Introduction

Digital representations of value that are electronically traded or transferred i.e. Virtual Assets have enabled quick and arguably cost-effective transactions through surpassing national boundaries and the constraints of traditional banking. 

However, the use of Virtual Assets also presents several risks, including money laundering, terrorism financing, proliferation financing, tax evasion, fraud, cybercrime, weak governance, and consumer protection issues. 

In September 2023, against this backdrop, Kenya issued its National Risk Assessment Report on Money Laundering and Terrorism Financing concerning Virtual Assets and Virtual Asset Service Providers. The assessment report takes the position that the unique characteristics of Virtual Assets and Virtual Asset Service Providers, along with their cross-border nature and lack of regulation, may heighten the risks of money laundering and terrorism financing. The report recommended that the country implements regulations for Virtual Assets and Virtual Asset Service Providers to address the identified risks related to money laundering and terrorism financing, thereby enhancing the framework for anti-money laundering and counter financing of terrorism.

On the back of this, the National Treasury in December 2024 introduced a Draft National Policy on Virtual Assets and Virtual Asset Service Providers that has in turn driven the drafting of the Virtual Asset Service Providers Bill, 2025.

We set out below a brief analysis of the draft national policy and bill.

Draft National Policy on Virtual Assets and Virtual Asset Service Providers, December 2024

The Policy aims to establish Kenya as a leading player in the global digital finance ecosystem, fostering a fair, competitive, and stable market for Virtual Assets and Virtual Asset Service Providers. 

It acknowledges the regulatory challenges posed by the decentralized and often anonymous nature of Virtual Assets, with global jurisdictions working to balance innovation with consumer protection, financial stability, and the prevention of illicit activities such as money laundering, terrorism financing, proliferation financing, and tax evasion.

Chapter Two of the Policy provides a comparative analysis of global developments and regulatory frameworks for Virtual Assets and Virtual Asset Service Providers, noting challenges and lessons for Kenya. Key observations include:

• Countries have largely relied on existing frameworks (self-regulation, twin peaks, integrated models) to regulate service providers.
• Different agencies in some jurisdictions oversee various aspects of service provision, including prudential and market conduct regulations.
• There has been global cooperation due to the worldwide nature of Virtual Assets like cryptocurrencies.

In response to these challenges, the Policy identifies and proposes addressing several key gaps:

1. Legal and Regulatory Framework: Establish a comprehensive legal and regulatory structure for Virtual Assets and Virtual Asset Service Providers, along with a coordination mechanism for effective implementation.
2. Risk Management: Create a framework to guide risk management for Virtual Assets and Virtual Asset Service Providers.
3. Market Efficiency: Develop mechanisms to enhance consumer protection, market conduct, and Virtual Asset Service Provider operations.
4. Financial Innovation: Promote innovation, research, and awareness in the Virtual Assets ecosystem through dedicated frameworks.
5. Capacity Building: Improve institutional arrangements for awareness, supervision, and regulation of Virtual Assets and Virtual Asset Service Providers.