Virtual Assets in Kenya: What the New Policy and Bill Mean for Owners

Introduction

Over the last decade, Kenya’s regulatory stance on cryptocurrencies has shifted from initial caution to a more balanced approach that seeks to foster innovation while addressing risks like fraud, volatility, and consumer protection gaps. Despite early warnings from the Central Bank of Kenya (CBK), Kenyans have embraced virtual assets for financial inclusion, cross-border remittances, and investment opportunities.

The 2023 Finance Act formalized taxation on digital assets, marking the government's first step toward integrating crypto into the mainstream financial ecosystem. Building on this momentum, the National Treasury introduced the Draft Policy and VASP Bill, aiming to create a framework for oversight, compliance, and risk mitigation in the virtual asset sector.

But what do these developments mean for individuals who own virtual assets? Let’s delve into the provisions and their real-world impact.

Salient Provisions

1.???? Legal Recognition and Ownership Rights

Virtual assets will be formally recognized as property within the legal framework, ensuring clear ownership rights. This recognition gives owners explicit legal protection for their holdings, ensuring that their assets are treated like traditional property in transactions and disputes.

Implications for Owners

• Your ownership rights are legally acknowledged, meaning you have enforceable protection against fraud, disputes, or wrongful claims on your assets.
• Transactions involving your virtual assets (e.g., buying, selling, or transferring) are now backed by laws on contract enforcement and dispute resolution.
• This recognition enhances market transparency, boosting confidence in Kenya’s digital asset space for both local and international investors.

2.???? Taxation on Transfers

The Finance Act, 2023, introduced a 3% Digital Asset Tax (DAT) on transfer of digital asset. The tax is a withholding tax to be paid by the users of VASPs. However, the definition of "transfer" remains ambiguous, creating unique challenges for virtual asset owners:

• Double Taxation Risk: Transferring your assets between personal wallets could still be taxed, even if no economic gain occurs.
• Loss-Making Transfers: The tax applies regardless of whether the transfer results in a profit or a loss.

Implications for Owners: VASPs are required to withhold the 3% Digital Asset Tax on behalf of their clients, meaning that as a virtual asset owner, your transactions deemed as a “transfer” will automatically be subject to this tax.

3.???? Enhanced Consumer Protections

The regulations introduce a range of consumer protection measures designed to create a safer environment for virtual asset transactions:

• Data Security and Privacy: Your personal information must be handled in compliance with Kenya's Data Protection Act.
• Clear Product Information: VASPs must provide transparent details on their services, including risks, benefits, and terms of use.
• Complaints Redress Mechanisms: If you face issues with a VASP, you will now have formal avenues for dispute resolution.
• Insurance Safeguards: Your assets may be protected through mandatory insurance policies held by VASPs.

Implications for Owners: These measures boost trust in the digital asset space, ensuring better protection for your assets and personal information. Additionally, ongoing consumer education programs will empower you with the knowledge to make informed decisions.

4.???? Anti-Money Laundering (AML), Counter Financing of Terrorism (CFT) & Counter-Proliferation Financing (CPF) Measures

VASPs shall be subject to AML, CFT, and CPF laws. They will also be closely monitored and regulated to ensure adherence to these laws. Virtual asset owners may face stricter KYC verification requirements under future guidelines, and VASPs failing to comply with AML/CFT/CPF regulations could face sanctions, potentially impacting service availability for owners, especially if a provider is penalized or restricted in extreme cases.

Implications for Owners: While virtual asset owners may face a more stringent regulatory environment with potential impacts on accessibility and documentation requirements, the overarching aim of these provisions is to ensure a safer, more transparent virtual asset market.

Potential Challenges for Virtual Asset Owners

1. Increased Costs

VASPs will face higher compliance costs to meet regulatory requirements, which may trickle down to virtual asset owners in the form of higher transaction fees or service charges.

Impact on Owners: Prepare for potentially higher costs when trading, transferring, or holding assets on regulated platforms.

2. Restricted Access to Certain Platforms

The Bill requires all VASPs operating in Kenya to be licensed, which could restrict access to international or unregulated platforms.

Impact on Owners: You may lose access to some platforms you currently use if they do not, limiting your trading or investment options. To avoid legal risks, always confirm that a platform is licensed before engaging in transactions.

3. Regulatory Oversight and Stablecoins

While the Bill provides comprehensive regulations for virtual assets, it is notably silent on stablecoins and their issuers. Stablecoins play a critical role in cross-border remittances and financial inclusion, making their omission a gap that may affect owners reliant on these assets.

Impact on Owners: The absence of stablecoin regulation leaves uncertainty around their use and acceptance in Kenya. Owners should stay informed about potential future regulations that may address this gap.

Opportunities for Virtual Asset Owners

While the challenges are significant, the regulations also present benefits and opportunities:

• Security: Legal recognition and consumer protection measures provide a safer environment for owning and transacting virtual assets.
• Credibility: By regulating the industry, Kenya positions itself as a credible hub for digital assets, attracting more investment and innovation.

Conclusion

The virtual assets policy and VASP Bill represent a bold step toward legitimizing the virtual asset ecosystem in Kenya. For owners, it offers much-needed legal recognition, consumer protections, and market transparency. However, challenges such as ambiguous taxation policies and increased costs highlight the need for further refinements to the regulatory framework.