Kenya’s regulatory and supervisory authorities have been urged to ensure that the framework for crypto assets are aligned with international frameworks and standards, an International Monetary Fund (IMF) report released yesterday says.
In the report titled ‘Technical Assistance Report Kenya Crypto Regulation and Legislation, December 2024,’ the IMF said the relevant authorities should be equipped with the necessary resources to monitor crypto asset activities and the potential build-up of risks, including risks to the functioning of the payment system and monetary transmission channels.
The IMF has disclosed that the regulatory and supervisory framework ought to be calibrated based on the current and expected risks emanating from crypto asset market activity prevalent in Kenya.
It further reveals that the formulation of policies should be based on a close monitoring of market developments as in line with Element V of the Bali Fintech Agenda.
The technical working group (TWG) the IMF suggested should conduct a comprehensive analysis of the current state of the Kenyan crypto asset market as well as a risk assessment as a priority adding that the analysis should include an assessment of the use of crypto assets for domestic and international payments.
The Capital Market Authority (CMA) should conduct a legal analysis of what crypto assets are currently being used or traded in Kenya meet the qualification threshold of a security.
“A clear allocation and delineation of regulatory and supervisory objectives and mandates should be put in place to ensure legal certainty and clarity for the relevant market participants and authorities,” the IMF said it its report.
The objectives and mandates should be anchored in the relevant laws and be informed by the different types of crypto-assets and the economic functions they perform (or are intended to perform).
The study also reveals that the CMA should further set out expectations or minimum requirements for standard terms and conditions used by crypto services providers so that customer funds are sufficiently safeguarded from the service providers own estate.
Legal certainty as regards the regulatory treatment of crypto assets should be enhanced. In order to achieve this, different approaches taking the form of comprehensive bespoke frameworks or of more targeted and surgical amendments to existing laws could be envisaged.
In both instances, it would be crucial to put in place a clear definition of the digital assets that would be captured under the respective framework(s), a clear classification of different types of assets based on their economic functions and a set of rules that would be commensurate with the risks and functions performed by those assets.
Given the cross-border nature of many crypto-asset activities, legal and regulatory arrangements that facilitate cross-border supervision and enforcement actions seem warranted. Such arrangements should again be informed by the dedicated risks identified in the stocktaking exercise.
However, because many services in Kenya are provided online by Foreign Service providers, cooperation arrangements with foreign jurisdictions and their supervisory authorities are an important tool to facilitate the supervision of cross-border activities.
For virtual assets service providers with a strong imprint on the Kenyan market, requirements to obtain local licenses combined with a requirement to have some form of legal establishment in Kenya to ensure enforceability could be considered.
Financial literacy initiatives should be considered as an additional safeguard against crypto. asset related scams and other criminal behavior.
In the past, the CMA, the CBK, and the National Treasury have visited the IMF Kenya to understand the approach and challenges of the authorities in designing the regulatory framework. Private sector meetings were held with several market participants.
The mission also provided in-house lectures covering key regulatory and legal concepts, and the conduct of crypto asset activities supervision.
However, the CMA and the CBK’s rulemaking in the area of crypto-assets or digital assets has thus far remained limited and no legally binding, formal instruments that would specifically or expressly cover digital assets have been issued by either institution.
Under existing laws, it remains also unclear which types of assets would fall under the remit of the CMA or the CBK and, in turn, who should be the competent regulator and supervisor of those assets.
The prevalence of crypto asset related frauds and other criminal activity has prompted the authorities to issue several warnings to the Kenyan public. In December 2015, the CBK issued a public notice informing the public of the unregulated status of Bitcoin (BTC) and other crypto assets.
