Regulators mull loosening up crypto laws in a major U-turn

Tools for Humanity CEO and Co-Founder Alexi Blania (centre) flanked Sam Sadle (left) Head of Policy and Thomas Scott, Chief Legal Officer when they appeared before the Adhoc Committee of Enquiry into the Worldcoin controversy at Mini chambers, Nairobi. September 6, 2023. [Elvis Ogina, Standard]

Kenya is considering the possibility of easing regulations on cryptocurrencies, marking a notable change in the country's approach to digital assets.

Five financial regulators including the Central Bank of Kenya (CBK) said recently they will establish and execute comprehensive and accommodating structures that seek to simplify innovation, including digital assets, to meet the needs of the masses and promote financial development.

This comes at a time when the US government has launched a sweeping crackdown on two of the largest cryptocurrency exchanges or trading hubs in the world, Binance and Coinbase, which are also popular in Kenya.

The US move has unsettled Kenyan crypto dealers who have been seeking to profit from the popularity of digital currencies. But the Kenyan regulators said their consideration is aimed at keeping up with innovations around the world.

The regulators made the resolution after holding their yearly Joint Financial Sector Regulators Forum in Kwale County.

The forum was established in 2009 to collaborate on matters relevant to fostering overall financial sector stability and innovation in the country.

It is comprised of CBK, Capital Markets Authority, Insurance Regulatory Authority, Retirement Benefits Authority, and the Sacco Societies Regulatory Authority.

“The 14th Retreat of the JFSRF resolved that all member regulators…will develop and adopt comprehensive facilitative frameworks for streamlining innovation, including virtual assets, to meet the needs of the general public and to support economic growth in recognition of the rapid adoption of technological innovations,” said a statement issued by CBK after the forum.

Kenyan authorities do not recognise crypto as a legal tender, and have in the past warned that they are "unregulated, and highly speculative and volatile" which puts them at great risk of losing value.

The government has also maintained that it cannot offer any protection if crypto exchanges collapse.

But roughly 8.5 per cent of the Kenyan population, or 4.25 million people own cryptocurrencies, ranking Kenya fifth in the world in global adoption of crypto, according to a report by the United Nations.

In 2017, CBK warned on the risks of cryptocurrencies, which said digital currency is volatile and lacks specific regulation.

"We warned everybody that this was a risky venture and and the consumer is not protected,” said then CBK Governor Patrick Njoroge.

"It could very well be a Ponzi scheme of a kind, I think you have seen how the prices have gone up and down in various places.” 

"Our point is that there is risk and it is important that everybody knows that those risks can come back to haunt us and could have financial stability concerns,” Dr Njoroge said.

The Kenyan government has implemented a new tax on digital assets in order to take advantage of their increasing popularity as alternative sources of funding become costlier or difficult to access.

The Digital Assets Tax (DAT) was introduced on September 1 as an amendment to the Financial Act 2023, and it requires a 3 per cent tax on any income generated from the transfer or exchange of digital assets.

The CBK mid this year decided to put on hold its plans to introduce a digital currency due to the current instability in the global crypto assets market and the high adoption of digital payments in the local market.

The regulator had previously conducted public consultations to assess its readiness to launch a Central Bank Digital Currency (CBDC), and the outcome revealed that the allure of CBDCs globally is diminishing.

CBK cited challenges faced by other central banks that were first to roll out digital currencies as a reason for the delay.

It stated that recent instability in the global crypto assets market has raised concerns and the need for a careful review of the innovation and technology risks.

Therefore, the implementation of a CBDC in Kenya may not be a compelling priority in the short to medium term.

CBDC was meant to be a national fiat currency in digital form. This would have meant that besides the printed cash, CBK would also issue the electronic equivalent.

It would, however, have been different from cryptocurrencies such as Bitcoin and Ethereum, as the CBK would maintain reserves and deposits to back it up.

Last week, amid the Biden crackdown, the chief executive of Binance, the largest global cryptocurrency exchange, stepped down and pleaded guilty to violating US anti-money-laundering requirements, in a deal that might preserve the company’s ability to continue operating, according to court documents.

Binance has consequently seen outflows amounting to more than $1 billion (Sh152 billion) since the development, not including bitcoin, according to reports.

Founder and CEO Changpeng Zhao and others were charged with violating the US Bank Secrecy Act by failing to implement an effective anti-money-laundering program and for willfully violating US economic sanctions.

Binance agreed to forfeit $2.5 billion to the government and pay a fine of $1.8 billion — a combined $4.3 billion — in “one of the largest penalties we have ever obtained,” according to US Attorney General Merrick Garland.

The US crackdowns have raised jitters among Kenyan investors of digital currencies which have rapidly gained popularity over the last few years despite warnings from local regulators.

The global crypto market is also in upheaval following the collapse of high-profile exchanges.

The US crackdown on the cryptocurrency hubs has posed an existential threat to the affected companies, and the broader US crypto industry, according to crypto analysts.

The head of the US securities watchdog leading the crackdown Gary Gensler was appointed by US President Joe Biden in 2021.

Over the past year, he has come down hard on the US crypto industry, suing numerous companies for allegedly selling unregistered securities.

He has also questioned the need for crypto, telling journalists: “We don’t need more digital currency…We already have digital currency - It’s called the US dollar, it’s called the euro, it’s called the yen. They’re all digital right now...so what’s the real underlying value of these tokens?”

The United Nations Conference on Trade and Development estimates that more than 4.25 million Kenyans own cryptocurrency.

A separate report shows Kenya is ranked second in Africa (19th globally) after Nigeria in terms of crypto adoption, and fifth globally in terms of peer-to-peer (P2P) exchange trade volume.

This gives the country a high ranking in terms of participation in the digital currencies market.