Is cryptocurrency legal in Kenya?

Kenya and Cryptocurrency

Kenya Cryptocurrency Laws
Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology

In Kenya, cryptocurrency is primarily regulated by the following acts: (1) The National Payments Systems Act (NPSA); (2) the Capital Markets Act (CMA); and (3) the Kenya Information and Communication Act (KICA). The NPSA is administered by the Central Bank of Kenya (CBK). In contrast, the CMA is administered by the Capital Markets Authority (CMA). Finally, the KICA is administered by the Communications Authority. The scope of this article focuses on the CBK’s power to regulate cryptocurrency through the NPSA and through Kenya’s money remittance regulations.

The NPSA authorizes the CBK to oversee and regulate payment systems and payment service providers within Kenya. All payment service providers, including mobile phone service providers, are regulated under the NPSA. The CBK is responsible for overseeing payment service providers to ensure that platforms are safe for investors.

In 2015, the CBK published public warnings on the risks of cryptocurrencies. Specifically, the CBK emphasized that cryptocurrency is volatile and lacks specific regulation. For these reasons, the CBK advised the public to refrain from trading cryptocurrencies, including Bitcoin. Nevertheless, the CBK did not prohibit cryptocurrency trading. Therefore, Kenyans are legally allowed to buy and sell cryptocurrencies. In fact, Kenya holds more than $1.5 billion worth of Bitcoin alone, equating to 2.3% of Kenya’s GDP. Substantially, this figure does not include other cryptocurrencies, such as Ethereum or Dogecoin. These statistics indicate that cryptocurrency is accepted by Kenyan society despite the CBK’s warnings.

The CBK is also authorized to regulate cryptocurrencies through Kenya’s Money Remittance regulations. Under these regulations, cryptocurrency companies must acquire licensing from Kenyan authorities to offer transmission services within Kenya. Licensing is required whenever a company offers a service for the transmission of money or any representation of monetary value without any payment accounts being created in the name of the payer or the payee, including: (1) where funds are received from a payer for the sole purpose of transferring a corresponding amount to a payee or another payment service operator acting on behalf of the payee; or (2) where funds are received on behalf of and made available to the payee. Therefore, virtually all cryptocurrency providers must be licensed in Kenya to legally operate within the country.

Cryptocurrency companies that do not acquire the proper authorization from Kenyan authorities will have their banking services suspended. For example, in Lipisha Consortium Limited & another v Safaricom Limited, Safaricom suspended Lipisha Consortium’s and Bitpesa’s M-PESA services because Bitpesa was operating a money remittance business through Bitcoin without the CBK’s authorization. M-PESA is a mobile banking service that empowers users to save and spend money through their mobile phones. Safaricom, Kenya’s largest cell phone operator, introduced M-PESA in 2007 to act as an alternative way for Kenyans to access financial services. Safaricom’s policy is to suspend banking services for cryptocurrency firms that do not receive proper authorization from the CBK.

In Lipisha Consortium, the court held that Safaricom’s policy was legal. In other words, the court held that Safaricom was legally permitted to terminate a company’s M-PESA services for operating as a money remittance business without governmental authorization. The court reasoned that it could not force Safaricom to trade with Lipisha and Bitpesa because Safaricom could be held liable for anti-money laundering violations if they allowed cryptocurrency transactions through its M-PESA platform. Specifically, an AML violation could occur because the anonymous nature of cryptocurrency makes it difficult for institutions to lawfully follow know-your-customer (KYC) regulations. Therefore, firms must obtain licenses to operate within the country because Kenyan courts have upheld the termination of banking services for unauthorized cryptocurrency providers.

To summarize, the CBK may regulate cryptocurrency either through the NPSA or through Kenyan money remittance regulations. Therefore, the CBK is empowered with broad discretion and several legal avenues to regulate the cryptocurrency space.

WORKS CITED

  1. Blockchain Laws and Regulations | Kenya | GLI| Blockchain Laws and Regulations | Kenya | GLI| Blockchain Laws and Regulations | Kenya | GLI. (2021). GLI – Global Legal Insights – International Legal Business Solutions. https://doi.org/http://www.globallegalinsights.com
  2. BITCOIN AND OTHER VIRTUAL CURRENCIES FROM A KENYAN LEGAL PERSPECTIVE. (n.d.). https://www.africalegalnetwork.com/wp-content/uploads/2018/04/Bitcoin-and-other-Virtual-Currencies-from-a-Kenyan-Legal-Perspective.pdf
  3. Kagan, J. M-Pesa. (2021). Investopedia. https://www.investopedia.com/terms/m/mpesa.asp
  4. Geral, D., Muthoni, I., & Kalule, B. (n.d.). UNSCRAMBLING BLOCKCHAIN: REGULATORY FRAMEWORKS IN CRYPTOCURRENCY. https://www.bowmanslaw.com/wp-content/uploads/2018/09/Unscrambling-Blockchain_Session-1_Regulatory-Frameworks.pdf

Securities

In Kenya, cryptocurrency is primarily regulated by the following acts: (1) The National Payments Systems Act (NPSA) administered by the Central Bank of Kenya (CBK); (2) the Capital Markets Act (CMA) administered by the Capital Markets Authority (CMA); and (3) the Kenya Information and Communication Act (KICA) administered by the Communications Authority. The scope of this article focuses on the CMA’s power to regulate cryptocurrency through securities regulations.

Cryptocurrencies that qualify as securities are regulated under the CMA. The CMA is the agency charged with overseeing the public offers of securities within Kenya. According to the CMA, “securities” include the following: shares; debt instruments; right options relating to other securities; future options relating to assets or property; depositary receipts; asset-backed securities; interests, rights, and properties commonly viewed as securities; or any other instrument classified as a security by the CMA. Thus, even though the CMA has not yet classified cryptocurrency as securities, the legislation empowers the CMA with broad discretion to classify certain cryptocurrencies as securities.

To determine if a cryptocurrency is a security, Kenyan courts apply the Howey test. Under the Howey test, an investment classifies as a security if it involves a contract, transaction, or scheme whereby a person invests their money in a common enterprise for the expectation of profits derived solely from efforts of a third party. Since the Howey test involves questions of fact, whether a specific cryptocurrency is a security must be determined on a case-by-case basis.

In Wiseman Talent Ventures Limited v. Capital Markets Authority, Capital Ventures intended to raise funds by issuing an ICO. The court held that the ICO token constituted a security because it was a scheme that involved an investment of money in a joint enterprise with profits coming solely from the efforts of others. Generally, any ICO token that satisfies the Howey Test will be classified as a security and therefore under the CMA’s jurisdiction.

To protect Kenyans from the risks of the digital marketplace, the CMA declared that it would regulate cryptocurrencies. Subsequently, the CMA proclaimed that Kenyan authorities need to implement a common approach towards cryptocurrency and ICO regulations. Presumably, this would bring uniformity and more consistency in Kenya’s legal framework for cryptocurrency.

The CMA suggested two approaches to implement a common approach for cryptocurrency regulations. The first suggestion is to form a working coalition where Kenya’s financial regulators collaborate to regulate cryptocurrencies. The CMA’s second suggestion is to create an agency that would serve as the primary cryptocurrency regulator in Kenya. Regardless, both approaches would increase the consistency and uniformity of cryptocurrency regulations in Kenya.

Overall, the goal of the CMA is to harness cryptocurrency’s potential while ensuring financial stability and mitigating the risk of money laundering and terrorism financing. The CMA also wants to battle the public perception that Kenya’s market regulations are outdated. The CMA declared that this perception cannot be battled unless Kenyan regulators demonstrate a willingness to accommodate cryptocurrency. Therefore, the policy of the Kenyan government is to provide up-to-date regulations and a favorable legal environment for cryptocurrency.

WORKS CITED

  1. Blockchain Laws and Regulations | Kenya | GLI| Blockchain Laws and Regulations | Kenya | GLI| Blockchain Laws and Regulations | Kenya | GLI. (2021). GLI – Global Legal Insights – International Legal Business Solutions. https://doi.org/http://www.globallegalinsights.com
  2. BITCOIN AND OTHER VIRTUAL CURRENCIES FROM A KENYAN LEGAL PERSPECTIVE. (n.d.). Retrieved June 15, 2021, from https://www.africalegalnetwork.com/wp-content/uploads/2018/04/Bitcoin-and-other-Virtual-Currencies-from-a-Kenyan-Legal-Perspective.pdf
  3. E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946).

Taxation

In November 2019, the Kenyan government passed amendments to the Income Tax Act of Kenya. These amendments introduce the “digital service tax.” According to the Kenya Revenue Authority (KRA), the digital service tax applies to cryptocurrency transactions. The effective date of the amendments is January 1, 2021. Therefore, cryptocurrency traders in Kenya must now pay income taxes.

Following the effective date, all income accrued through a “digital marketplace” is now subject to income taxes. In other words, traders on digital marketplaces must pay cryptocurrency taxes or face civil liability. Under Kenyan law, digital marketplaces are defined as electronic platforms that facilitate “the direct interaction between buyers and sellers of goods and services through electronic means.” The KRA declared that cryptocurrency platforms are included in the broad statutory definition of “digital marketplaces.”

Specifically, cryptocurrency platforms are digital marketplaces because they provide an internet platform for buyers and sellers to trade cryptocurrency from anywhere in the world. One prominent example of a cryptocurrency platform is Coinbase. In applying Kenyan law, Coinbase is a digital marketplace because it permits traders to use its platform for cryptocurrency transactions through electronic means on the internet.

Under Kenya’s digital service tax, cryptocurrency transactions are taxed at a rate of 1.5%. Under the KRA’s formula, digital service taxes equals the gross cryptocurrency transaction value multiplied by .015. Under this formula, a transaction exchanging $10,000 worth of Bitcoin would be liable for $150 in digital service taxes. This formula suggests that cryptocurrency taxes in Kenya are substantially low.

Under the digital service tax, only certain individuals may offset their cryptocurrency taxes by deducting their capital losses. Anyone with a permanent establishment in Kenya may offset their digital service tax against the tax payable for the preceding year of income. However, cryptocurrency traders that do not have a permanent establishment in Kenya are prohibited from offsetting their cryptocurrency taxes. Therefore, only Kenyan residents may lower their taxes by offsetting their losses from their taxable income.

To enforce the new tax laws, the KRA plans to create a unique tax agency that specifically regulates cryptocurrency taxes. Accordingly, the 2019 amendments authorize the Commissioner of Income Taxes at the KRA to appoint agents to collect and remit digital services taxes in Kenya. The KRA’s special agents will be authorized to collect digital service taxes from local and international cryptocurrency firms operating in Kenya.

Between local and international firms, it is far more burdensome for foreign exchanges to properly report their taxes to the KRA since international firms must remit their taxes every month. In contrast, local firms may claim back their digital services taxes at the end of the year because “they also pay other taxes within the Kenyan jurisdiction.” Despite this discrepancy in remittance obligations, the KRA has jurisdiction to collect taxes for local and international firms that offer cryptocurrency services in Kenya. Therefore, these amendments provide the KRA with broad powers to tax any digital marketplace that operates in Kenya.

P.S. Insights on Cryptocurrency Legal Issues

Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.

Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.

However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.

Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency.  The globe below provides links to country-by-country summaries:

Podcast:

The Freeman Law Project – Cryptocurrency Regulation and Taxation: A Brief Primer

Do you have questions about cryptocurrency, digital currency, or blockchain technology?

Freeman Law can help with digital currencies, tax planning, and tax compliance.   Contact us now or Schedule a consultation or call (214) 984-3410 to discuss your cryptocurrency and blockchain technology concerns.

WORKS CITED

  1. Taxation of Cryptocurrency Block Rewards. (2021). Loc.gov. https://loc.gov/law//help/cryptocurrency/block-rewards/kenya.php
  2. Blockchain Laws and Regulations | Kenya | GLI. (2021). GLI – Global Legal Insights – International Legal Business Solutions. https://doi.org/http://www.globallegalinsights.com
  3. Zimwara, T. New Kenyan Digital Tax to Affect Crypto Platforms – Taxes Bitcoin News. (2020, August 8). Bitcoin News. https://news.bitcoin.com/new-kenyan-digital-tax-to-affect-crypto-platforms/

 

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