By 
By Dominic Indokhomi and Daniel Mwathe, Partners, and Richard Odongo and Elvis Wakaba, Associates, Bowmans Kenya
On 9 January 2025, the Cabinet Secretary for National Treasury and Economic Planning unveiled the Virtual Assets Service Provider’s Bill 2024 (the Bill). This landmark legislation is currently undergoing the public participation process, marking a significant step towards regulating virtual assets (VAs) and virtual asset service providers (VASPs) in Kenya. The Bill aims to address the regulatory and financial risks associated with the misuse of VAs, providing a robust legislative framework to foster innovation while ensuring economic stability and consumer protection.
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Background
The Ministry of National Treasury & Economic Planning (the Ministry’s) efforts to regulate VAs are driven by the need to balance fostering innovation with ensuring economic stability and consumer protection. VAs, while offering significant opportunities for growth and financial inclusion, also pose risks such as money laundering, fraud, and cybersecurity threats. The Bill is geared towards regulation that will create a secure and transparent environment, address potential vulnerabilities, and build trust in the ecosystem.
The Bill is informed by the need to supplement existing legal frameworks that apply to virtual assets. In this regard, while existing legal frameworks such as the Capital Markets Act, Companies Act, Proceeds of Crime and Anti-Money Laundering Act, Banking Act, Central Bank of Kenya Act, Data Protection Act, Competition Act, Computer Misuse and Cybercrimes Act, and Consumer Protection laws provide some guidance, they are insufficient to address the complexities of VA policy and regulation.
Licensing and regulatory overview
The Bill seeks to align Kenya with the global Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) standards respectively as recommended by the Financial Action Task Force (FATF). By mitigating the risks associated with VAs, the Bill also seeks to address consumer protection, and financial stability in an increasingly digital economy.
The Bill introduces a regulatory framework by introducing a licensing regime for VAs, and VASPs in Kenya. In this regard, the regulated/licensable service providers under the Bill include VASPs generally, VA exchanges, Payment processors, VA brokers, Investment advisors, Portfolio managers, Tokenization providers, Escrow service providers and Virtual Asset
Validators/Administrators/Miners. Additionally, the proposed licensing categories under the Bill include the Virtual Asset Wallet Provider license; the Virtual Asset Exchange license; the Virtual Asset Payment Processor license; the Virtual Asset Broker license; the Virtual Assets Investment Advisor license; the Virtual Asset Manager license; the Initial Virtual Asset Offering Provider license; the Virtual Asset Escrow Service Provider license; and the Virtual Asset Validator/Administrator/Miner license.
“Natural persons are explicitly prohibited from offering VASP services”
The holders of these license categories will be regulated by the Communications Authority (the CA), the Central Bank of Kenya (the CBK) and the Capital Markets Authority (the CMA) either jointly or interchangeably depending on the service offered.
Natural persons are explicitly prohibited from offering VASP services, thus reinforcing the focus on corporate responsibility and liability.
The Bill also prioritises the regulation of custodial platforms, excluding non-custodial services from licensing requirements. However, platforms offering escrow services must obtain a license. All licensees must maintain prescribed capital requirements. Miners and validators are required to obtain licenses, with oversight from the CA, while virtual asset managers and investment advisors will be regulated by the CMA. Payment gateway service providers will be regulated by the CBK.
Potential drawbacks in the Bill
- Stringent licensing and core capital requirements may deter start-ups and smaller businesses from innovating and offering VAs. The Bill is lacking in practical provisions to support small and medium-sized enterprises in adopting VAs as a treasury or operational asset.
- Lack of clarity in regulation: The Bill assigns responsibilities to various regulators and is not definitively clear on the lead regulator for VAs and VASPs. Various sections refer to the CBK, and the CMA interchangeably, or both. Miners and validators are to be regulated by the CA (which we note will be difficult to implement practically).
- Impractical regulation: The Bill proposes licensing and regulatory requirements for VA miners and validators (blockchain validators running on proof of stake) as VASPs. Given that a natural person cannot be a VASP, the implication is that miners and validators must first incorporate entities and apply for the relevant licenses before staking VAs. This raises concerns about the practicability and implementation of such requirements that would require proactive disclosures by individuals. It should be noted that globally, several jurisdictions have avoided this approach towards VA miners and validators due to its implementation challenges.
More Potential drawbacks
- Short licensing periods: Licenses under the Bill must be renewed annually, and will all expire on 31 December of each year, thus posing an administrative burden on VASPs.
- The Bill is not clear on the regulation of stablecoins considering that stablecoins differ primarily in their stability mechanisms (collateralised or uncollateralised) and governance structures (centralised or decentralised). As such, regulatory clarity and analysis will be required on a case-by-case basis, but a stablecoin would most likely constitute a financial product as a VA when it has the characteristics of a managed investment scheme, security, derivative and/or non-cash payment facility. This may entail licensing stablecoins under one of the proposed licensing categories depending on the specific service offered.
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Taxes: The Bill proposes a 3% Digital Assets Tax (DAT) chargeable on all transactions involving VAs. The proposed tax which is to be applied to every VA transaction may discourage the use and uptake of VAs. This could limit the adoption of VAs and VASPs as a medium of exchange. The absence of tax breaks or incentives for businesses holding VAs as long-term assets discourages the opportunity to encourage VA asset adoption as a national reserve asset. Furthermore, loss-making transactions should not be unfairly taxed.
Probable regulatory developments
Pursuant to Sections 4(a) and 5(3) (a) and (b) of the Statutory Instruments Act, 2013, the Ministry is undertaking public participation on the draft Bill.
From our review of the draft Bill, we note that the Bill has not yet undergone the First Reading stage at Parliament (as of 29 January 2025). This marks a departure from the usual practice where a Bill is first tabled at the National Assembly (at the First Reading stage), before being subjected to public participation. The Ministry published the call for comments and public participation, and as such, will be the government agency responsible for this process. It is therefore likely that the Ministry will take most of the comments and feedback on board before finalising the draft Bill and sending it across to the National Assembly for the First Reading.
It should be noted that the National Assembly and the Senate are currently in recess until 11 February 2025. As such, the final Bill will be tabled before the National Assembly only after 12 February 2025. The Bill is a positive step forward given that it legitimises VASPs, thus opening the door to increased investor confidence and participation by the traditional (TradFi) financial institutions. Notably, the Bill aims to ensure compliance with global standards while fostering innovation in the VA space.
Once the National Assembly formally receives the final Bill and tables the same during the week of 10 – 14 February 2025, the legislative development process prescribed under Kenyan law will commence.
