Kenya recently proposed new laws for the digital asset sector in a bid to tame the fast-growing industry, estimated to have attracted nearly 10% of the population. The new laws pushed by the country’s finance ministry could usher in a new era of safer, cheaper and regulated digital asset activities, a local expert told CoinGeek.
A new era for Kenya’s digital asset sector
The Minister of Finance, John Mbadi, recently revealed the new draft National Policy on Virtual Assets and Virtual Asset Service Providers, which requires public feedback as the country aims to be the first in the region with a comprehensive digital currency framework.
The bill leans more towards policing VASPs, establishing a mandatory licensing system for exchanges and wallets. According to local digital asset expert, Rufas Kamau, this is a crucial first step in taking digital assets mainstream.
“I believe the proposed framework will cement exchanges and wallets as legal institutions operating from a fully regulated environment, allowing Kenyan investors and institutions direct market access rather than relying on P2P markets, which are often more expensive and difficult to take into account when filing taxes,” Kamau told CoinGeek.
However, he believes that the bill should have delved further into creating a separation between different digital assets. Those that are sufficiently decentralized should be classified as digital raw materials while the rest should be branded digital securities, says Kamau, who serves as a regional market analyst for FXPesaa Nairobi-based global online broker.
This challenge is not unique to Kenya. In the US, regulators have struggled to define which digital assets are securities, with BTC the only token the SEC has exempted. This classification triggered one of the most high-profile lawsuits in which the regulator took on Rippleand claimed that its XRP digital asset was a security.
The Kenyan market is much smaller than the US, and the definition of specific tokens is unlikely to be addressed in the first phase of the regulatory process.
The digital currency taxation dilemma
Digital asset taxation is yet another area where regulators globally have struggled. Advanced economies, such as the US and UK, still rely on older financial guidelines and case-specific directives; others, like India, are pushing extremely high taxes which traders claim will wipe out the nascent sector; while others, such as South Korea, postponed the tax decision for another two years (for a total of seven years now).
In Kenya, government attempts at digital asset taxation have been problematic in recent years. One such attempt was the introduction of Digital asset tax (DAT) to the Income Tax Act 2023. DAT would be levied at 3% of the income derived from the exchange or transfer value of a digital asset.
This proposal fails to recognize the nuances of digital assets, such as the significant difference between those who trade digital assets, those who use them for payments (such as, according to the International Monetary Fund)has increased in cross-border transactions by Kenyan companies), and those who buy them as long-term investments. This amalgamation of all activities under one framework tax denies Kenyans benefits such as tax deductions and set-off of losses against future taxable income.
Kamau believes the best approach would be for digital currency taxes to mirror the existing regulatory framework for taxation.
“Companies pay normal income taxes, employees pay normal PAYE rates and exchanges pay normal fees similar to what forex brokers pay,” he told CoinGeek.
A balanced approach
Like many other advocates of digital assets, Kamau believes the best way forward is for the government to adopt a balanced approach.
“The crypto industry is still young in Kenya, but the technology is developing rapidly … the industry is scaling up and giving Kenyans more opportunities in terms of jobs, education, investment and savings. Aggressive policies around AML, taxation and control can stifle the great work that is happening today,” he believes.
However, while the proposed bill may be the closest Kenya has come to a comprehensive framework, questions remain over the government’s commitment to push it into law.
Just days after the proposals were unveiled, the Ministry of Finance demanded Kshs. 1.8 billion ($14 million) to “formulate and publish regulations for the use of cryptocurrencies and digital tokens.”
“This is way too expensive. They are looting public coffers in the name of creating crypto laws,” Kamau said in his criticism of the budget requirement.
“There are paid legislators in parliament, there is a Blockchain Association of Kenya, there are stakeholders, and the whole process can be done online… Also, the proposed rules only focus on raising more taxes from the crypto industry, not supporting it to grow and thrive.”
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