## tarea2025001-print-pdf ## Source details **Canonical URL:** [tarea2025001-print-pdf](https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2025/english/tarea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2025/english/tarea2025001-print-pdf.pdf.json) --- ### Preface — mission, current situation, and government direction - Mission purpose and activities - IMF MCM and LEG visited Nairobi during February 12-16, 2024 to conduct a diagnostic analysis of crypto-asset activities and the related regulatory and legal framework in Kenya at the request of the Capital Markets Authority (CMA). - Mission provided in-house lectures (including lessons from the failure of FTX) and met with CMA, Central Bank of Kenya (CBK), National Treasury, and private industry participants. - Additional expertise provided by Belgian Financial Services and Markets Authority and LEG’s Financial Integrity Division via conference calls; interactive call organized between CMA and LEGFI on AML/CFT regulatory issues. - Current regulatory situation and findings - No crypto asset specific regulations currently in place in Kenya. - Crypto-related activities addressed under existing regulations and mandates of CMA and CBK; neither has issued legally binding instruments specifically covering digital assets. - Unclear which assets fall under CMA or CBK remit; institutional competency and supervisory responsibilities are ambiguous. - Multiple public warnings issued due to prevalence of scams: - CBK public notice in December 2015 on unregulated status of Bitcoin (BTC) and other crypto assets; reiterated warnings multiple times. - CMA first warning in 2018; targeted warnings including ICO and OTC markets post-WorldCoin. - Directorate of Criminal Investigations (DCI) alert in February 2024 warning about crypto asset platforms used for fraud schemes. - Government direction and institutional arrangements - Government intends to regulate the crypto assets market. - November 2023: National Treasury and Economic Planning issued policy guidance to Director General of the Financial Reporting Center (FRC) to develop comprehensive regulatory and supervisory framework for crypto assets and crypto asset service providers. - TWG chaired by National Treasury, including CMA and CBK, Secretariat at CMA: - TWG to commence work on 1 March 2024 and finalize policy recommendations by September 2024. - Regulatory framework including FATF Recommendation 15 to be enacted by April 2025. - TWG tasked to assess adoption, market size and players, conduct risk assessment, formulate regulatory/supervisory framework, stakeholder engagement, collect best practices, and undertake benchmarking visits. ### Market data, uncertainty, and recommended assessment approach - Market uncertainty and limited empirical evidence - 2017 Citi research note (cited in CMA March 2023 Draft Policy Framework) estimates bitcoin holdings in Kenya at approximately 2.3 per cent of GDP in 2016. - 2020 research report cited in CMA policy paper suggests Kenya was second in Africa after Nigeria in P2P bitcoin trades, accounting for over 12 percent of Africa’s P2P bitcoin trades. - Chainalysis ranks Kenya on place 21 out of a total of 155 countries in the Chainalysis Global Crypto Adoption Index and ranks Kenya third overall in terms of P2P exchange trade volume. - TWG/FRC questionnaire survey (September 2023 VA and VASP ML/TF Risk Assessment) - Respondents: a total of 341 responses from public and private sector entities, including VASPs, Traditional Obligated Entities (TOEs), and members of the public. - Recommendation: conduct a more representative analysis, not exclusively based on questionnaires and not limited to AML/CFT risks, to better understand the market and inform policy. ### Alignment with international standards and supervisory capacity - Framework development should align with: - IMF/World Bank Bali Fintech Agenda - IMF Policy Paper on Elements of Effective Policies for Crypto Assets - IOSCO Policy Recommendations for Crypto and Digital Asset Markets - FSB Global Regulatory Framework for Crypto-Asset Activities - Relevant FATF recommendations - Emphasis on regulatory clarity, resource provisioning, and regular supervisory training to monitor crypto activities and risks to payment systems and monetary transmission. ### Key recommendations (selected from Table 1; timelines preserved) - Short term (ST, 6–12 months) and medium term (MT, 12–24 months) actions: - Conduct or commission a comprehensive empirical market analysis and assessment of financial sector, market, conduct, and consumer protection risks — Timeline: ST — Responsible: TWG - Agree on a cross-agency understanding of the crypto asset market and define appropriate policy response — Timeline: ST — Responsible: TWG - Conduct a risk-based stock taking of crypto assets traded/used in Kenya to assess coverage under existing regulations; attempt to gauge P2P extent and use cases — Timeline: MT — Responsible: CMA, CBK - Consider measures to increase financial literacy among potential crypto investors — Timeline: MT — Responsible: JSFRF - Implement effective cooperation mechanisms across authorities for comprehensive supervision — Timeline: MT — Responsible: CMA, CBK - Clarify scope of CMA Guidelines aligning with IOSCO Policy Recommendations (FR11/2023) — Timeline: ST — Responsible: CMA - Ensure adequate technical and human resources and regular training for supervisors — Timeline: MT — Responsible: TWG, CMA - Ensure legal certainty by implementing adequate legal framework and inter-agency processes; regularly review adequacy against market and international developments — Timeline: MT, LT — Responsible: CMA, CBK, National Treasury --- ### Section 7 — Use of crypto assets for payments for domestic non-financial assets and services - Market use and prevalence - Use of crypto assets for domestic payments appears very limited. - No crypto asset ATMs known to be operating in Kenya. - Anecdotal evidence: stablecoins (such as USDT) used by domestic companies to settle contracts with foreign suppliers during domestic USD shortages; private sector reports indicate stablecoins used as store of value and hedge against KSh depreciation. - TWG survey findings (design and outcomes) - Data sources: open-source intelligence and survey questionnaires; total 341 responses. - Identified market participants and activities: - Four types of VASPs; six types of VASP services; eleven activities/channels. - VASPs include wallet providers, exchanges, broking/payment processing, investment providers. - Services include NFT and stablecoin trading, P2P and peer-to-business (P2B) transfers, fiat-crypto conversion. - Typical user profile and behaviour: - Typical user under 40 years of age. - Primarily engaged in investment in BTC, ETH, or USDT. - Invested funds not exceeding Ksh 100,000 (around 635 USD). - Funded with own income or savings. - Stablecoin usage (survey time): - USDT: 49 percent of all stablecoins used. - USDC: 31 percent. - BUSD: 9 percent. - Other outcomes: - 27 percent of respondents utilize NFTs for art or collectible acquisitions. - 26 percent had traded or invested in the metaverse. - 38 percent knew someone who has been subject to crypto asset scams. - 62 percent affirmed crypto assets presented a potential risk for facilitating money laundering. - Conversion/transaction channels: P2P, e-wallet intermediaries, brokers, and card schemes enable fiat-crypto and crypto-fiat conversions despite CBK cautionary statements. - Recommendation: perform a more representative analysis beyond questionnaires and AML/CFT focus. - Regulatory stance and enforcement - CBK circulars: - December 18, 2015: CBK Banking Circular No 14 of 2015 cautioned financial institutions against dealing in crypto assets and expressly advised not to open accounts for persons dealing in crypto assets. - September 1, 2020: CBK National Payments System Circular No 3 of 2020 required PSPs to review customer files and report unlicensed activities. - Resulting uncertainty: CBK circulars create ambiguity about permissiveness of crypto business; customers may not disclose crypto transactions enabling continued use of fiat rails; private actors indicate circumvention of CBK’s soft ban could be widespread. - CMA actions: first warning in 2018, targeted warnings after Worldcoin, cease-and-desist in 2019 against KeniCoin issuer; CMA has transferred investor complaints to DCI. - Market structure, consumer protection, and fraud risks - Informal market structure inhibits development of domestic infrastructure aligned with market integrity and consumer protection. - Reliance on P2P trades via chat groups and international platforms; use of unregulated escrow agents lacking KYC reported. - Recommendations: emphasize pre-trade disclosure, withdrawal rights, and consider registration/licensing regime to help users identify legitimate providers and facilitate banking relationships. - Supervisory and resource constraints - CMA staffing and monetary constraints may inhibit effective supervision, monitoring of market developments, onboarding, and transaction monitoring. - Reporting and data gaps due to absence of regulatory reporting and informal market nature. ### Legal and legislative framework context - Current legal basis for regulation rests on existing statutes: Capital Markets Act 2022 (CMA Act), National Payment Systems Act (NPSA), Central Bank of Kenya Act (CBK Act); Kenya Information and Communication Act or the Banking Act may be incidentally relevant. - CMA Act - Regulates issuance, offer to the public or admission to trading of securities; licensing regime for exchanges; powers for regulatory, supervisory, investigatory and enforcement actions. - No specific crypto-asset rules or amendments issued to date. - CBK Act and NPSA - CBK mandates include promotion/supervision of payment, clearance/settlement systems, sole issuance of currency notes and coins, licensing of authorized dealers. - Money Remittance Regulation of 2013 requires license for money remittance services; used as legal basis for CBK circular stating “no entity is currently licensed to offer money remittance services and products in Kenya using virtual currency such as Bitcoin". - NPSA grants CBK powers to designate, authorize and regulate payment systems, instruments and PSPs; includes powers to prohibit issuance of payment instruments and conduct audits/inspections. - Rulemaking and classification constraints - CMA and CBK rulemaking powers subject to Statutory Instruments Act (SIA) and parliamentary scrutiny. - In absence of legislative change, crypto activity must be classified within existing instruments (e.g., as security or payment instrument) for regulatory powers to apply; correct legal classification is difficult in practice. - Consequence: uncertainty, supervisory forbearance, isolated enforcement, and reliance on warnings/circulars; no admissions to CMA sandbox reported for crypto-asset entities. --- ### Statutory Instruments Act and market effects (Section 23) - SIA requires acts with force of law to undergo parliamentary scrutiny and approval; rulemaking by CMA and CBK must follow SIA process. - CBK circular No: 14 of 2015 asserts crypto assets are not legal tender; Article 22 of CBK Act reserves legal tender status to CBK-issued coins and notes. - CBK circular operates as a de-facto ban on regulated financial institutions facilitating crypto activities, though not criminalizing holding or engaging in crypto activities; activity driven out of regulated sector leads to opacity, limited data, and enforcement challenges. - Cross-border and jurisdictional issues - Legal uncertainty on treatment of foreign service providers operating online; cross-border digital nature exacerbates enforcement constraints. - Suggested measures: cooperation agreements for information exchange, “onshoring” service providers via Kenyan licensing and requiring local incorporation as precondition for license. - Private law and consumer protection - No dedicated private law framework for digital assets; traditional private law instruments insufficiently clear for tokenization, custody, and collateralization of tokenized real-world assets. - Regulators should engage to foster private law clarity and require supervised entities to provide clear terms and conditions, segregation and safekeeping protections. - Tax law - Finance Act 2023 introduces a “digital asset tax”: - Tax charged at a flat rate of 3% of the gross value on income derived from transfer/exchange of digital assets. - Collected as withholding tax by owner of platform or facilitator. - Definition of digital assets includes (i) anything of value that is not tangible and cryptocurrencies, token code, number held in digital form and generated through cryptographic means or otherwise… and (ii) a non-fungible token or any other token of similar nature. - Press reports indicate a petition filed before the High Court blocking implementation; not yet in force. - VAT (Electronic, Internet, and Digital Marketplace Supply) Regulations, 2023: “facilitation of online payment for, exchange or transfer of digital assets” is a taxable supply subject to VAT (tax on facilitation service, not transfer of asset). - Observation: tax definition is broad and not suitable for financial regulation which requires differentiation by economic function/use case. --- ### Case study — KeniCoin (Sections 42 and related) - Legal classification and court reasoning - CMA injunction and court applied Howey test (SEC v. W.J. Howey) to find KeniCoin issuance constituted an “investment contract”: - Criteria: investment of money/property in common enterprise with expectation of profit based on others’ efforts; funds subject to risks of enterprise. - Facts: purchases via fiat or crypto, promise of 10% return monthly for three years, advertised as “crowd sale of cloud tokens.” - Court upheld CMA’s public warning and injunction; treated offering as subject to securities regime under CMA Act. - Limits and implications of judgment - Court did not classify the token itself nor provide abstract criteria to determine when a token is a security; legal and regulatory uncertainty persists. - Court noted token demonstrated features of a currency, implicating possible CBK mandate on currency and payment systems; did not delineate how CMA and CBK jurisdiction should be allocated. - Resulting ambiguity risks conflicts of competence between regulators and unpredictable extension of securities laws to crypto assets. - CMA jurisdictional reasoning and limits - Court’s approach considered economic function/reality of token but falls short of creating clear precedent or delineating digital securities vs digital means of payment. - De lege ferenda developments - Ongoing legislative initiatives (e.g., Capital Markets (Amendment) Bill 2023) aim to define crypto assets and establish bespoke regime: - Bill contains dedicated definitions, licensing regime, some tax provisions, and rudimentary prudential/conduct rules. - Concerns: inconsistent use of terms like “digital currencies” and lack of technology neutrality; potential loss of clarity if terminology used interchangeably. - Recommendation: ensure National Treasury, CBK, CMA, and revenue authority sufficiently involved in legislative activity; do not leave rulemaking solely to private sector. ### Legal design options and trade-offs (summary) - Options: 1. Comprehensive legal reform — Pros: clarity, dedicated regime; Cons: time consuming, capacity demanding. 2. Targeted legal amendments + regulations — Pros: flexible, legitimate mandate; Cons: requires authority to issue regulations. 3. Issuing regulations without legislative changes — Pros: quick, flexible; Cons: may not resolve mandate conflicts. 4. Use of exemptions — Pros: case-by-case fixes; Cons: limited legal certainty. 5. Prohibition/bans — Pros: clear stance; Cons: stifles innovation, drives activity underground, hard to enforce. - Considerations for choosing approach: institutional capacity, clear objectives (consumer protection, market integrity, financial stability), clarify regulated scope (activity/product/provider), tailor rules for products like stablecoins. ### CMA Draft Policy Framework and Draft Guidelines — refinements (paragraphs 52–64) - CMA Draft Framework (finalized March 2023) is an internal working draft not yet approved by CMA Board; includes jurisdictional analysis, high-level Draft Guidelines in Annex. - Suggested refinements to Draft Guidelines: - Clearly delineate scope and map regulatory requirements to specific activities. - Align definitions section (e.g., consistent use of “Crypto service provider”, “Crypto Asset Service Providers”, “Crypto Asset Businesses”). - Include definition of “stablecoins” and clarify whether/how stablecoins fall under Draft Guidelines. - Incorporate IOSCO Policy Recommendations (FR11/2023) on custody of client monies/assets and addressing abusive behaviors. - Clarify cross-sector cooperation mechanisms with CBK and other authorities. - CMA Regulatory Sandbox (paragraphs 53–57) - Launched March 2019; first participants admitted June 2019; standalone within CMA perimeter. - Formal application criteria include business plan, risk assessments, Safeguards Plan; key function holders must meet fit and proper criteria under section 24A of Capital Markets Act. - Sandbox has seen five successful exits but no crypto asset related applicants admitted to date. - Risks: eligibility does not require prior authorization; recommendation for additional safeguards (continuous monitoring, experienced senior compliance managers); admission of crypto applicants conditional on safeguards, staff training, technological monitoring capacity, and cost-benefit analysis. - Recommendations for regulatory framework (paragraphs 58–64) - Align with international standards (IMF/World Bank Bali Fintech Agenda; IMF Policy Paper; IOSCO; FSB; FATF). - Calibrate framework based on current and expected risks; TWG to conduct comprehensive market and risk analysis, including domestic and international payment use. - Implement cross-sector cooperation and clear mandate allocation anchored in law. - Enhance legal certainty via bespoke frameworks or targeted amendments; definitions/classification should be functionally based and aligned with regulator mandates. - Strengthen private law clarity and investor protections (minimum contractual terms, safeguarding customer funds). - Facilitate cross-border supervision and enforcement; consider local licensing and legal establishment requirements for VASPs with significant Kenyan footprint. - Promote financial literacy initiatives as additional safeguard against scams. ### Next steps and IMF support (paragraph 65) - TWG priorities: understand current market state and assess market, conduct, and consumer protection risks; undertake stock-taking and risk assessment as priority. - IMF can provide technical assistance once assessments are complete to address risks to financial stability, markets, and consumers. --- ### Annex I — Selected international legislative regimes (high-level highlights) - Japan - Payment Services Act (PSA) amendments since May 2016; subsequent reforms in 2019 and 2022; licensing for Crypto Asset Exchange Service Providers (CESP); EPIESP license for stablecoin trading; extensive conduct, prudential, AML/CFT, custody, disclosure and market integrity rules; supervision by FSA and Local Finance Bureaus. - European Union (MiCAR) - MiCAR is a bespoke regime applying as fallback unless other financial instruments apply; categorizes ARTs and EMTs with stricter rules; issuer white paper requirements; licensing for crypto-asset services; safeguards for reserve assets of ARTs/EMTs; supervisory significance regime and extra-territorial effects. - Nigeria - No single legislation historically; CBN and SEC issued rules/guidelines with contradictory effects. Recent harmonized framework provides licensing regime for VASPs under SEC; CBN Guidelines (post-2023) enable banks to transact with CBN-authorized VASPs; SEC Rules require registration and assessment if asset qualifies as a security. - Mauritius - Virtual Asset and Initial Token Offering Services Act (VAITOS Act) enacted 2021; licensing and supervision by FSC; defines virtual assets (excludes fiat, Bank of Mauritius digital currencies, securities); licensing requires physical presence; prudential, governance, AML/CFT and custody rules. - Global overview — choice of legal design (selected examples) - Singapore: targeted amendments then regulations (Payment Services Act). - USA: regulation by enforcement (SEC/CFTC cases). - South Africa, Hong Kong, Nigeria: issuance of regulations without targeted legal amendments. - Botswana, Bahamas, Namibia, Brazil, EU: bespoke legislation enacted. --- ### VAITOS Act — Section 2 (excerpted features) - VASP definition: person conducting as a business one or more of exchange between virtual assets and fiat currencies; exchange between virtual assets; transfer of virtual assets; safekeeping/administration of virtual assets or instruments enabling control over virtual assets; participation in and provision of financial services related to issuer’s offer/sale of a virtual asset. - AML/CFT and registration for initial token offerings: - Issuers must register with FSC and submit a white paper with full disclosures. - Advertising ICOs must be accurate and not misleading. - 72 hour right of withdrawal for purchasers of an initial coin offering. - Treatment and exclusion of securities tokens: - VAITOS Act excludes “securities tokens” from its scope; transitional provisions remove virtual tokens from definition of “security” under Securities Act. - FSC will determine whether a security token constitutes a share, debenture, derivative, unit in a CIS, or other instrument based on structure, characteristics and rights. - Legal hierarchy: inconsistency rule provides that VAITOS Act prevails over other applicable laws in case of inconsistency. *Source: tarea2025001-print-pdf* ### Preface ................................................................................................................ ### Preface ### Mission purpose and activities - At the request of the Capital Markets Authority (CMA) of Kenya, the Monetary and Capital Markets Department (MCM) and Legal Department (LEG) of the IMF visited Nairobi, Kenya to conduct a diagnostic analysis of crypto-asset activities and the related regulatory and legal framework in Kenya during February 12-16, 2024. - The mission provided in-house lectures covering key regulatory and legal concepts, as well as lessons learned from the failure of FTX for the implementation of regulatory frameworks and the conduct of crypto asset activities supervision. - Meetings were held with the CMA, Central Bank of Kenya (CBK), National Treasury, and private industry participants. - Additional regulatory expertise was provided by the Belgian Financial Services and Markets Authority and LEG’s Financial Integrity Divisions (LEGFI) by way of interactive conference calls. - The mission organized an interactive conference call with LEGFI; CMA participants discussed pending AML/CFT regulatory issues and next steps with LEGFI experts. ### Current regulatory situation and findings - There are currently no crypto asset specific regulations in place in Kenya. - Crypto-related activities are being dealt with based on existing regulations and in line with existing mandates of relevant regulatory authorities, in particular the CMA and the CBK. - The CMA and the CBK have not issued legally binding, formal instruments that specifically or expressly cover digital assets. - Under existing laws, it remains unclear which types of assets fall under the remit of the CMA or the CBK, and therefore which institution is the competent regulator and supervisor for particular assets. - The prevalence of crypto asset related scams and other criminal activity has prompted several public warnings: - In December 2015, the CBK issued a public notice informing the public of the unregulated status of Bitcoin (BTC) and other crypto assets; the CBK has reiterated warnings on several occasions. - The CMA issued its first warning in 2018 and subsequent targeted warnings (including risks associated with initial coin offerings (ICOs) and over-the-counter crypto asset markets in the wake of WorldCoin). - In February 2024, the Directorate of Criminal Investigations (DCI) issued an alert warning about the use of crypto asset platforms for fraud schemes. ### Government direction and institutional arrangements - The Kenyan government intends to regulate the crypto assets market. - In November 2023, the National Treasury and Economic Planning issued policy guidance to the Director General of the Financial Reporting Center (FRC) to develop a comprehensive regulatory and supervisory framework in respect to crypto assets and crypto asset service providers. - The policy guidance followed continued growth in interest and adoption of crypto assets in Kenya and recommendations by the Eastern and Southern Africa Anti-Money Laundering Group in its 2022 Mutual Evaluation Report for Kenya. - Based on the findings of the Virtual Asset Service Provider (VASP) Money Laundering/terrorist Financing (ML/TF) risk assessment, National Treasury decided to develop a regulatory and monitoring framework for VAs and VASPs. - A Technical Working Group (TWG) chaired by the National Treasury and Economic Planning and including members from the CMA and the CBK has been established; the TWG Secretariat is the CMA. - The TWG is set to commence work on 1 March 2024 and has been instructed to finalize policy recommendations by September 2024. - The regulatory framework, including the implementation of FATF Recommendation 15, is to be enacted by April 2025. - The TWG has been tasked to assess the current state of crypto asset adoption in Kenya, including market size and players, conduct a risk assessment, formulate an appropriate regulatory and supervisory framework for crypto assets and crypto asset service providers, conduct extensive stakeholder engagement, collect international best practices, and undertake benchmarking visits. ### Market data, uncertainty, and recommended assessment approach - There is a significant degree of uncertainty and a lack of consensus among authorities regarding the actual size, structure, and risks of the Kenyan crypto assets market. - Existing empirical evidence is limited and inconsistent: - A 2017 Citi research note cited in the CMA’s March 2023 “Draft Policy Framework on Crypto Assets and Crypto-Service Providers Oversight” estimates the volume of bitcoin holdings in Kenya to amount approximately 2.3 per cent of GDP in 2016. - A 2020 research report cited in the CMA’s policy paper suggests Kenya was second in Africa after Nigeria in Peer-to-Peer (P2P) bitcoin trades, accounting for over 12 percent of Africa’s P2P bitcoin trades. - Chainalysis ranks Kenya on place 21 out of a total of 155 countries in terms of the Chainalysis Global Crypto Adoption Index and ranks Kenya third overall in terms of P2P exchange trade volume. - A questionnaire survey conducted by a TWG led by the FRC underpinning the September 2023 VA and VASP ML/TF Risk Assessment corroborated widespread use of P2P trading among Kenyans. - The mission recommends conducting a more representative analysis, not exclusively based on questionnaires and not limited to AML/CFT risks, to reliably understand the market and inform appropriate policy responses. ### Alignment with international standards and supervisory capacity - The development of Kenya’s regulatory and supervisory framework for crypto assets should be aligned with international frameworks and standards, including: - IMF/World Bank Bali Fintech Agenda - IMF Policy Paper on Elements of Effective Policies for Crypto Assets - IOSCO Policy Recommendations for Crypto and Digital Asset Markets - FSB Global Regulatory Framework for Crypto-Asset Activities - Relevant recommendations by FATF - Particular emphasis should be placed on providing regulatory clarity to allow the domestic crypto asset sector to develop transparently and enable effective supervision. - Relevant authorities should be equipped with necessary resources to effectively monitor crypto asset activities and potential build-up of risks, including risks to the functioning of the payment system and monetary transmission channels. - Supervisory staff should be regularly trained. ### Key recommendations (from Table 1) - Short term (ST, 6–12 months) and medium term (MT, 12–24 months) actions include: - Conduct or commission a comprehensive empirical market analysis of the current state of the Kenyan crypto asset market as well as a comprehensive assessment of the financial sector, market, conduct, and consumer protection risks based on the market analysis. — Timeline: ST — Responsible: TWG - Agree on a cross-agency understanding of the current state of the crypto asset market and the associated risks and define an appropriate policy response based on the mutual understanding. — Timeline: ST — Responsible: TWG - Conduct a risk-based stock taking exercise of crypto assets currently traded/used in the Kenyan market as to whether these assets are already covered by existing regulations. Given the prevalence of peer-to-peer crypto asset activity, the stock taking exercise should attempt to gauge the extent and associated use cases as comprehensively as possible. — Timeline: MT — Responsible: CMA, CBK - Consider further measures to increase financial literacy among potential investors in crypto assets. — Timeline: MT — Responsible: JSFRF - Implement an effective cooperation mechanism across relevant authorities to facilitate comprehensive supervision of the entire crypto asset market. — Timeline: MT — Responsible: CMA, CBK - Clarify scope of the CMA Guidelines taking into account applicable international standards, in particular IOSCO Policy Recommendations for Crypto and Digital Asset Markets (FR11/2023). — Timeline: ST — Responsible: CMA - Ensure that adequate technical and human resources are in place to allow for the effective supervision of crypto asset activities. Supervisory staff should be regularly trained. — Timeline: MT — Responsible: TWG, CMA - Ensure legal certainty by implementing an adequate legal framework, including a clear institutional set-up and inter-agency processes to ensure a comprehensive and effective regulation and supervision of crypto asset activities. The adequacy of these processes should be regularly reviewed and assessed against developments in crypto asset market activities in Kenya and developments of international regulatory standards. — Timeline: MT, LT — Responsible: CMA, CBK, National Treasury *IMF Technical Assistance Report | Preface* ### 7. The use of crypto assets for payments for domestic non-financial assets and services ### 7. The use of crypto assets for payments for domestic non-financial assets and services ### Market use and prevalence - Use of crypto assets for payments for domestic non-financial assets and services seems to be very limited. - No crypto asset ATMs are known to be operating in Kenya. - Anecdotal evidence suggests domestic companies use stablecoins such as USDT to settle contracts with foreign suppliers, particularly in times of domestic USD shortages. - Private sector reports indicate stablecoins are used as a store of value and hedge against depreciation of the KSh. ### Findings from the Technical Working Group survey underpinning the September 2023 VAs and VASPs ML/TF Risk Assessment Report - Survey design and data sources: - Data collected from open-source intelligence and survey questionnaires disseminated to the public, reporting institutions, regulators, law enforcement agencies, Virtual Asset Service Providers, and members of the Technical Working Group. - Respondents: a total of 341 responses from public and private sector entities, including Virtual Asset Service Providers (VASPs), Traditional Obligated Entities (TOEs), and members of the public. - Identified market participants and activities: - Four types of VASPs identified. - Six types of VASP services identified. - Eleven activities/channels associated with the identified services. - Identified VASPs include wallet providers, exchanges, broking/payment processing, investment providers. - VASP services range from custodial to payment gateway services. - Identified services include Non-Fungible Token (NFT) and stablecoin trading, P2P and peer-to-business (P2B) transfer services, or fiat to crypto asset conversion services. - Typical user profile and behaviour: - Typical user is under 40 years of age. - Primarily engaged in investment activities relating to BTC, ETH, or USDT. - Invested funds not exceeding Ksh 100,000 (around 635 USD). - Funding investments with own income or savings. - Stablecoin usage (at time of survey): - USDT: 49 percent of all stablecoins used. - USDC: 31 percent. - BUSD: 9 percent. - Other survey outcomes: - 27 percent of respondents utilize NFTs for art or collectible acquisitions. - 26 percent of respondents confirmed they had traded or invested in the metaverse. - 38 percent of respondents confirmed they know someone who has been subject to crypto asset scams. - 62 percent of respondents affirmed that crypto assets presented a potential risk for facilitating money laundering. - Conversion and transaction channels identified: - Fiat to crypto and crypto to fiat conversions are possible through P2P mechanisms, e-wallet intermediaries, brokers, and card schemes despite CBK cautionary statements. - Survey limitations and recommendation: - It is recommended that a more representative analysis be conducted, not exclusively based on questionnaires and not limited to an analysis of potential AML/CFT risks, to more reliably understand the market and inform appropriate policy responses. ### Regulatory stance, circulars, and enforcement actions - CBK circulars and public notices: - December 18, 2015: CBK Banking Circular No 14 of 2015 cautioned all financial institutions against dealing in crypto assets or transacting with entities engaged in crypto asset activities and expressly advised financial institutions not to open accounts for any person dealing in crypto assets. - September 1, 2020: CBK National Payments System Circular No 3 of 2020 asked all PSPs to conduct a review of all customer files and to submit to the CBK details of customers found to be carrying out unlicensed activities referred to in the Circular and the joint Public Notice of August 25, 2020. - CBK has reiterated warnings on several occasions, including targeted warnings against dealing with unregulated entities such as online foreign exchange dealers. - Resulting uncertainty: - Following CBK circulars, uncertainty exists regarding the permissiveness of crypto asset business activities. - Despite commitment by banks and PSPs to comply with CBK Circulars, customers engaged in crypto asset activities may not disclose such transactions, enabling continued use of fiat rails for crypto activity. - Private actors indicate circumvention of CBK’s soft ban on fiat payment rails for crypto sector actors could be widespread. - Other regulatory actions and warnings: - CMA issued a first warning in 2018 and targeted warnings after Worldcoin events; in 2019 CMA issued a targeted warning against risks associated with ICOs and used existing powers to enforce a cease and desist against the issuer of KeniCoin. - CMA has transferred investor complaints related to alleged crypto fraud to the Directorate of Criminal Investigations (DCI). - February 2024: DCI issued an alert warning about the use of crypto asset platforms for fraud schemes. ### Market structure, consumer protection, and fraud risks - Informal market structure and market integrity concerns: - Informal structure inhibits development of domestic market infrastructure aligned with international best practices on market integrity and consumer protection. - Absence of domestic licensing and regulatory framework leads Kenyans to rely on P2P transactions with unknown counterparties via dedicated chat groups (e.g., WhatsApp, Telegram) and to settle on international platforms such as Binance. - Use of unregulated crypto asset escrow agents that do not require KYC is reported; actors behind these escrow agents are typically unknown. - Anonymity of actors and lack of legal clarity limit viable legal recourse in cases of fraud. - Consumer protection and awareness: - Worldcoin events (August 2023) highlighted need for increased public awareness and financial literacy regarding crypto asset risks. - CMA issued cautionary statement on Worldcoin’s unregulated status and fraud risk in over-the-counter token markets. - National Assembly Ad Hoc Committee recommended, inter alia, a ban on Worldcoin’s activities in Kenya and development of a regulatory framework for crypto assets. - Authorities should consider emphasis on effective pre-trade disclosure requirements and other consumer protection measures such as withdrawal rights when designing regulatory response. - Prevalence and impact of scams: - Prevalence of scams and criminal activity prompted multiple warnings from Authorities. - Retail users with low crypto literacy are particularly vulnerable. - Lack of registration or licensing regime for VASPs aggravates difficulty for users to distinguish legitimate from illegitimate providers. - Both public and private stakeholders see value in a registration or licensing regime to help users identify legitimate actors and to facilitate domestic banking relationships for VASPs. ### Supervisory and resource constraints - Resource limitations: - Staffing and monetary constraints may inhibit the ability of the CMA to effectively supervise domestic crypto asset activities. - Constraints affect monitoring of market developments, onboarding of new players and products, and transaction monitoring to detect abusive market behavior. - Reporting and data gaps: - Given the lack of regulatory reporting requirements for VASPs and the informal nature of the market, authorities have been unable to empirically ascertain the breadth and depth of the crypto asset market. ### Legal and legislative framework context - Current legal basis: - Regulation and supervision of crypto assets currently rests on existing laws: Capital Markets Act 2022 (CMA Act), National Payment Systems Act (NPSA), and Central Bank of Kenya Act (CBK Act). Kenya Information and Communication Act or the Banking Act could be incidentally relevant. - CMA Act: - Regulates issuance, offer to the public or admission to trading of securities and certain other financial instruments. - Provides licensing regime and obligations for securities exchanges; contains rules pertaining to services related to the securities industry and market integrity. - Confers regulatory, supervisory, investigatory and enforcement powers to CMA. - No specific crypto-asset rules or targeted amendments of existing regulations have been issued to date. - CBK Act: - Contains CBK mandates including promotion and supervision of payment, clearing and settlement systems, sole issuance of currency notes and coins, and licensing and supervision of authorized dealers. - Contains rules related to regulation and supervision of currency remittances. - Money Remittance Regulation of 2013 requires a license for money remittance services; used as legal basis for CBK circular stating “no entity is currently licensed to offer money remittance services and products in Kenya using virtual currency such as Bitcoin". - Kenyan High Court case Lipisha Consortium Limited & another v Safaricom Limited found it legal for Safaricom to terminate contract with a virtual asset service provider for engaging in money remittance without appropriate CBK license. - NPSA: - Grants CBK powers to designate, authorize and regulate payment systems, payment instruments and payment service providers; lays out obligations for regulated activities and entities; includes powers to prohibit issuance of payment instruments and conduct audits or inspections. - Rulemaking constraints and legal classification issues: - CMA and CBK have limited rulemaking powers subject to parliamentary scrutiny; regulations, guidelines, or instruments must align with higher ranking laws. - In absence of legislative change, crypto asset activity must be classified within existing instruments (e.g., as a security or payment instrument) for regulatory powers to apply. - Correct legal classification of crypto assets is difficult in practice because existing laws were drafted without specific recourse to crypto assets. - Consequence: uncertainty, regulatory and supervisory forbearance, isolated enforcement actions, and regulatory efforts largely constrained to warnings or circulars. - No admissions to the regulatory sandbox for entities engaged in crypto-asset activities have been reported. *IMF Technical Assistance Report | Section 7* ### 23. The regulatory activities of public authorities in Kenya are governed by the Statutory ### 23. The regulatory activities of public authorities in Kenya are governed by the Statutory ### Legal and institutional framework - The Statutory Instruments Act (SIA) provides that any act pertaining to the force of law is subject to parliamentary scrutiny and approval via a dedicated parliamentary sub-committee. - Parliamentary powers under SIA include rejecting or annulling acts inconsistent with the constitution, the SIA, other relevant laws, and the “parent law”. - The rulemaking powers of the CMA and CBK are to be conducted in line with the SIA process. ### Current regulatory actions by CBK and CMA - No legally binding, formal instruments specifically or expressly covering crypto assets have been issued by either CMA or CBK to date. - Both institutions have issued warnings or circulars related to risks of investments in digital assets. - CBK circular No: 14 of 2015 outlines that crypto assets do not qualify as legal tender within Kenya. - Article 22 of the Kenyan Central Bank Act provides that only coins and notes issued by the CBK enjoy legal tender status; the CBK enjoys the sole right to issue such coins and notes. - The CBK circular reiterates existing law: a privately issued crypto asset would contradict the CBK’s monopoly to issue currency and would not easily fall within categories of coins or notes (physical assets). - The CBK circular sets the expectation that financial institutions regulated by CBK should not facilitate any activities related to crypto assets; although non-binding, in practice it has effectively cut off digital asset activities from the regulated financial sector and can be considered a de-facto ban on directly investing in digital assets or facilitating activities in digital asset markets. - The de-facto ban is ineffective in that transactions not clearly and evidently linked to crypto-related activities remain possible. ### Market effects, enforcement challenges, and illicit risks - The cut-off of crypto activity from the regulated sector: - Obfuscates transparency of the crypto market in Kenya because the regulated financial sector officially cannot engage in or report on crypto markets. - Results in banks being used unofficially to transact in crypto markets. - Makes it easier for illicit actors to deploy fraudulent schemes (e.g., P2P agreements where consumers effectuate payments linked to digital assets without ever receiving assets; claiming money back is difficult as it would expose the payee to having engaged in crypto asset transactions). - Under current law, holding or engaging in crypto-asset activities in Kenya is not illegal or officially banned; activity is driven out of the regulated sector by effective soft-law guidance, leading to: - Opaque company and transaction structures, - Limited data, - High legal uncertainty. - The CMA has, despite applications, refrained from granting digital assets firms access to its sandbox or from licensing such firms under the CMA Act due to legal, regulatory and political uncertainty. ### Cross-border and jurisdictional issues - Legal uncertainty exists regarding treatment of foreign service providers offering crypto asset services online and from foreign/offshore jurisdictions. - Crypto assets being digital and easily offered across borders exacerbates jurisdictional enforcement constraints for Kenyan authorities. - Suggested measures to expand regulatory reach include: - Robust cooperation agreements, including arrangements for information exchange (taking into account professional secrecy requirements) with foreign authorities. - “Onshoring” certain service providers with a relevant footprint within Kenya by requiring a Kenyan license to conduct services. - As a precondition for such a license, requiring service providers of a certain size to legally incorporate themselves within Kenya. ### Private law, consumer protection, and contractual clarity - No dedicated private law framework for digital assets exists in Kenya. - Authorities state traditional instruments of Kenyan private law would not provide sufficient clarity for: - Tokenization (particularly of real-world assets), - Custodial arrangements surrounding digital assets (e.g., wallets), - Taking in custody of real-world assets that collateralize tokenization. - Absent specific private law rules, crypto transactions will primarily be governed by private contracts between parties. - The following areas require transparency and clear contractual frameworks: - Rights of holders, - Transfer mechanisms, - Status of an asset in the insolvency of a custodian, - Nature of services provided. - While private law matters fall outside CMA’s mandate, from an investor and consumer protection perspective the CMA and other regulators should: - Actively engage in discussions to foster an appropriate private law framework. - Require supervised entities to have clear and transparent terms and conditions for customers, ensuring customers are informed and aware of rights under a contract. - Require contracts to fulfil certain minimum regulatory requirements (e.g., protection of customer funds and assets in and outside insolvency via segregation and safekeeping) while acknowledging regulators cannot directly intervene in private contracts. ### Tax law developments and uncertainties - Finance Act 2023 introduces a “digital asset tax” payable by a person on income derived from the transfer or exchange of digital assets. - The tax is charged at a flat rate of 3% of the gross value. - The tax is collected as a withholding tax by the owner of a platform or the person who facilitates the exchange or transfer of the asset. - The amendment includes a definition of digital assets which includes: - (i) “anything of value that is not tangible and cryptocurrencies, token code, number held in digital form and generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration that can be transferred, stored or exchanged electronically”; and - (ii) “a non-fungible token or any other token of similar nature, by whatever name called.” - Press reports indicate a petition was filed before the High Court blocking the implementation of the digital asset tax and it is therefore not yet in force. - The VAT (Electronic, Internet, and Digital Marketplace Supply) Regulations, 2023 provides that the “facilitation of online payment for, exchange or transfer of digital assets” shall be considered a taxable supply subject to VAT — this imposes tax on the facilitation service rather than the transfer of the digital asset itself. - The tax law’s definition of digital assets is aimed at broad taxability and is not suitable for financial regulation because: - Financial regulation requires differentiation by economic function and use case. - A single treatment of all crypto assets under financial law would not be in line with international best practice. ### Overall assessment of legislative scope and activation of regulatory powers - The legislative framework for crypto assets is governed by rules not specifically tailored to their nature and type: - Private law: complete absence of specific rules. - Tax regime: attempts to capture digital assets but with limited success and uncertainty due to pending court cases. - Public law: legal hooks to regulate and supervise crypto assets and service providers exist in principle, but activation depends on classifying assets/services as securities, securities exchanges, payment instruments or payment service providers (or other regulated activities depending on crypto-asset design). - Due to heterogeneity of digital assets and lack of common understanding among authorities, neither CMA nor CBK have used their powers in a consistent, all-encompassing manner beyond isolated issues (e.g., lack of legal tender status; application of securities laws in specific incidents). ### Case law example — KeniCoin (illustrative of legislative gaps) - No legal definition of crypto assets under Kenyan law. - CMA Act (Section 2) defines a security to include shares, debentures, bonds, commercial paper, or notes issued or proposed to be issued by a corporate body; debentures or bonds issued or proposed to be issued by a government; derivatives including futures contracts and options contracts; any unit, interest or share offered under a collective investment scheme or other similar vehicle; interests, rights or property commonly known as securities; asset-based securities; and any other instrument prescribed by the CMA to be a security for the purposes of the Act. - The definition appears narrow and excludes securities not issued by a corporate or government entity, potentially making it difficult to classify decentralized crypto assets or tokens issued by individuals as securities under the CMA Act. - KeniCoin facts and judicial reasoning: - In 2019 Wiseman Talent Ventures attempted an initial coin offering of “KeniCoin” to the Kenyan public. - CMA issued a cautionary statement and an injunction ordering Wiseman Talent Ventures to stop issuance and actions requiring authorization under CMA Act. - Wiseman Ventures filed suit arguing CMA had no mandate over cryptocurrencies. - The court applied the US Howey test (Securities Exchange Commission (SEC) v. W.J Howey Co) as persuasive authority to determine whether the offer constituted an “investment contract.” - The Howey test defines an “investment contract” as a contract involving: - the investment of money or other property, - in a common enterprise, - with the expectation of profit or gain based on the expertise, management or effort of others, - and such money or other property is subject to the risks of the common enterprise. - The court found KeniCoin met the criteria for an investment contract and upheld the CMA’s public warning and injunction. - Specific facts supporting characterization as a security included that participants could purchase KeniCoin via fiat or another crypto asset with a promise of a 10% return monthly for a guaranteed period of three years, advertised as a “crowd sale of cloud tokens,” with promises of substantial rewards. - The court concluded Section 2 and Section 11 of the CMA Act confer jurisdiction on CMA to regulate the issuance and offer of KeniCoin in absence of a specific regime, guided by policy goals to protect the public and ensure transparency and accountability under the Kenyan constitution. - The court’s balancing of harms favored upholding the injunction to avoid exposing the public to unregulated and untransparent investment schemes. *IMF Technical Assistance Report* ### 42. The categorization of the KeniCoin token offering as an offer of an investment contract ### 42. The categorization of the KeniCoin token offering as an offer of an investment contract ### Legal classification and uncertainty - The application of the Howey test led the Court to consider the issuance of the KeniCoin token as an investment contract and thus subject to the general regime under existing securities law. - The Court did not: - classify the token itself; nor - outline abstract criteria to determine whether a token constitutes a security. - Resulting condition: "considerable legal and regulatory uncertainty persists." - Distinction emphasized: an investment contract is distinct from the crypto asset. Example from Howey: contracts related to the sale of land and provision of agricultural services were deemed an investment contract, while the orange groves themselves were not deemed securities. - Implication: "It may not be appropriate to extend the concept and definition of a security to all crypto assets," as doing so "may result in an unpredictable extension of securities laws to all crypto assets." ### Currency features, regulator mandates, and jurisdictional overlap - The courts found KeniCoin "demonstrated features of a currency." - Regulatory implication: if KeniCoin is considered a type of currency, the regulatory and supervisory mandate of the CBK "would be implicated" because CBK has the exclusive mandate on matters of currency, payment systems and payment service providers under the National Payments Systems Act. - Court motivation: concern that absent classification, "no regulation at all would apply, leaving the greater public at risk of significant financial losses." - Missing guidance: no criteria provided to distinguish between security and payment type tokens. - Jurisdictional ambiguity: Court did not indicate how to establish jurisdiction between the CMA versus the CBK, risking "conflicts of competences between the two regulators." ### CMA jurisdictional reasoning and limits of the judgement - The KeniCoin case establishes jurisdiction of the CMA over certain crypto assets based on protecting the public from unregulated activities in financial markets. - Method: considering the "economic function or reality of the token" and reading existing definitions of the CMA Act in light of US jurisprudence to allow CMA to assume certain crypto assets. - Shortcomings: - The judgement "falls short of delivering a precedent" that clearly defines a security in the digital assets sphere. - It does not "clearly delineate digital securities from digital means of payments." - It also "falls short [of] drawing a clear line between the regulatory and supervisory perimeters of the CMA and the CBK." ### Legal scope and institutional uncertainty - The precise scope of the CMA Act, and relatedly the CBK Act and the NSPA Act, "remains unclear with respect to digital assets." - Consequence: since objectives and powers of authorities derive from legislative scope, the lack of clarity "exacerbates legal uncertainty." ### Current developments de lege ferenda (Box 1) - Ongoing initiatives in Kenya aim to legislate on the crypto-asset sector; initiatives are "driven by the private sector and policy interest groups" and "did not form an integral part of the TA mission." - Recommendation: ensure "public sector authorities—in particular the Ministry of Finance (National Treasury) together with the CBK, the CMA and other relevant stakeholders such as the revenue authority—are sufficiently involved in any legislative activity." - Role of private sector: stakeholder consultation is important, but "the elaboration of a rulebook for crypto assets should not be left in the hands of the private sector" due to conflicts of interest and omission of public sector expertise. - Capital Markets (Amendment) Bill 2023: - Contains dedicated definitions of crypto assets and aims to provide a bespoke regulatory regime of crypto assets and related services. - Contains some tax related provisions and a "rather rudimentary prudential and conduct regulation framework, consisting mainly of licensing requirements." - Positive: explicit definitions and a licensing regime are "a good starting point" and align with recommendations in this TA report and best international practice. - Problems noted: - Legal texts should "arguably refrain from defining digital assets as 'digital currencies.'" The term "currency" has a specific legal meaning and usage is "not suitable for privately issued coins that are most often very volatile." - The Bill "defines digital currencies and cryptocurrencies in a different manner, while the text of the law then appears to use those notions interchangeably (and also the undefined expression of virtual currency)." Result: "The added value of having explicit definitions is lost" if terminology is not used consistently. - Questionable scope: constraining definitions to tokens using DLT may not be "sufficiently future proof" and is "not completely technology neutral," risking loopholes. - A Virtual Assets Bill has been brought forward by private stakeholders; the TA mission "did not assess this bill in detail." ### Choice of legal design for crypto assets (design options and trade-offs) - Countries may choose among: 1. undergoing comprehensive legal reform, 2. drafting targeted legal amendments followed by regulations, 3. issuing regulation without legislative changes, 4. the use of exemptions, 5. prohibition or bans. - Summarized pros and cons: - (a) Comprehensive legal reform: - Pros: special regime with detailed definitions; cover licensing, supervision, sanctions, enforcement; provide clarity and legal certainty; define roles of regulators. - Cons: technically challenging; time consuming; requires institutional capacity; less flexible; risk of ambiguity with existing financial sector laws—legislation must ensure consistency with existing laws. - (b) Targeted legal amendments followed by regulations: - Pros: greater flexibility; legislative specification of definitions and mandates provides legitimacy; adaptable over time without parliamentary review; can ensure consistency between regulators. - Cons: regulators must have "requisite legal authority" to issue regulations. - (c) Issuing regulations without legislative changes: - Pros: quickest to implement; flexible; may promote innovation. - Cons: requires clear legal authority; may not resolve competing mandates or conflicts of competences between existing laws (e.g., payments vs securities laws). - (d) Use of exemptions: - Pros: can address cases where traditional laws do not fit new business models. - Cons: not comprehensive; often case-by-case; not binding on future enforcement; may not provide legal certainty. - (e) Prohibitions or outright bans: - Pros: clear stance. - Cons: stifles innovation; promotes illicit activity through regulatory arbitrage; drives activity underground; "difficult and costly to enforce given the borderless nature of crypto assets." ### Considerations for selecting an approach - Factors to consider: - institutional capacity constraints and resource capability of bodies developing the framework; - clear regulatory objectives: consumer and investment protection, integrity of financial markets, financial stability; - clarify what is being regulated—activity, product, services, providers, and relevant actors; - recognize that some products (e.g., stablecoins) "may require more detailed or tailored legal and regulatory provisions." - Recommendation: engage industry participants to identify risks and ensure interagency coordination of financial sector regulators and other relevant authorities. ### Aim of the legal framework - Objectives regardless of approach: - be comprehensive and provide legal certainty; - address risks posed by issuance, trading, custody, service provision and intermediary or ancillary activities; - clearly allocate responsibility for regulator(s) and supervisor(s); - ensure investor protection, minimize regulatory arbitrage, provide flexibility and adaptability, and enable continuous monitoring and coordination; - address ownership and contractual relationships, data privacy and insolvency, and private law issues. - Alignment: legislation "should be aligned with the guidance provided by international organizations and standard setters," including IMF/World Bank Bali Fintech Agenda, IMF Policy Paper on Elements of Effective Policies for Crypto Assets, IOSCO Policy Recommendations for Crypto and Digital Asset Markets, FSB Global Regulatory Framework for Crypto-Asset Activities, and relevant FATF recommendations. ### CMA Draft Policy Framework (policy development and suggested refinements) - CMA prepared a Draft Policy Framework for Crypto Assets and Crypto-Service Providers Oversight (CMA Draft Framework) outlining capital markets policy priorities and high-level recommendations; it "has not yet been approved by the CMA Board" and is a tentative internal working draft. - Finalized in March 2023, the Draft Framework: - sets out CMA staff’s initial thoughts to inform the TWG’s work; - includes discussion of crypto assets and the Kenyan context; policy and regulatory considerations (including IOSCO and FATF references); jurisdictional analysis (UK, US, South Africa, Botswana, Nigeria); a high-level risk assessment and impact analysis; and high-level Draft Guidelines in the Annex. - Areas for refinement identified by the TA mission: - Make explicit how the CMA Draft Framework "aligns with and ties into the government’s key policy development objectives." - Provide an empirical market and risk analysis that captures all prevalent crypto asset market activities and associated risks (not limited to AML/CFT risks), and focus on risks currently not dealt with adequately in the existing regulatory framework. - The Impact Analysis should assess expected risks and benefits in more detail; current analysis "does not expect any negative impact on the financial sector regulators" but a detailed analysis might show supervisory strains or negative impacts from failures of supervised crypto exchanges. - Clarify how analyses of other jurisdictions feed into the Draft Framework’s conclusions and recommended policy measures. *Source: tarea2025001-print-pdf - 42. The categorization of the KeniCoin token offering as an offer of an investment contract* ### 52. Also, the Draft Guidelines in Appendix A of the CMA Draft Framework would potentially ### tarea2025001-print-pdf - 52. Also, the Draft Guidelines in Appendix A of the CMA Draft Framework would potentially ### Draft Guidelines: recommended refinements and additions (paragraph 52) - The scope of the Draft Guidelines is somewhat vague. - Unclear whether scope is limited to the issuance of smaller sized debt instruments or to crypto asset related market activity more broadly. - Recommendation: The scope of the Guidelines should be delineated clearly, and the individual regulatory requirements should be mapped to the specific activities the requirements apply to. - The Draft Guidelines do not yet include all of the relevant IOSCO Policy Recommendations for Crypto and Digital Asset Markets (FR11/2023), including inter alia recommendations on custody of client monies and assets or recommendations to address abusive behaviors. - Definitions section misalignment. - The definitions section of the Draft Guidelines should be aligned with the terminology used in the Draft Guidelines. - Example inconsistency: definitions refer to "Crypto service provider", while the Draft Guidelines also uses "Crypto Asset Service Providers" and "Crypto Asset Businesses". - A definition of e.g., “"stablecoins” is missing. - Stablecoins and cross-sectoral coordination. - It should be clarified to what extent, if any, stablecoins would fall under the regulatory perimeter of the Draft Guidelines. - If the use of stablecoins as a means of exchange for trading in crypto asset should be exempt or considered an auxiliary activity, the scope and conditions of the exemption should be clarified. - Given the cross-sectoral nature of crypto asset activities, the cooperation mechanism with other regulatory authorities such as the CBK should be clearly outlined. ### CMA Regulatory Sandbox (paragraphs 53–57) - Background and objectives (paragraph 53) - CMA launched a regulatory sandbox in March 2019 and admitted its first three participants in June 2019. - After discontinuing initial plans for a cross-sector, inter-agency sandbox, CMA implemented a standalone regulatory sandbox within its regulatory perimeter. - Sandbox objectives: ensure Kenyan capital markets regulatory environment is conducive for innovative business models and emerging technologies; deepen capital markets; review regulatory requirements that may inhibit innovation and FinTech in capital markets. - Eligibility and application criteria (paragraph 54) - Sandbox has broad eligibility, allowing admission for both domestic companies and companies licensed in another IOSCO member jurisdiction. - Formal application criteria include a comprehensive business plan, risk assessments, and a Safeguards Plan. - Key function management holders must meet fit and proper criteria under section 24A of the Capital Markets Act. - Proof of sufficient financial and non-financial resources must be submitted to the CMA. - While certain regulatory relief measures may be granted, participants must comply with a number of minimum regulatory requirements specified by the CMA in the Safeguards Plan. - Risks from allowing unauthorized entities to test (paragraph 55) - CMA Sandbox eligibility criteria do not require participants to be authorized prior to testing, potentially creating risks to customers and investors during the testing period. - Regulatory safeguards are implemented pursuant to Sections 22 to 28 of the CMA’s Regulatory Sandbox Policy Guidance Note. - Recommendation: CMA should consider additional safeguards such as continuous monitoring of the fitness and propriety of key function holders and recruitment of experienced senior compliance managers by participants. - CMA monitoring of unauthorized participants should allow for early detection of potential risks and implementation of remedial actions before risk materialization. - Sandbox outcomes and crypto interest (paragraph 56) - The CMA Sandbox has seen five successful exits,30 but so far, no crypto asset related applicants have been admitted to the sandbox. - Successful exits include a mobile phone based collective investment scheme solution, a screen-based securities lending and borrowing platform, and a robo-advice offering. - Pending the TWG’s recommendations on the future crypto asset framework, CMA has refrained from approving crypto asset related applications. - Interest from the crypto asset sector has been especially strong for blockchain based real economy asset tokenization, in particular real estate. - Real estate tokenization regulatory questions that could be tested: management and custody of the underlying asset; transfer of ownership rights; attribution of liability. - Preconditions for admitting crypto asset applicants (paragraph 57) - If CMA considers admitting crypto asset applicants, appropriate resources and safeguards should be put in place before commencement of crypto asset related Sandbox tests. - CMA should ensure Sandbox staff is sufficiently trained and that technological resources for transaction monitoring are available. - Recommendation: perform a cost-benefit analysis of expected supervisory resource needs versus expected value added of admitting crypto asset projects. - Crypto asset applications should be admitted only if all acceptance criteria are met by applicants. - For potential real estate tokenization projects, admission should be considered only if regulatory issues are significant enough to warrant sandbox testing. ### Recommendations for crypto asset regulatory and supervisory framework (paragraphs 58–64) - Align with international frameworks and standards (paragraph 58) - Development should be aligned with: IMF/World Bank Bali Fintech Agenda; IMF Policy Paper on Elements of Effective Policies for Crypto Assets; IOSCO Policy Recommendations for Crypto and Digital Asset Markets; FSB Global Regulatory Framework for Crypto-Asset Activities; and relevant FATF recommendations. - Emphasis: regulatory clarity to allow sector development in a transparent way and enable effective supervision. - Authorities should be equipped with necessary resources to monitor crypto asset activities and potential build-up of risks, including risks to the functioning of the payment system and monetary transmission channels. - Calibrate based on current and expected risks (paragraph 59) - Regulatory and supervisory framework configuration should be calibrated based on current and expected risks from crypto asset market activity in Kenya. - TWG should conduct or commission a comprehensive and robust analysis of the current state of the Kenyan crypto asset market and a risk assessment as a priority. - Analysis should include assessment of the use of crypto assets for domestic and international payments. - CMA should conduct a legal analysis of what, if any, crypto assets currently used or traded in Kenya meet the qualification threshold of a security. - Cross-sector cooperation and mandate clarity (paragraph 60) - Implement adequate cooperation mechanisms across relevant authorities for effective oversight of entire crypto asset markets. - Put in place clear allocation and delineation of regulatory and supervisory objectives and mandates to ensure legal certainty and clarity for market participants and authorities. - Objectives and mandates should be anchored in relevant laws and informed by types of crypto-assets and economic functions they perform. - Legal certainty, definitions, and classification (paragraph 61) - Enhance legal certainty via either comprehensive bespoke frameworks or targeted amendments to existing laws. - Crucial elements: clear definition of digital assets captured; clear classification of asset types based on economic functions; rules commensurate with risks and functions. - Definitions and classification should align with objectives and mandates of respective regulators and supervisors (see paragraph 50). - Consistency of frameworks is critical to avoid regulatory arbitrage, loopholes, or supervisory forbearance. - Private law clarity and investor protections (paragraph 62) - Enhance legal certainty in private law; CMA regulatory approach could ensure investors and consumers receive sufficient, clear, and easily understandable information regarding their rights under agreements with service providers. - CMA could set expectations or minimum requirements for standard terms and conditions used by crypto services providers so that costumer funds are sufficiently safeguarded from the service providers own estate. - Cross-border supervision and enforcement (paragraph 63) - Legal and regulatory arrangements that facilitate cross-border supervision and enforcement actions are warranted given cross-border nature of many crypto-asset activities. - Arrangements should be informed by risks identified in the stock-taking exercise. - Cooperation arrangements with foreign jurisdictions and supervisory authorities are important tools to supervise cross-border activities. - For virtual assets service providers with a strong imprint on the Kenyan market, consider requirements to obtain local licenses combined with requirement to have some form of legal establishment in Kenya to ensure enforceability. - Financial literacy (paragraph 64) - Financial Literacy initiatives should be considered as an additional safeguard against crypto. asset related scams and other criminal behavior. ### Next Steps (paragraphs 65) - TWG priorities and IMF support (paragraph 65) - Country aims to develop a comprehensive regulatory and supervisory framework for crypto assets and crypto service providers. - TWG should first understand the current state of the Kenyan crypto asset market and assess market, conduct, and consumer protection risks based on market analysis. - Once assessment is complete, the IMF can provide technical assistance to support Kenyan Authorities addressing risks to financial stability, markets, and consumers. *IMF Technical Assistance Report | pages 27–32* ### Annex I: Legislative regimes for crypto assets in ### Annex I: Legislative regimes for crypto assets in the world ### A. Japan - Regulatory basis: Payment Services Act (PSA). - Timeline: - PSA first amended to introduce specific regulation for crypto assets in May 2016; reform entered into force in April 2017. - Subsequent reform of the PSA in 2019 introduced a more comprehensive framework and stricter requirements for CESPs. - PSA amended in 2022 to introduce a regime for stablecoin issuers and exchanges; enacted in 2022 and entered into force in June 2023. - Key regulated entity: Crypto Asset Exchange Service Providers (CESP). - Licensing and scope: - New category of exchange operators required registration as CESP. - Activity of “management” of crypto assets (wallet services) included within the definition of CESP (entities offering wallet services need a CESP license). - Entities with a CESP license that want to trade stablecoins must apply to the FSA for a separate Electronic Payment Instruments Exchange Service Provider (EPIESP) license. - Trust banks and FTSPs enabled to issue stablecoins. - Commercial banks allowed to issue stablecoins, but only in permissioned platforms and taking the form of tokenized deposits. - Conduct, prudential and market integrity measures introduced: - AML/CFT: identity verification at account opening, record keeping, reporting of suspicious transactions. - Disclosure requirements, rules on minimum capital and net assets, external audit of financial statements. - Asset segregation requirements and system security management requirements. - Requirement for crypto assets to be managed in an offline environment (cold wallet). - Requirement to establish a system to prevent conflicts of interest. - Exchanges must notify authorities prior to adding new crypto assets for trading. - Prohibitions on manipulation of prices, rumor spreading and other unfair acts. - Marketing and solicitation requirements. - Regulatory texts and supervision: - Requirements detailed in the PSA, the Cabinet Order on Crypto Asset Service Providers and JVCEA Guidelines. - FSA Guidelines for Supervision of CESPs provide additional granularity. - CESP Monitoring Office registers CESPs. - CESPs supervised by the FSA and Local Finance Bureaus. - FSA can impose administrative measures for infringement of laws and regulations. - Areas covered by the framework include: AML/CFT, capital requirements, governance and conflict of interest and other handling and trade disclosures, Record keeping requirements Listing of assets Market integrity Custody of funds and crypto assets Use of leverage IT and operational risk and Marketing activities. ### B. European Union (EU) - Regulatory basis: Markets in Crypto-Assets Regulation (MiCAR) as dedicated bespoke regime; other sectorial laws (e.g., MiFID/MiFIR) remain relevant depending on classification. - Legal design and scope: - MiCAR characterized as a fallback regime applying to any crypto-asset unless a specific exemption applies. - Exemptions: crypto-assets that fall within definition of traditional financial instruments (MiFID/MiFIR applies); Non Fungible Tokens (NFTs) if they do not have any financial use. - If an NFT’s substance brings it close to a security, it should be regulated under MiCAR despite designation as NFT. - Classification under MiCAR: - Asset Referenced Tokens (ARTs): backed by assets (financial instruments, currencies or a mix thereof). - e-money Tokens (EMTs): backed by the Euro (or another official currency of a EU Member State). - Where crypto asset fulfils ART or EMT definition, stricter rules for ARTs and EMTs under MiCAR apply. - Crypto-assets not fulfilling ART/EMT definitions but not exempt fall under general MiCAR rules for other crypto-assets. - ARTs and EMTs specific rules: - Dedicated licensing and authorization regime for ARTs and EMTs. - Issuance of EMTs restricted to banks and e-money institutions; ARTs can be issued by other legal entities if prudential, governance and risk management rules complied with. - Statutory rights for holders to redeem tokens at par for both ARTs and EMTs. - Prohibition of granting interest to limit use as a store of value. - Reserve mechanisms protected by safeguarding, segregation, and safekeeping obligations for reserve assets and/or funds received. - ECB or national Central Banks can limit or block issuance of ARTs or EMTs if widely used as means of payment; can block authorization if it would endanger payment systems or monetary policy transmission. - Central Banks’ powers after issuance: demand reduction of tokens in circulation; impose minimum denomination size per token. - General issuer and marketing requirements (all token types): - Issuers, offerors to the public or persons seeking admission to trading must prepare a white paper with detailed minimum contents, notably risk-statements and warnings that funds are at risk of loss. - Marketing materials must be fair, clear, and concise. - Statutory liability for wrong, missing or misleading information in white papers or marketing materials. - Crypto-asset services and licensing: - MiCAR defines crypto-asset services (exchange of fiat/crypto, transfer of crypto-assets, custody, investment advice, portfolio management, execution of orders, placing crypto assets, setting up crypto-asset exchange) requiring a license. - General licensing requirements plus obligations linked to risk management, governance, fitness and propriety of managerial staff. - Specific obligations per service type: - Investment advice must be tailored to customer’s best interest and commensurate with customer’s risk appetite, understanding and investment aims. - Exchange rules must ensure non-discriminatory, objective processes. - Custody services require safeguarding, legal and operational segregation of customer funds to ensure insolvency remoteness. - Market integrity and extra-territoriality: - Market manipulation and insider information prohibitions tailored to crypto-specific risks (e.g., wash trading, use of social media). - Rules have extra-territorial effect; licensed exchanges must implement systems to detect and report potential market abuse or insider dealings. - Supervisory arrangements and significance regime: - MiCAR does not prescribe designation of competent supervisory authority (national law); ensures involvement of Central Banks where necessary. - Significance regime: crypto-assets considered “significant” based on number of holders, transactions, transaction values subject to a more stringent ruleset and stricter supervisory regime with increased role for European Supervisors. - Significance regime pertains specifically to ARTs and EMTs: - European Banking Authority responsible for designation of a specific coin as significant (mandate related to payments supervision and oversight). - European Market Supervisory Authority responsible for increased and enhanced coordination for supervision of significant crypto-asset service providers. - Supervisory tools and sanctions: - MiCAR provides investigatory powers, supervisory measures, sanctions and penalties (including, in certain cases, criminal penalties). - Certain obligations apply to both legal entities (crypto-asset service providers) and natural persons (managers, key function holders). - Statutory civil liability for misinformation in white papers or marketing expands to natural persons involved. ### C. Nigeria - Overall status: - No specific legislation on crypto assets; regulatory framework provided by rules, guidelines and regulations issued by the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC), often resulting in a contradictory, uncoordinated approach without legal certainty. - New harmonized framework provides a licensing regime for virtual asset service providers (VASPs), and guidance on issuance of crypto assets, offering platforms, custodians and exchanges as regulated by the SEC. - CBN has issued guidelines and authorization requirements for banks and other financial institutions transacting with crypto asset providers. - CBN actions and history: - 2017 circular: CBN warned banks of AML/CFT risks in dealing with crypto assets and crypto asset providers. - 2021 circular: CBN banned banks, financial institutions and regulated entities from transacting with, dealing in or facilitating crypto asset transactions, and to close down all crypto asset related accounts; instructed banks to ensure they do not hold or trade in any way with crypto assets. These circulars were not binding legislation but effectively deterred banks from transacting with crypto asset service providers. - 2023: CBN issued guidelines on the operations of bank accounts for virtual asset service providers; overturned its 2021 ban in December 2023 by issuing a circular providing guidelines on operations of bank accounts for VASPs. - CBN Guidelines rely on FATF Recommendation 15 and the amended Money Laundering (Prevention and Prohibition Act), which recognizes VASPs as part of the definition of a financial institution. - Citing powers under the CBN Act and BOFIA, the CBN Guidelines allow banks to transact with VASPs subject to CBN authorization, provide minimum standards and requirements, guidance on banking relationships and account opening for VASPs, risk management and monitoring of banks and other financial institutions providing services to SEC-licensed VASPs. - Definitions introduced by CBN Guidelines: digital assets vs virtual assets (digital assets represent assets such as debt or equity claims on the issuer; virtual assets are digital representations of value transferable, digitally traded and can be used for payment or investment purposes). Definitions exclude digital representations of fiat currencies, securities and other financial assets already covered in FATF recommendations. - SEC actions and history: - 2020 statement: SEC asserted that all crypto assets defined as “a digital representation of value that can be digitally traded and functions as (1) a medium of exchange; and/ or (2) a unit of account; and or (3) a store of value, but does not have legal tender status in any jurisdiction,” fell under its jurisdiction by virtue of the Investment and Securities Act 2007; required token offerings in Nigeria to be registered with the SEC. - 2022: SEC issued more comprehensive regulatory framework on issuance, offering and custody of digital assets and VASPs (effectiveness stalled due to CBN prohibition). - Post-2023 developments: SEC’s Rules on Issuance, Offering and Custody of Digital Assets presumably reactivated; brings regulation of digital assets and service providers under SEC purview. - Under SEC Rules: - VASPs include entities providing exchange services between virtual assets and fiat currencies, transfer of virtual assets, safekeeping/administration of virtual assets and services related to issue or sale of a virtual asset. - All digital assets must be registered with the SEC; through an initial assessment filing, the SEC will determine if the asset qualifies as a “security” under the Investment and Securities Act. - All service providers must be registered with the SEC and comply with specific rules relating to the service they provide (offering platform, custodial service, exchange) and general requirements for VASPs. - Registration requirements include minimum paid up share capital, corporate governance fit and proper requirements for key officers, senior management, the issuer; operational and risk management; conflict of interest; separation of accounts and safeguarding, amongst others. - A proposed Investment and Securities Bill passed in the Senate in 2023 seeks to expand the definition of securities to include virtual assets and provide regulatory mandate of the SEC in legislation. - Taxation: - Introduction of a capital gains tax on the disposal of digital assets in the 2023 Finance Act to provide a regulatory framework for operations in Nigeria. ### D. Mauritius - Regulatory evolution: - Prior to bespoke legislation, Financial Service Commission (FSC) issued guidance on recognition of digital assets as an asset-class for investment by sophisticated investors and guidance on security token offerings. - 2019: FSC published rules on provision of custodial services to regulate and supervise custody of digital assets. - 2021: Virtual Asset and Initial Token Offering Services Act (VAITOS Act) passed, providing comprehensive legislative framework authorizing FSC to regulate and supervise virtual asset service providers and issuers of initial token offerings. - Definitions and scope under VAITOS Act: - Virtual assets: digital representation of value that can be digitally traded or transferred and may be used for payment of investment purposes, excluding digital representation of fiat currencies, digital currencies issued by the Bank of Mauritius, securities and other financial assets under the Securities Act. - Act declares virtual assets are not legal tender in Mauritius. - Virtual tokens: “any cryptographically secured digital representation of a set of rights including smart contracts, provided on a digital platform and issued or to be issued by an issuer of initial token offerings.” - Initial token offering: offer for sale, to the public, of a virtual token in exchange for fiat currency or another virtual asset, as a means of raising funds for projects through a digital platform. - Licensing and supervisory powers: - VAITOS Act provides a licensing regime for VASPs seeking to provide services in or from Mauritius; requires physical presence in Mauritius including for foreign entities seeking to provide virtual asset services in Mauritius. - Services requiring specific licensing include virtual asset broker-dealers, wallet services, custodial services, advisory services, and provision of an exchange platform. - FSC empowered under Section 52 of the VAITOS Act to issue guidance and rules including on client disclosure, AML/CFT requirements, custody of client assets and cybersecurity. - Prudential and conduct requirements: - VASPs subject to prudential and market conduct requirements to maintain high standard of professional conduct. - Fit and proper criteria for controllers, beneficial owners, key officers, and senior executives to be approved by the FSC. - Specific requirements for VASPs which hold client assets, financial requirements related to minimum capital to be held, separation of client and business accounts, amongst other requirements. *IMF Technical Assistance Report | Annex I: Legislative regimes for crypto assets in the world* ### Section 2 of the VAITOS Act. ### Section 2 of the VAITOS Act ### Definition and scope of VASP - The Act defines a VASP as a person, that as a business, conducts one or more of the following activities or operations for, or on behalf of another person – exchange between virtual assets and fiat currencies; exchange between one or more forms of virtual assets; transfer of virtual assets; safekeeping and/ or administration of virtual assets or instruments enabling control over virtual assets; participation in, and provision of, financial services related to an issuer’s offer and/or sale of a virtual asset. ### AML/CFT and registration requirements for initial token offerings - The Act includes provisions to mitigate AML/CFT risks in compliance with international standards set by the FAFT. - The Act provides for a registration regime for issuers of initial token offerings: - All issuers must register with the FSC. - Issuers must submit a white paper, publishing full disclosures relating to the offering. - The Act provides for the advertisement of initial coin offerings which must be accurate and not misleading. - The Act grants a 72 hour right of withdrawal to purchasers of the initial coin offering. ### Treatment and exclusion of securities tokens; transitional provisions - The VAITOS Act excludes “securities tokens” from its scope. - Under the transitional provisions of the Act, a “security” as defined under the Securities Act no longer includes a virtual token. - Securities tokens are defined as digital assets which fall into the category of securities as defined under the existing Securities Act. - The FSC has declared that a security token may constitute: - a share, where it confers or represents ownership or economic rights of the holder of the security token in a corporation; - a debenture, where it constitutes or evidences the indebtedness of the issuer of the Security Token in respect of any money lent to the issuer by a holder of the Security Token; - a derivative, as defined under the Securities Act; - a unit in a collective investment scheme, where it represents a right or interest in a CIS including an option to acquire a right or interest in a CIS. - The FSC has declared that this list is not exhaustive and that it will look to the structure, characteristics and rights attached to a virtual token in determining if it falls under the definition of securities under the Securities Act. - A new framework for securities token offering is provided for in the Securities (Solicitation) Rules 2020, the Securities (Licensing) (Amendment Rules) 2020 and the Financial Services (Consolidated Licensing and Fees Amendment No. 2) Rules 2020. - The FSC has issued a series of guidance notes which provide standards for securities token offerings and the licensing of security token trading systems. ### Legal hierarchy and inconsistency rule - The Act seeks to provide a comprehensive legal regime for crypto assets and VASPS and to eliminate any inconsistency. - An “inconsistency rule” under the Act provides that in the event of any inconsistency between the provisions of Act as it pertains to crypto assets and related matters, the Act will prevail over other applicable laws. ### United Kingdom: regulatory approach and measures - There is no specific regulatory framework for crypto assets in the UK; providers of crypto asset services need to be registered with the Financial Conduct Authority (FCA) under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (MLRs). - Section 22 of Part II of the Joint Money Laundering Steering Group Guidance provides detailed guidance for UK crypto asset exchange and custodian wallet providers on complying with the MLRs; Annex 22-I of Part II provides additional guidance on crypto asset transfers ("travel rule"). - The FCA classifies crypto assets into two broad categories in its Guidance on Crypto assets (PS19/22): - “unregulated tokens” (“exchange tokens” and “utility tokens”) - "regulated tokens” (“security tokens” and “e-money tokens”) - Providers of crypto asset services related to unregulated tokens need to be registered with the FCA under the MLRs; providers related to regulated tokens need to comply with all applicable regulations. - The FCA amended its Conduct of Business Sourcebook (COBS) to prohibit the marketing, distribution, and sale of a “crypto asset derivative" or a "crypto asset exchange traded note" to a retail client (COBS 22.6.5.). - The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (FPO) brought "qualifying crypto assets" within the scope of the UK Financial Promotions Regime, classifying crypto assets as a "Restricted Mass Market Investment" and imposing rules including: - prominent display of risk warnings, - a ban on incentives, - restriction of direct offer financial promotions to certain categories of investors, - a 24-hour cooling off period for new customers, - the conduct of an ex-ante appropriateness assessment for customers. - In November 2023, the FCA published a Guidance on Crypto asset Financial Promotions; the FCA also published a Guidance consultation on financial promotions on social media, with examples of compliant and non-compliant promotions. ### United States: regulation by enforcement and recent developments - Absent specific crypto legislation in the US, authorities have regulated crypto asset activities via enforcement of existing regulations; both the SEC and the CFTC have brought several cases against crypto market actors including exchanges, decentralized finance actors, and individuals. - In enforcement actions the SEC has highlighted crypto assets it deems to meet the qualification criteria of a security. Examples cited include SEC v. Binance Holdings Limited, which singled out crypto assets including Binance Coin (BNB), Binance USD (BUSD), Solana (SOL), and Cardano (ADA). - In SEC v. Coinbase, Inc., the SEC set out its view that certain crypto asset related services such as Coinbase’s staking program qualify as investment contracts under the Howey test. - Legal action against SEC decisions has created regulatory uncertainty; in SEC v. Ripple Labs, et al., the U.S. District Court for the Southern District of New York issued a split decision on July 13, 2023, holding that sales of XRP under certain conditions would not satisfy all criteria of the Howey test, while under other circumstances all criteria would be met. - On January 10, 2024, the SEC approved the listing and trading of a number of spots BTC Exchange Traded Products (ETP). The SEC’s approval of the ETPs was preceded by a ruling of the U.S. Court of Appeals for the District of Columbia, in which the Court held that the SEC had failed to adequately explain its reasoning in disapproving the listing and trading of a spot BTC ETP. ### Annex II: Global overview — choice of legal design for crypto asset frameworks (selected country approaches) - Singapore: Targeted legal amendments, followed by issuance of regulations; amendments to the Payment Services Act; licensing regime for service providers related to “digital payment tokens” under the Monetary Authority of Singapore. - Mauritius: Bespoke legislation — Enactment of the Virtual Asset and Initial Token Offering Services Act; licensing and registration regime for virtual asset providers and issuers of initial token offerings under the Financial Services Commission. - Japan: Targeted legal amendments followed by targeted regulations; amendment of the Payment System Act; targeted regulations on exchange services, custody services, ICO rules; Financial Services Authority responsible for regulation and oversight, with self-regulatory agencies. - EU: Bespoke legislation — Enactment of MiCA providing tailored rules on issuance, custody, trading and ancillary services. - USA: Regulation by enforcement — enforcement of existing securities rules on a case-by-case basis. - Nigeria: Issuance of regulations without targeted legal amendments; issuance of regulation by securities regulator regarding definition of crypto assets, rules on issuance, custody, trading; licensing and registration regime for service providers. - South Africa: Issuance of regulations without targeted legal amendments; crypto assets classified as “financial product” under the Financial Advisory and Intermediary Service Act; service providers and intermediaries must be authorized by the Financial Sector Conduct Authority. - Hong Kong: Issuance of regulations without targeted legal amendments; licensing regime under securities regulator; amendment of AML/CFT laws to define virtual assets and regulate VASPs. - Botswana: Bespoke legislation — Enactment of the Virtual Assets Act with licensing regime for VASPs and initial token issuers; the Non-Financial Institutional Regulatory Authority designated as regulatory and supervisory authority. - UAE: Bespoke legislation — Federal level legislation applicable to virtual assets; provides for licensing regime under federal or local licensing authority; note that the only local licensing authority currently is Dubai’s Virtual Assets Regulator Authority which regulated virtual assets within Dubai. - Bahamas: Bespoke legislation — Enactment of the Digital Assets and Registered Exchanges Act; the Securities Commission is responsible for regulation, monitoring and supervision of digital asset issuances and digital asset businesses. - Namibia: Bespoke legislation — Enactment of the Virtual Assets Act providing for licensing and regulation of VASPs and virtual asset services including initial token offerings, exchange services, custody; the Act designated the Bank of Namibia as the regulatory and supervisory authority. - Brazil: Bespoke legislation — The Crypto assets Act provides rules for crypto asset service providers with a focus on investor protection, AML/CFT, licensing and registration; regulates issuance, sale, transfer, exchange, and custody of crypto assets; the central bank oversees and regulates services related to crypto assets. *Source: Section 2 of the VAITOS Act (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/tar/2025/english/tarea2025001-print-pdf.pdf_