tracker in July 202¹⁷.

The Capital Markets Authority (CMA)

Kenya’s Capital Markets Authority (CMA) was set up in 1989 as a statutory agency under the Capital Markets Act 485A. The Act grants the CMA the primary responsibility for the regulation and development of orderly, fair and efficient capital markets in Kenya in order to establish and maintain market integrity and investor confidence.

The Capital Markets Act provides that (financial) securities include any instrument prescribed by the CMA to be a security. According to Bowmans Law⁸, the Capital Markets Act allows the CMA to prescribe cryptocurrencies as securities.²¹

However, the CMA has not yet clarified its position with regard to cryptocurrencies nor contributed to their regulation.

February 2018: CMA declares it has not approved any initial coin offering (ICO)

The Kenyan Capital Markets Authority (CMA) warned⁹ Kenyans of risks associated with initial coin offerings (ICOs) in an attempt to dissuade Kenyans from investing in newly-issued digital tokens.

An ICO brings a new cryptocurrency to market, involving the creation of new digital coins using distributed ledger technology and their subsequent sale to investors.

“It is notified for the general information that the Capital Markets Authority has not as of this date approved any initial coin offering. The ongoing offerings are unregulated and speculative investments with considerable risk to the investor […],” said the Authority.

The note adds:

“Members of the public are, therefore, urged to exercise caution before participating in any ICO lacking regulatory sanction.”

The risks cited by the CMA include a heightened potential for fraud, cross-border distribution risks, information asymmetry, and a lack of liquidity¹⁰.

This extract should not, however, be read as a rebuke of cryptocurrencies. In fact, the CMA is very much pro-blockchain. This is also reflected in the CMA’s statement, which says:

Members of the public are, therefore, urged to exercise caution before participating in any ICO lacking regulatory sanction. CMA is cognisant of the importance of FinTech and the benefits that can be derived from leveraging blockchain technology and is willing to work with interested parties through the already established SandBox model for purposes of supporting innovative FinTech products in a controlled and safe environment¹⁰


March 2019: The CMA sets up a “Regulatory Sandbox”

The CMA’s in March 2019 Regulatory Sandbox Policy Guidance Note¹¹ provides a framework for startups to deploy and conduct live tests of innovative fintech products, solutions and services, including cryptocurrencies, that have the potential to deepen and broaden Kenyan capital markets.

The Regulatory Sandbox, as a part of the CMA’s strategic priority to leverage technology across the capital markets value chain, will help the CMA gain visibility of new innovations as innovative companies test their products and services in live environments.

The boundaries that the Regulatory Sandbox puts around live testing reduce risks to consumers from new financial products and services.

In May 2021, on the occasion of the launch of its Regulatory Sandbox Milestones Report, the CMA announced it had admitted seven firms to the Regulatory Sandbox.¹²


The Government of Kenya

February 2018: The Kenyan Government creates the Distributed Ledger (Blockchain) and Artificial Intelligence Taskforce

The Ministry of Information, Communications and Technology, appreciating the need to put Kenya on par with other nations in its use of “appointed a Taskforce for the exploration and analysis of upcoming digital technologies that demonstrate great potential to transform Kenya’s economy including disruptive technologies that are currently shaping the global economy such as distributed ledger technologies (blockchain and hashgraph), artificial intelligence (A.I.), 5G wireless technology, and the internet of things”.¹³

The task force’s terms of reference include:

  • to critically review distributed ledgers and artificial intelligence technologies;
  • to contextualise how the application of distributed ledgers and artificial intelligence technologies can and will deliver the Government’s Big Four Agenda of affordable housing, universal healthcare, increase manufacturing and agriculture agro-processing;
  • to develop a roadmap on how distributed ledgers and artificial intelligence technologies can promote and enhance Government services

July 2019: The Kenyan Blockchain & AI Taskforce submits its report and recommendations

The Government’s blockchain and AI task force issued a series of recommendations in its report in July 2019.¹⁴

The report calls on the government to play two key roles in blockchain development:

(i) enable supportive regulations and developing supportive policies and ecosystems to enable the growth and development of the private sector and

(ii) active investment using blockchain solutions.

Among several other recommendations, the task team called for the government to:

  • Leverage blockchain and AI to eliminate corruption, given that technologies such as blockchain offer transparency and immutability.
  • Strengthen democracy and elections: utilize blockchain technology and AI to offer real-time polling results and thus improve vote integrity and trust in the voting process.
  • Improve agriculture and food security by using blockchain for food supply chain traceability and authenticity from end-to-end (i.e. from seeds to marketplace).
  • Introduce blockchain technology to enable customers to trace the supply chain of medication and develop a health token incentive to reward citizens who maintain a healthy lifestyle.
  • Use blockchain in supply-chain networks to help flag and report counterfeit goods.

Affordable housing to the poor people will become possible since the State Department of Housing has committed to using Blockchain for the allocation and financial management of affordable housing.¹⁵

May 2019: The Government launches its Digital Economy Blueprint

The Digital Economy Blueprint¹⁶ is a framework to increase the economic growth of Kenya and Africa. The document is structured around five key pillars for the growth of a digital economy. They are Digital Government, Digital Business, Infrastructure, Innovation-Driven Entrepreneurship and Digital Skills and Values. The Blueprint also highlights the cross-cutting issues that need to be considered by two or more of these verticals in tandem for the success of a digital economy.

The document sets out the opportunities and challenges for maximizing the benefits on offer. It also highlights the significant work already happening across Government, civil society, businesses, academia and other sectors, identifying further action required to ensure all Kenyan citizens and residents can thrive in a global digital economy.

The document emphasises the importance of taking into account the work and recommendations of the Task force on Distributed Ledgers (Blockchain) Technology and Artificial Intelligence¹⁴.

October 2020: The Kenya Revenue Authority sets up a new Digital Service Tax applicable to cryptocurrencies

A Digital Service Tax¹⁷ created by the Kenya Revenue Authority (KRA), which came into effect at the start of 2021, is payable on income earned in Kenya from the provision of services through a digital marketplace. A digital marketplace is further defined as “a platform that enables direct interactions between buyers and sellers of goods and services through electronic means.”

This tax is then applicable to cryptocurrencies¹⁸, implying that cryptocurrency platforms must pay 1.5% tax on gross transaction value.

The new policy places Kenya among the group of countries officially levying taxes on crypto transactions. However, cryptocurrencies have yet to obtain any legal status in the country. In the words of the CMA, they lack “regulatory sanction.”

The Digital Service Tax brought a new hope that the Central Bank of Kenya would soon clarify industry regulations in order to harmonize its position with that of the KRA vis-à-vis crypto business.

The bottom line

Kenyans’ appetite to embrace blockchain continues to promote innovation in the fintech space. The effective use of the technology and its use to improve governance, industry, and financial security as outlined by the Government-appointed task force on the subject, requires consistent and clear regulation from the various Kenyan institutions with responsibility for finance and markets.

Cryptocurrencies remain unregulated in Kenya, and they are not backed by the Government or the central bank. However, recent developments seem to indicate that Kenyan authorities recognize that a clear framework is needed in the near future to organise and promote the growing Kenyan crypto space.

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