IMF Urges Kenya to Modernize Crypto Framework for Financial Stability

• In a recent report, the International Monetary Fund (IMF) called on Kenyan authorities to implement a structured regulatory framework for the crypto market and provided a set of key guidelines.
• Kenya’s outdated regulations lack the legal authority to govern the crypto sector, creating opportunities for a rise in crypto-related scams and illicit activities.

The International Monetary Fund (IMF) has advised Kenya to establish a robust and transparent regulatory framework for its cryptocurrency market, aiming to safeguard consumers and address risks related to anti-money laundering (AML) and combating the financing of terrorism (CFT). This recommendation comes as Kenya grapples with the growing influence of digital assets and the need for regulatory clarity to ensure financial stability.

At present, Kenya lacks a legal definition for crypto assets. The Capital Markets Authority (CMA) Act, which provides the legal foundation for securities regulation in Kenya, is outdated in the context of cryptocurrencies. The CMA Act defines securities to include shares, debentures, bonds, and commercial papers. However, this definition is limited, excluding securities not issued by corporate or government entities. This oversight has made it difficult to categorize decentralized crypto assets, or those issued by individuals or non-corporate entities, as securities under the existing legal framework.

For instance, in 2019, Wiseman Talent Ventures attempted to launch an Initial Coin Offering (ICO) for its proprietary token, “KeniCoin,” to the Kenyan public. The CMA responded with a cautionary statement, warning the public that the offering was unauthorized and unapproved. The CMA highlighted concerns over the lack of adequate disclosures and potential fraud risks associated with the offering. The incident demonstrated the regulatory challenges Kenya faces in managing the rapidly evolving crypto landscape.

IMF’s Recommendations for Regulatory Clarity

In the technical assistance report released on January 8, 2024, the IMF emphasized the need for Kenya to align its crypto regulation with international frameworks and standards. These include the IMF/World Bank Bali Fintech Agenda, the IMF Policy Paper on Elements of Effective Policies for Crypto Assets, and the IOSCO Policy Recommendations for Crypto and Digital Asset Markets. The IMF also stressed the importance of adhering to relevant guidelines set by the Financial Action Task Force (FATF), the entity that tackles money laundering and proliferation financing.

A clear framework would help guide the industry’s growth while allowing authorities to effectively supervise and mitigate digital asset risks. The report highlights the need for Kenyan regulators to be equipped with the necessary resources to monitor crypto activities, assess risks to the payment system, and ensure the stability of the financial system.

The IMF’s short-term recommendations for Kenya include conducting empirical analysis, fostering collaboration among regulators, and clarifying crypto regulations. Medium- to long-term steps involve creating a legal and licensing framework, enhancing supervisory resources, and aligning regulations with international standards. 

Given the cross-border nature of many crypto activities, the IMF advocates for regulatory arrangements that enable international cooperation in supervision and enforcement. Many crypto services in Kenya are provided by foreign firms, which complicates local enforcement efforts. Therefore, the IMF suggests that Kenya collaborate with foreign regulatory authorities to oversee cross-border crypto activities effectively.