INTRODUCTION: A TALE OF TWO APPROACHES – KENYA VS. NIGERIA

While Kenya and Nigeria have both gained prominence as fintech leaders in Africa, their strategies toward cryptocurrency regulation stand in stark contrast. Kenya, despite its reputation for innovation, has taken a cautious approach, delaying the creation of a formal regulatory framework for digital assets. Meanwhile, Nigeria has embraced a proactive stance, positioning itself as a trailblazer by issuing licenses to cryptocurrency platforms. This divergence could place Kenya at a competitive disadvantage in the rapidly evolving crypto space. As Nigeria moves ahead, it is crucial for Kenya to re-examine its position in light of international pressures, including FATF’s Recommendation 15 on regulating virtual assets. This article explores Nigeria’s crypto journey and where Kenya stands in this new frontier.

NIGERIA’S BOLD REGULATORY MOVE

While many African countries have cautiously entered the cryptocurrency space, Nigeria has taken bold steps forward, positioning itself as a leader on the continent. The Nigerian Securities and Exchange Commission (SEC) has issued provisional operating licenses, a move that not only showcases the country’s commitment to regulating the crypto sector but also paves the way for more robust regulatory frameworks.

Recently, the SEC granted provisional licenses/Approval-in-Principle to two major cryptocurrency exchanges, Quidax and Busha, recognizing them as legitimate trading platforms. This move, facilitated through the SEC’s Accelerated Regulatory Incubation Program (ARIP), allows exchanges to test their business models and innovative technologies in a controlled environment while maintaining compliance with regulations.

THE REGULATORY SANDBOX: FOSTERING INNOVATION AND COMPLIANCE

Nigeria’s regulatory sandbox has emerged as a safe pathway for digital asset companies to enter the market. By offering a controlled “sandbox” environment, the SEC provides companies with the space to test their products and services under regulatory supervision. This not only fosters innovation but also ensures that digital assets are introduced within a framework aligned with Nigeria’s financial regulations. As the SEC learns more about the intricacies of the industry through these sandbox programs, it will be able to develop informed regulations, creating a balance between encouraging innovation and maintaining market integrity.

 

NIGERIA’S TUMULTUOUS CRYPTO JOURNEY

Despite its current leadership in cryptocurrency regulation, Nigeria’s relationship with digital assets has been turbulent. The Central Bank of Nigeria (CBN) first banned financial institutions from facilitating crypto transactions in 2021, citing concerns over market volatility, illicit activities, and inadequate consumer protection. This led to a significant disruption in the market, forcing exchanges to operate in a regulatory grey area or close down.

The situation further escalated in 2023 when the CBN cracked down on peer-to-peer platforms and arrested Binance executives, intensifying the need for regulatory clarity. However, the SEC’s recent decisions signal a shift towards a more supportive and structured regulatory approach, aiming to revitalize Nigeria’s crypto ecosystem, attract foreign investment, and restore its reputation as a forward-thinking player in the global digital asset landscape.

FATF RECOMMENDATION 15: A GLOBAL PUSH TOWARDS CRYPTO REGULATION

As countries worldwide adopt cryptocurrency regulation, the Financial Action Task Force (FATF) has been a key driver in pushing for consistent global standards. FATF Recommendation 15, updated in 2019, specifically calls on member states to regulate virtual assets (VAs) and virtual asset service providers (VASPs) under anti-money laundering (AML) and counter-terrorism financing (CTF) regimes. Countries are required to implement these international standards to mitigate the risks associated with virtual assets, such as anonymity, cross-border transferability, and the rapid movement of funds.

For Kenya, as a member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), a FATF-style regional body, compliance with Recommendation 15 is not optional—it’s a necessity. A failure to regulate virtual assets leaves Kenya vulnerable to being grey-listed by FATF, an outcome that would harm its financial reputation and create barriers for the country’s international financial transactions. Nigeria’s proactive steps in this space provide a blueprint for how Kenya can fulfill its FATF obligations and align with global standards to ensure its financial system remains secure.

CRYPTOCURRENCY: THE NEW FRONTIER FOR MONEY LAUNDERING

As cryptocurrencies gain wider acceptance, they are increasingly becoming the new frontier for money laundering. Criminals exploit the decentralized and pseudonymous nature of cryptocurrencies to conceal the origins of illicit funds. Without stringent regulation, Kenya risks becoming a hub for money laundering through virtual assets.

Criminals use techniques such as mixing, tumbling, and privacy coins to obscure the origin of funds. Mixers and tumblers make it nearly impossible for law enforcement agencies to trace transactions, allowing the proceeds of crimes like drug trafficking and terrorism financing to be laundered effectively. By not regulating virtual assets, Kenya leaves a critical gap in its AML regime. Establishing a regulatory framework would bring cryptocurrency exchanges and other virtual asset service providers under existing AML laws, requiring customer due diligence (CDD), record-keeping, and reporting suspicious transactions.

THE IRONY OF KENYA’S CMA SANDBOX: FOSTERING INNOVATION BUT AVOIDING CRYPTOCURRENCY

Kenya’s Capital Markets Authority (CMA) has taken steps to foster innovation through its regulatory sandbox, which provides a controlled environment for fintech firms to test their products and services under regulatory supervision. This sandbox is intended to drive technological advancement in the financial sector by creating a space where innovators can operate with regulatory oversight.

However, despite the potential of the CMA sandbox, no cryptocurrency or digital asset has been validated through it. This reflects an ironic stance by the CMA, where the very tool meant to foster financial innovation has largely avoided dealing with virtual assets, mirroring Kenya’s broader avoidant approach to cryptocurrency. The sandbox was established to create pathways for fintech growth, yet cryptocurrency—one of the most significant financial innovations of our time—remains outside its purview.

This avoidant approach leaves Kenya at risk of regulatory arbitrage and stifles its ability to harness the full potential of digital assets. While countries like Nigeria are embracing crypto regulation, the CMA’s cautious stance could inhibit the country’s fintech ecosystem from fully exploring virtual asset innovations.

THE CASE FOR KENYA’S IMMEDIATE ACTION

For Kenya to maintain its reputation as a fintech leader and comply with international AML/CFT obligations, swift action is needed to regulate virtual assets. FATF Recommendation 15 provides the necessary framework for how Kenya should regulate cryptocurrencies. If Kenya fails to act, it risks falling behind as other countries, including Nigeria, position themselves as leaders in the digital asset space.

Kenya’s Central Bank (CBK) and financial regulators must work together to create a robust legal framework that both encourages innovation and protects the integrity of its financial system. By aligning with global standards, Kenya can strike a balance between fostering technological advancements in the cryptocurrency space and ensuring that its financial system remains compliant and secure.

WHERE DOES THIS LEAVE KENYA? A CALL FOR ACTION!

While Nigeria has made proactive steps to regulate cryptocurrency, Kenya’s approach remains largely conservative. Despite being an African fintech hub, Kenya has yet to implement a formal regulatory framework for virtual assets. The Central Bank of Kenya (CBK) continues to issue cautionary advisories about the risks of cryptocurrencies but has not moved towards comprehensive regulation.

This cautious stance leaves Kenya exposed to risks such as regulatory arbitrage, where companies and individuals could exploit the country’s regulatory grey areas to engage in illicit activities. With Nigeria embracing regulation and countries worldwide increasingly formalizing their crypto policies, Kenya risks being left behind in this rapidly evolving sector.

The FATF Recommendation 15 and the growing AML risks tied to cryptocurrencies demand immediate action. Kenya has the opportunity to leverage its strong fintech foundation to establish itself as a leader in the crypto space, but it requires the right political will and regulatory commitment. By creating a balanced regulatory framework, Kenya can safeguard its financial system, attract foreign investments, and ensure that it remains at the forefront of Africa’s digital asset revolution.