Kenya's moves on cryptocurrency taxes and regulations: Advancements made in the sector with potential for increased Web3 development
Kenya is taking significant strides in regulating and taxing digital assets, aiming to create a comprehensive framework that addresses the unique challenges of this rapidly evolving sector. The proposed amendments to the Virtual Assets and Service Providers (VASP) Bill are designed to enhance digital asset taxation, regulation, and compliance with international standards.
The amendments include a licensing requirement for all virtual asset service providers (VASPs), ensuring that only legally registered entities such as limited liability companies can operate. A clear definition of virtual assets has been proposed, excluding digital fiat currencies and securities, and covering various services such as wallet provision, exchange services, payment processing, investment advisory, stablecoin issuance, and mining services.
Strengthening Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) measures is another key feature of the amendments. VASPs will be mandated to implement robust internal risk management, customer due diligence, transaction monitoring, and reporting suspicious activity.
The proposed changes also require VASPs to collect and disclose extensive customer information to the Capital Markets Authority (CMA), in line with compliance to the Financial Action Task Force (FATF) 'Travel Rule' and global crypto regulatory recommendations.
New excise duty and a restructuring of tax obligations on virtual asset transactions are intended to better capture taxation opportunities in the digital asset ecosystem. These changes are detailed in the revised Excise Duty Act provisions incorporated by the Bill.
Emphasis on data protection and cybersecurity frameworks is another important aspect of the amendments, aiming to safeguard users and enhance consumer protection, aligned with Kenya’s legal standards.
The motivation for these changes is twofold. First, to address the challenges of tracing and taxing digital assets while aligning Kenya with international financial standards, thereby reducing risks of money laundering and terrorist financing through cryptocurrencies. Second, to foster innovation in Kenya’s digital economy.
The collection of Sh10 billion from digital asset taxation by the Kenya Revenue Authority is a testament to the potential of this industry. However, the current tax structure is under scrutiny due to concerns of double taxation and its impact on job creation, Foreign Direct Investment (FDI), and innovation.
The average Virtual Asset Service Provider (VASP) in Kenya would need to pay corporate income taxes, value-added taxes, and an excise duty tax. This, coupled with the numerous taxes that apply to the industry, is causing existing stakeholders to reconsider operations and potential stakeholders to not engage.
Larry Cooke, the Africa head of Legal Counsel at Binance, has emphasised the importance of dialogue, clarity, and adaptability in navigating these complex issues. By embracing these principles, Kenya can secure both a prosperous digital economy and a thriving innovation ecosystem for generations to come.
Regulators must be wary of the cannibalistic traits found in emerging industries where they are damned if they do and damned if they don’t. The formation of the Virtual Assets Regulatory Authority (VARA) in the VASP Bill is celebrated as it includes Tradfi regulators joining forces and local industry representation.
However, the question remains whether this tax structure amounts to double taxation, which is objected to at a constitutional level. Failing to address this issue risks driving innovators, investors, and startups to friendlier regulatory environments, undermining Kenya’s standing as Africa’s Silicon Savannah.
The digital revolution is too important to be slowed by outdated or overly broad policies, Fear Uncertainty and Doubt (FUD), or bad actors detracting from the collective's efforts. Kenya has an opportunity to lead Africa's digital economy by crafting a regulatory environment that is both fair and practical.
The proposed amendments to the VASP Bill reflect a growing awareness of these challenges and a willingness to refine Kenya’s approach to digital asset taxation and regulation. By addressing these issues, Kenya can not only foster innovation but also draw more stakeholders in as tax contributors, growing the industry and securing its future as a global hub for digital assets.
[1] Virtual Assets and Service Providers (VASP) Bill, 2021
[2] Financial Action Task Force (FATF) Recommendations
[3] Kenya Revenue Authority
[4] Capital Markets Authority
[5] Binance
- The proposed amendments to the Virtual Assets and Service Providers (VASP) Bill in Kenya cover various tech-based services like wallet provision, exchange services, payment processing, and stablecoin issuance, positioning technology as a crucial aspect of the digital asset industry.
- In an effort to enhance health and financial security, the amendments aim to strengthen Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) measures, ensuringrigorous internal risk management and customer due diligence in the industry.
- The collection of revenue from digital asset taxation by the Kenya Revenue Authority demonstrates the growing potential of the finance sector in the digital economy, while also highlighting the need for a balanced approach to avoid double taxation and maintain a friendly business environment for innovation and investment.
