Understanding the Virtual Assets Service Providers Bill, 2025: A Legal Perspective for Kenya's Digital Economy

The introduction of the Virtual Assets Service Providers Bill, 2025 by the National Treasury signals a decisive shift in Kenya's approach to regulating the digital economy. As virtual assets continue to reshape financial services, investment models, and global trade, Kenya is taking deliberate steps to ensure that these innovations are brought within a structured and secure legal framework.

The Bill, currently undergoing stakeholder consultations, proposes registration, licensing, and supervision of virtual asset service providers (VASPs) in a manner aligned with international standards, particularly those set out by the Financial Action Task Force (FATF).

At MEN Advocates LLP, we recognise the immense significance of this proposed law not only as a tool for market order and investor protection, but also as a critical lever for economic transformation, innovation, and global competitiveness in the digital economy.

1. Statutory Recognition of Virtual Assets

The Bill provides the first formal statutory recognition of virtual assets in Kenyan law, defining them as "a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes." This includes—but is not limited to—cryptocurrencies, tokenised securities, utility tokens, and other blockchain-based instruments.

Importantly, central bank digital currencies (CBDCs) and closed-loop digital representations (such as loyalty points or in-game credits) are excluded from this definition, thereby reserving monetary policy tools for the state while creating space for private-sector-led innovation.

This clarity in definition has far-reaching implications for investors, startups, and service providers, as it removes ambiguity and situates virtual assets within Kenya's broader financial and legal system.

2. Introduction of a Licensing Regime for VASPs

The Bill introduces a mandatory licensing framework for all Virtual Asset Service Providers (VASPs) operating in Kenya or offering services to persons within the country. VASPs include virtual asset exchanges, custodial wallet providers, digital brokers, and any entity involved in the safekeeping, transfer, or administration of virtual assets.

To secure a licence, applicants must demonstrate:

• Clear corporate governance structures;
• Financial soundness, including minimum capital thresholds;
• Technical and cybersecurity capabilities;
• Implementation of Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) controls;
• Transparency in beneficial ownership and operational disclosures.

We opine that this licensing framework is essential for legitimising the virtual asset ecosystem and shielding the sector from abuse, while also increasing investor confidence through regulated market participation.

It is a criminal offence under the Bill to operate as a VASP without a license, punishable by substantial fines or imprisonment.

3. Designation of Regulatory Authorities

The Bill empowers the Capital Markets Authority (CMA) to oversee digital asset investment and exchange platforms, while the Central Bank of Kenya (CBK) is assigned regulatory responsibility over stablecoins and digital wallets. Other regulatory bodies may be designated by the Cabinet Secretary for Finance depending on the nature of the service or asset in question.

The dual-regulatory structure reflects the complexity of the digital asset space, where financial, technological, and monetary functions often intersect. Businesses will need to work closely with the appropriate regulatory authority to ensure sector-specific compliance.

4. AML/CFT Compliance and Risk Monitoring

In compliance with Financial Action Task Force (FATF) recommendations, the Bill places stringent AML and CFT obligations on VASPs. These include:

• Mandatory Know Your Customer (KYC) protocols;
• Ongoing transaction monitoring;
• Filing of Suspicious Transaction Reports (STRs) and Currency Transaction Reports (CTRs);
• Secure data retention systems for a period of not less than seven years.

Moreover, services designed to enhance anonymity—such as mixers, tumblers, and privacy-enhancing technologies—are strictly prohibited, a move aimed at curbing illicit flows and enhancing financial transparency.

5. Consumer Protection and Data Security

A standout feature of the Bill is its comprehensive consumer protection provisions. It requires licensed VASPs to:

• Make accurate and full disclosures regarding the risks associated with virtual asset services;
• Maintain asset segregation to protect client funds from operational liabilities;
• Provide clear mechanisms for client dispute resolution;
• Comply fully with the Data Protection Act, 2019 in the handling of personal data.

For digital asset users, these provisions introduce enforceable rights and protections. For VASPs, they impose binding legal obligations which must be integrated into user terms, smart contracts, and customer service policies.

6. Tax Compliance and Future Obligations

Although the Bill does not yet establish a tax regime specific to virtual assets, it mandates collaboration between the proposed regulator and the Kenya Revenue Authority (KRA) to design appropriate tax policies. Likely tax implications include:

• Capital Gains Tax on the disposal of virtual assets;
• Income Tax on proceeds from mining, staking, and token sales;
• VAT and Withholding Tax obligations for cross-border transactions involving digital goods or services.

These fiscal measures will be elaborated in subsidiary legislation. In the interim, businesses must adopt prudent accounting, valuation, and record-keeping practices in anticipation of future audits or reporting duties.

7. Strategic Recommendations for Market Participants

As the Bill moves through the legislative process, stakeholders in the digital asset space must take proactive steps to align their operations with the anticipated legal framework. We recommend:

• Conduct a Legal Readiness Assessment: Evaluate your current business model for regulatory exposure;
• Initiate Licensing Preparations: Begin compiling necessary documents, corporate records, and compliance systems;
• Engage Legal Counsel: Secure expert guidance on cross-border service provision, token classification, and investor disclosures;
• Review Smart Contracts: Ensure legal enforceability and user protection mechanisms are embedded in code;
• Plan for Taxation: Collaborate with legal and tax advisors to structure tokenomics and profit models in a compliant and efficient manner.

Penalties for Non-Compliance

The Virtual Assets Service Providers Bill, 2025 introduces stringent penalties for individuals and entities that operate in contravention of the proposed law. These penalties are designed to deter unlawful activity and ensure full regulatory adherence across the digital asset ecosystem.

Specifically, the Bill provides that:

• Individuals found to be operating as virtual asset service providers without a valid licence may be liable to a fine of up to Kenya Shillings five million (KES 5,000,000).
• Corporate entities in breach of the Act may face a fine of up to Kenya Shillings ten million (KES 10,000,000).
• In addition to financial penalties, individuals may also face imprisonment for a term not exceeding five years.
• The regulatory authority may further impose revocation of licences, suspension of business operations, and disqualification from future registration or licensure for repeat or egregious violations.

These penalties underscore the importance of timely compliance, transparent disclosures, and the establishment of robust legal and governance structures by all participants in the virtual asset industry.

Conclusion: A New Chapter for Kenya's Digital Financial Ecosystem

The Virtual Assets Service Providers Bill, 2025 reflects Kenya's ambition to become a leader in digital finance while safeguarding its financial system and citizens. Far from stifling innovation, this legal framework aims to provide clarity, investor protection, and accountability—key ingredients for sustainable growth in a rapidly evolving industry.

At MEN Advocates LLP, we continue to advise clients across fintech, blockchain, and digital finance sectors on how to navigate the changing regulatory landscape in Kenya and in Africa. We believe that with strategic planning and informed legal guidance, businesses can not only comply with the new law but also thrive under it.

For tailored legal support on the Virtual Assets Bill and related compliance matters, kindly contact our team via info@menadvocates.co.ke or call us via 0700690060 or visit our offices in Nairobi, Kenya.

MEN ADVOCATES LLP
Empowering Compliance in the Age of Virtual Assets.

This article is intended for informational purposes only and does not constitute legal advice. For specific guidance on compliance with Kenya's Virtual Assets Bill, consult with qualified legal professionals.