KENYA ON THE MOVE TO REGULATE CRYPTOS

Review of Kenya’s Draft Virtual Assets Service Providers Bill,2024

On 22nd January 2024, the Block Chain Association of Kenya developed the Virtual Assets Service Providers (VASP)draft bill to regulate crypto assets in Kenya after being tasked to do that by the Kenyan parliament. This lobby group released the first draft of the proposed Virtual Assets Service Providers Bill for public review and feedback ahead of submitting it to Parliament on 14th February 2024.

On a comparative review of the provisions of the Virtual Assets Service Providers Bill 2024, it is clear that the proposed bill draws a lot from the Namibian Virtual Assets Act which was a groundbreaking piece of legislation in Africa. The primary objective of this bill is to provide for the licensing and regulation of virtual asset service providers and token issuers, admission to trading on trading platforms of virtual assets and related activities.

The bill goes further to provide for the establishment of a Joint Regulatory Sandbox that shall ensure consumer protection, prevent market abuse and prevent and mitigate the risk of money laundering, financing of terrorism and proliferation activities.

Under the Bill, Virtual assets are defined to mean “cryptographically secured digital representations of value that may be digitally traded or transferred, and may be used for payment or investment purposes, or are distributed through a distributed ledger technology where value is embedded or in which there is a contractual right of use.”

The Bill further distinguishes and excludes digital representations of legal tender as provided for under the Central Bank of Kenya “CBK” Act, from the definition of a virtual asset. This then removes Fiat Currency and E-Money from the ambit of the VASP. The VASP also excludes digital securities and other financial assets that are regulated under the Capital Markets Authority (CMA) Act from its purview.

The VASP bill is intended to apply to virtual asset service providers, and to token issuers who carry out their business activities in Kenya or offer their services to Kenyan consumers online irrespective of the physical location from which the activity is carried out.

Regulatory and Supervisory Authority

The VASP bill proposes to vest mandate for the regulation and supervision of virtual service providers on the Capital Markets Authority (CMA). CMA will be mandated to register and license virtual asset providers and token issuers. Furthermore, CMA will have the authority to issue such rules and regulations as it deems expedient. These include rules on the taking of fees and levying of charges and setting prudential standards in respect of disclosures to consumers, risk management, custody of client assets, cybersecurity and financial reporting. CMA will also be tasked with the responsibility of creating a virtual asset register to register persons who hold virtual assets.

The Bill also proposes a Joint Assets Regulatory Sandbox (the Sandbox) which shall be a framework operated by CMA to facilitate and support the development of an efficient and globally competitive virtual assets sector in Kenya. The Sandbox will comprise of officers from the CMA, CBK, the Financial Reporting Centre (a body established under the Proceeds of Crime and Anti Money Laundering Act), the Ministry of ICT, the Nairobi International Finance Centre and two Virtual Assets providers.

The Sandbox is intended to run a one-stop shop that manages and oversees all regulatory concerns and queries raised with respect to virtual assets across government agencies. This Sandbox appears to have been informed by the need to shield the virtual assets sector from bureaucracy which has previously been identified as a hinderance to innovation like in the instances of Mpesa.

It is also important to note that under the Bill, it will be a requirement for a person who carries out the business activities of a virtual asset service provider within or from Kenya to obtain a license. The licensing requirement shall apply to corporate entities registered in Kenya that offer virtual asset services whether within or outside Kenya as well as persons who, irrespective of their physical location offer virtual asset services to persons resident in Kenya.

The Bill proposes four different classes of licenses depending on the service provided. The licenses shall be valid for a duration of 18 months subject to renewal.

In terms of consumer protection, the Bill require licensed service providers to maintain detailed records of transactions, to provide customers with receipts of every transaction and to establish complaints redress mechanisms to address customer complaints promptly.

In relating to taxes, the Bill requires Virtual asset service providers to keep records of virtual assets transactions and pay taxes on gains made from transactions in virtual assets.

In relation to dealings in dirty cash, the Bill requires virtual assets service providers to comply with the Proceeds of Crime and Anti-Money Laundering Act, 2009, the Prevention of Terrorism Act, 2012 and the Proceeds of Crime and Anti-Money Laundering (Amendment) Act, 2023. Further CMA will be required to carry out effective monitoring and reporting on persons under its purview using a comprehensive risk-based approach.

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