Digital Transactions and Crypto: A Compliance Guide for Bus…

Despite being a developing third-world country, Kenya has managed to harbor a thriving crypto and digital banking ecosystem. The rise of digital banking in Canada can largely be attributed to the large number of unbanked population. Mobile money services are popular with Kenyans, as they provide simple transaction solutions without overstretched proceedings.

Over 51 digital banks operate in Kenya; presently, one example of a leading brand is M-Pesa. The crypto industry is not left out of the surge, with growing interest and exploration by both startups and the central bank of Kenya. Kenya has managed to carve and dominate a unique proportion of the Web 3 global ecosystem and has been nicknamed the Silicon Savanah. It is the largest crypto market in East Africa.

However, this surge of digital banks and crypto platforms comes with risks that need to be tackled, with the help of regulatory government and industry bodies and digital transaction and crypto platforms in compliance. Numerous crypto scams have ravaged the East African country, from the argo coin scam to World Coin, amid money laundering and data privacy concerns.

Compliance Guide For Digital Transactions and Crypto Platforms In Kenya

Despite the surge in digital transaction platforms and crypto platforms, the government is still very skeptical about such platforms as they disrupt and entirely cause a shift in systems, legislation, and AML and CFT efforts. Regulations are still evolving, and it can be an unstable terrain at the moment as policies constantly change to accommodate new innovations and tackle new backways for illegal financial activities.

The Central Bank of Kenya is constantly doling out new policies to accommodate and regulate the surge in the interest of the government and consumers. The Central Bank of Kenya is especially suspicious about Crypto,

While there might not be organized or specific legislation, this article will provide a detailed overview of the legislative terrain for Digital Transactions and Crypto Platforms In Kenya.

Legislative Regulation For Digital Transactions and Crypto Platforms In Kenya.

1. The National Payments Systems Act (NPSA)

The National Payments Systems Act (NPSA), enacted in 2011 to create a fostering climate for new payment methods and services in Kenya's digital financial industry, is a key part of legislation governing digital transactions in Kenya. The act brings all payment systems under the jurisdiction of the Central Bank of Kenya (CBK) for oversight, ensuring safety and efficiency.

The law requires that all payment service providers operating in Kenya must be authorized or registered by the Central Bank of Kenya, and it sets out requirements for KYC procedures, record keeping, reporting, and consumer protection.

2. Central Bank of Kenya Public Warning (2015)

In 2015, the Central Bank of Kenya (CBK) issued public warnings about the risks related to cryptocurrencies. The Central Bank of Kenya mentioned that cryptocurrencies are volatile and lack specific market regulations. CBK advised the public to refrain from trading cryptocurrencies, including Bitcoin. However, the CBK did not impose a ban on cryptocurrency trading. As a result, Kenyans are legally permitted to buy and sell cryptocurrencies.

It is impressively worth noting that Kenya holds more than $1.5 billion worth of Bitcoin, which constitutes 2.3% of the country's GDP. This figure does not account for other cryptocurrencies, such as Ethereum or Dogecoin. These statistics show that cryptocurrency is widely accepted in Kenyan society despite the CBK's warnings.

3. Money Remittance Regulations Kenya, 2013

The Central Bank of Kenya (CBK) regulates cryptocurrencies under Kenya’s Money Remittance regulations. According to these regulations, cryptocurrency companies must obtain a license from Kenyan authorities to offer money transmission services.

This licensing is required if a company provides services for transferring money or monetary value without creating accounts for the payer or payee. This includes situations where funds are received to transfer to someone else or when funds are received on behalf of someone else. Therefore, nearly all cryptocurrency providers must be licensed to operate legally in Kenya.

4. Kenya Information and Communications Act (KICA) of 2009 (as amended in 2013)

KICA establishes the legal framework for electronic communication in Kenya. This includes recognizing electronic contracts as valid and enforceable. KICA provides a legal basis for e-commerce transactions; other relevant laws specific to consumer protection, data privacy, and taxation might apply to e-commerce activities.

Read: The Future of Digital Transactions and Compliance

Compliance Recommendations For Digital and Crypto Transactions In Kenya

1. Taxation

It is important to register with the Kenya Revenue Authority (KRA) and comply with the digital service tax (DST) on crypto transactions, which is currently pegged at 1.5%.

The registration process with KRA is straightforward and can be completed online through the iTax portal. Once registered, taxpayers must file their DST returns and make monthly payments. The DST is calculated based on the gross transaction value, and taxpayers are required to maintain accurate records of all crypto transactions to facilitate compliance. Failure to register for DST or non-compliance with tax obligations can result in penalties and legal consequences.

KRA has also issued guidelines for taxing cryptocurrency gains. Cryptocurrencies are treated as intangible assets, and any profits realized from their sale or disposal are subject to capital gains tax. The applicable tax rate is 30% of the net gains, and taxpayers are required to declare these gains in their annual income tax returns.

2. Consumer Data Protection

Digital and crypto transactions platforms should comply with the Data Protection Act of 2019. This includes obtaining user consent for data collection, storage, and use and implementing appropriate security measures.

3. Know Your Customer (KYC) and Anti-Money Laundering (AML)

This is crucial for both digital and crypto transactions. Verify customer identities, monitor transactions for suspicious activity, and report any concerns to the authorities, like the Central Bank of Kenya, Ethics and Anti-Corruption Commission (EACC), and Capital Markets Authority (CMA).

4. Compliance with Regulatory Frameworks

Ensure compliance with the National Payments Systems Act (NPSA) and the guidelines set by the Central Bank of Kenya (CBK). Concerned officials should familiarize themselves with the specific requirements for licensing and operation under Kenyan financial regulations.

5. Obtaining Necessary Licenses

Cryptocurrency companies must acquire the necessary licenses to operate in Kenya. This includes licensing for money transmission services as outlined by the CBK under Kenya’s Money Remittance regulations.

6. Implement Robust AML and KYC Policies

Strong Anti-Money Laundering (AML) and Know-Your-Customer (KYC) policies should be implemented to prevent illegal activities. This includes verifying customer identities and monitoring transactions for suspicious activities.

7. Concerned Entities Should Invest In Employee Education

Continuously educate employees and customers about compliance requirements and best practices. Regular training helps stay updated with regulatory changes and maintain compliance.

Also see the key digital transactions and crypto compliance businesses in the UK, Canada and South Africa.

Bottom Line

The Central Bank of Kenya is the principal regulator of Kenya's financial entities. While there are no digital translation or fintech platforms or products prohibited, it remains a volatile environment for digital transactions and crypto platforms. Digital transactions should take care of investing in efficient compliance software like Youverify’s suite of simple, easy-to-use compliance software. It is easy to use and scalable.

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