Kenya's Crypto Trade Grows Even as New Regulations Loom

By Shogo Ishida and Yosuke Yoshida, Co-CEOs, EMURGO Africa

Kenya's Crypto Trade Grows Even as New Regulations Loom

Kenya's crypto trade is growing, driven by increasing awareness among the youth of mobile money integration, high internet penetration and government exploration. Despite the uncertainties over impending regulations, the Kenyan government, exercising caution, is actively exploring potential applications of blockchain technology and a Central Bank Digital Currency (CBDC).

Key Takeaways:

• Kenya's crypto trade is experiencing massive growth. 
• Local and international investors are showing interest in Kenyan crypto startups.
• The government is actively engaging with stakeholders to develop a balanced regulatory framework for cryptocurrencies.
• The government is exploring blockchain technology for various applications.

Kenya's Crypto Industry is Recording Massive Expansion

Kenya has emerged as a frontrunner in African cryptocurrency adoption, showing remarkable growth in recent years. The rise of crypto trade in the country can be attributed to several factors, including a need for alternative financial solutions, a tech-savvy population, and a generally supportive technical environment in the form of M-Pesa, world’s most popular mobile money service.

Kenya's traditional banking system, like many countries in Africa, often presents challenges like high transaction fees, limited access to financial services, and currency volatility. Cryptocurrencies offer an attractive alternative, providing a borderless, cost-effective, and more inclusive means of conducting transactions. This has been particularly appealing to Kenyans seeking to send and receive remittances, a vital source of income for many households.

There are currently over 6 million crypto owners in Kenya, out of a population of 55 million people, according to Singaporean cryptanalysis firm Triple A. In 2021, Chainalysis data revealed that Kenya led the world in peer-to-peer crypto trade. 

Kenya boasts a young and technologically- inclined demographic. This population has proven eager to embrace new technologies, including cryptocurrencies. Over 80% of the Kenyan population is aged below 35 years. The growing availability of affordable smartphones and internet access has further fueled the adoption of crypto by allowing Kenyans to easily access digital wallets and cryptocurrency exchanges. Smartphone penetration stood at 58% in 2023 according to the Communications Authority of Kenya. Internet penetration has risen to 42%, according to Data Reportal.

The use of cryptocurrencies in Kenya extends beyond simple trading and speculation. Businesses are increasingly accepting crypto payments, particularly for cross-border transactions. Additionally, there's the potential for cryptocurrencies to be used in microfinance and lending.

Kenya’s Top 10 Blockchain Startups

Currently, there are at least 40 crypto and blockchain startups in Kenya.  Here are the most notable ones:

• Kotanipay: Helps users convert their local currencies (fiat) to stablecoins and vice versa, allowing them to participate in the blockchain ecosystem.
• Paylend: Specializes in delivering blockchain applications, consultancy services, while facilitating access to capital for Micro, Small, and Medium-sized Enterprises (MSMEs).
• Pezesha: Uses blockchain technology and credit scoring data to connect investors with SMEs.
• Pesabase: Blockchain-based platform that offers payments, micro banking and remittances.
• Amini: Leverages AI, satellite imagery and blockchain technology to be the single source of truth on Africa's environmental data.
• Fastagger: Utilises AI and blockchain to increase sales and access to finance for African SMEs, bringing customer insight and engagement to mobile-first retail.
• Safi Protocol: Blockchain-based platform thatconnects Africa's renewable energy consumers with the decentralized finance (DeFi) ecosystem.
• UTU: A decentralized trust infrastructure provider that uses blockchain to build new models of digital trust.
• Sankore 2.0:  Builds and helps developers create disruptive technologies on the NEAR blockchain Protocol.
• BuuPass: Uses smart contracts to improve travel bookings and payments while improving customer experience in the transport sector.

Why Investors are Showing Interest in Kenyan Blockchain Startups

The burgeoning interest of local and international investors in Kenyan crypto startups can be attributed to several factors, each offering a glimpse into the perceived potential of this blossoming ecosystem: 

• Promising Innovation: Kenyan startups are addressing local and regional challenges through innovative blockchain-powered solutions. These solutions, encompassing areas like remittances, microfinance, health and supply chain management, are resonating with investors seeking impactful applications of blockchain technology.
• Addressing Local Needs: Kenyan entrepreneurs are building solutions that directly address the needs of the local population, like facilitating efficient cross-border payments or offering alternative financial services to the unbanked. These solutions have the potential to create significant positive impact, attracting investors who value both financial gain and social responsibility.
• Untapped Market Potential: The vast unbanked population and rapidly growing internet penetration across Africa present a massive, largely untapped market for innovative financial solutions. Investors see Kenyan crypto startups as potential pioneers, catering to this growing demand and unlocking the continent's economic potential.
• First-mover Advantage: Kenya's relatively mature crypto ecosystem compared to other African nations positions its startups as potential first movers. Investors recognize the advantage of early entry into a market brimming with potential.
• Tech-savvy Population: Kenya boasts a young, tech-savvy population, creating a fertile ground for rapid adoption of cryptocurrencies and blockchain-based solutions. This demographic familiarity lowers the barrier to entry for startups and increases the potential user base, making them more attractive investment propositions.

Inside Kenya’s Plans to Regulate Crypto Trade

The Kenyan government passed amendments to the Income Tax Act of Kenya in November 2019, which introduced a digital service tax that applies to cryptocurrency transactions. The digital asset tax (DAT) imposes a 3% tax on digital asset trading.

As of March 2024, Kenya is working on a legal framework to outline the actions needed to regulate digital asset providers. In November 2023, The National Assembly's Departmental Committee on Finance and National Planning tasked the Blockchain Association of Kenya (BAK) with creating the first draft of the Crypto Bill, also known as the Virtual Asset Service Provider’s Bill. This was after BAK appeared before the committee in October to discuss digital asset regulation and how it can work with the government to develop policies for digital assets. Present in the meeting were representatives from Binance, Yellow Card, Kotani Pay, and The Law Society of Kenya. 

The BAK team made a presentation to parliament, covering areas it believes are crucial to developing a favorable and robust regulatory framework. These are licensing framework, tax framework, consumer protection framework, Anti-Money Laundering and Counter-Terrorism Financing (AMl/CTF), and a regulatory sandbox.

The regulatory framework is planned to investigate a wide range of digital payments, including electronic money (e-money), cryptocurrencies, stablecoins, and a Central Bank Digital Currency.

The Central Bank of Kenya, which maintains that crypto trade is illegal in Kenya, has issued warnings against crypto and banned financial institutions from dealing with crypto businesses. It has been utilizing existing regulations like the National Payments Systems Act (NPSA) to exert control but laws with stakeholder participation through parliament could secure a win-win consensus between the government, crypto platforms and users.

The Capital Markets Authority (CMA) has proposed regulations for Initial Coin Offerings (ICOs) and digital asset exchanges. These proposed regulations aim to bring transparency and oversight to the crypto market. The Kenya Revenue Authority (KRA on its part plans to establish a dedicated unit for taxing cryptocurrency transactions and digital services. This indicates their intention to integrate crypto into the existing tax framework. All these can only happen under the country’s first ever Crypto Act.

Kenya is Exploring the Use of Blockchain in Various Fields

In 2018, the Kenyan government set up the Blockchain and AI Taskforce to look into potential ways the technologies could be used to tackle challenges in the economy. In 2019, after studying various use cases of blockchain around the world, the taskforce listed a number of recommendations in the use of blockchain locally. Kenya plans to use blockchain in:

• Eliminating corruption through blockchain-based governance in the delivery and payment for government services and taxes. Providing a single-source-of-truth for all government documents and services.
•  Developing a digital asset framework to enable citizens to raise funds through Initial Coin Offers (ICOs) as a strategy to help local investors put their resources in cryptocurrencies underpinned by the utility of local resources.
• Strengthening of democracy and creating transparency in elections via blockchain-based voting and tallying systems that deliver results in real-time.
• Reducing transaction costs via crypto transfers and minimizing financial risks by encouraging the central bank to leverage blockchain to verify institutional reporting. 
• Improving agriculture and food security by using blockchain to track farm produce from end-to-end (from seeds to marketplace) and detect fraud and trace unsafe products.
• Improving health and drug safety by deploying blockchain technology to enable customers to trace the supply chain of medication, to help tackle the issue of counterfeit medication and overpriced drugs.
• Expanding manufacturing and eliminating counterfeits by using blockchain supply chain networks to flag and report counterfeit goods. Creating permissible networks with blockchain technology that can interoperate with manufacturer’s systems in a secure manner to identify and trace manufacturing inputs and outputs.
• Digitizing all land records throughout the country and then leveraging land data to introduce blockchain and create immutability and increased transparency of land transactions.
• Improving cybersecurity by decentralizing Domain Names Systems (DNS), distributing the contents to a large number of nodes and making it nearly impossible for hackers to attack. Domain editing rights would only be granted to those who need them.

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