Kenya has introduced a proposal for new laws aimed at regulating the rapidly expanding digital asset industry, which has captured the interest of nearly 10% of the nation’s population. The proposed regulations, spearheaded by the Treasury Ministry, are expected to create a safer and more regulated environment for digital asset activities. Experts believe this framework could significantly lower costs and enhance the legitimacy of the sector.
A New Framework for Kenya’s Digital Asset Sector
The Treasury Cabinet Secretary, John Mbadi, recently presented the Draft National Policy on Virtual Assets and Virtual Asset Service Providers (VASPs) for public feedback. If passed, Kenya would become the first country in the region with a comprehensive framework for digital assets. The proposal introduces mandatory licensing for crypto exchanges and digital wallets to formalize the industry.
According to Rufas Kamau, a regional market analyst for FXPesa, a Nairobi-based online broker, these regulations represent an important first step toward mainstream adoption. Kamau believes the framework will legitimize crypto exchanges and wallets, enabling Kenyan investors and institutions to access the market directly rather than relying on peer-to-peer (P2P) platforms, which are often more expensive and harder to account for during tax filings.
Kamau also suggests that the regulations should go further by distinguishing between different types of digital assets. Decentralized assets could be classified as digital commodities, while others should be treated as digital securities. This approach would provide more clarity for the market. The issue of categorizing digital assets is not unique to Kenya; even in the United States, regulators continue to debate the classification of tokens, with BTC being the only cryptocurrency explicitly excluded from securities regulations.
The Challenge of Taxing Digital Assets
Taxation of digital assets remains a contentious issue, not just in Kenya but globally. Many advanced economies, such as the U.S. and the U.K., still rely on outdated financial guidelines to tax digital assets, while countries like India impose steep taxes that some argue stifle the industry’s growth. South Korea, on the other hand, has postponed its taxation plans for several years.
Kenya attempted to address this issue in 2023 by introducing the Digital Asset Tax (DAT) into its Income Tax Act. The DAT proposed a 3% tax on the income derived from exchanging or transferring digital assets. However, this blanket tax failed to account for the differences between crypto traders, those using digital assets for payments (which have been increasingly used in cross-border transactions by Kenyan firms, according to the International Monetary Fund), and long-term investors. This generalized approach denied taxpayers certain benefits, such as tax deductions or the ability to offset losses.
Kamau advocates for a taxation model that mirrors Kenya’s existing mainstream tax system. He suggests that corporates should pay standard income tax rates, employees should pay Pay-As-You-Earn (PAYE) taxes, and exchanges should pay fees similar to those applied to forex brokers.
NEW: 🇰🇪 Kenya is drafting new laws to regulate its digital asset sector, which has attracted nearly 10% of the population.
The proposed legislation focuses on licensing cryptocurrency exchanges and wallets. pic.twitter.com/I90pLjAJQe
— Bitcoin News (@BitcoinNewsCom) January 23, 2025
Balancing Regulation and Growth
Kamau and other advocates for digital assets emphasize the need for a balanced regulatory approach. While the industry is still in its infancy in Kenya, it is evolving quickly, creating opportunities in areas such as jobs, education, and investment. Kamau warns that overly aggressive policies around anti-money laundering (AML), taxation, and control could stifle the sector’s growth.
However, questions remain about the government’s commitment to enacting the proposed framework. Shortly after the draft law was announced, the Treasury requested Kshs. 1.8 billion (approximately $14 million) to develop and promote regulations for cryptocurrencies and digital tokens. This demand drew criticism from Kamau, who argued that the process could be completed more cost-effectively by leveraging existing legislators, industry stakeholders, and online tools.
“The budget is unnecessarily high. Legislators are already in place, and there are organizations like the Blockchain Association of Kenya. This process doesn’t need to be so expensive,” Kamau stated. He also criticized the government for focusing on raising taxes from the crypto sector rather than supporting its growth.
The Road Ahead for Kenya’s Crypto Sector
Despite the challenges, the proposed bill represents Kenya’s most comprehensive attempt to regulate digital assets. By implementing clear policies, Kenya could position itself as a leader in digital asset regulation within the region. However, the government’s next steps will determine whether these proposals can effectively balance regulation with fostering growth in the crypto industry.
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