Experts caution: Kenya's VASP Bill holds the future of Web3

Kenya's emerging Web3 ecosystem stands at a critical juncture with the imminent enactment of the Virtual Asset Service Providers (VASP) Bill, 2025.

This comprehensive regulatory framework aims to bring clarity, legitimacy, and consumer protection to the country’s booming digital asset industry, a sector increasingly driven by youth-led startups and global players alike. 

However, experts and stakeholders caution that the law’s implementation must carefully balance innovation and oversight to avoid stifling Kenya’s vibrant crypto community.

Larry Cooke, the Africa head of legal counsel at Binance, says the bill gives Kenya “ an opportunity to lead Africa’s digital economy" but emphasizes a cautious approach.

“We strongly encourage the government to consider VAT exemption on digital asset transactions,” he said. “While the government has good intentions in widening the tax base, it risks stifling the very innovation it aims to encourage. Web3 and blockchain technologies represent a paradigm shift in how value is created, exchanged, and stored.”

Benjamin Arunda, Africa’s first blockchain-published author and chair of the Africa Blockchain Council, similarly views the Bill as an opportunity for crypto startups to shed legal ambiguities and regain the trust of most consumers who until now still see crypto as a scam in entirety.

"He stresses, however, that the law currently leans heavily towards consumer protection, potentially imposing compliance measures, like stringent KYC (Know Your Customer) and KYT (Know Your Transaction), that may undermine crypto’s hallmark traits such as anonymity.

Roselyne Wanjiru, a Nairobi-based blockchain research analyst, warns that the Bill may favor large capital players over local startups. "Given that relatively large capital players have lobbied for the Bill, it could sway away from youth-led startups. Basically, someone starting out in Kenya is up against global exchanges with a strong local presence," she said.

All experts agree the Bill’s intent to shield consumers is essential but emphasize the risks of overregulation. Sande cautions, "Some language (especially if we are not careful with how decentralization is treated) could be interpreted in ways that make innovation harder. The risk is that in trying to regulate platforms, we accidentally criminalize protocols."

Arunda points out that annual licensing fees and high scrutiny might erect barriers that discourage smaller Web3 innovators.

"The Bill shows some progress, proof that the regulator has grown in their understanding of the sector," he said, "but the KYC/KYT requirements and scrutiny are so high it could diminish one of the key value proposition of crypto which is anonymity."

Victor Kyalo, a veteran crypto community manager in Nairobi, agrees that "an equilibrium hasn’t been met yet." He warns that the Bill's "privacy, licensing challenges, limitation to innovation, creativity and expansion" need to be addressed to realize the benefits of regulatory clarity, investor confidence, and job growth.

Wanjiru adds that the Bill’s heavy emphasis on anti-money laundering (AML) and counter-terrorism financing (CTF) compliance is driven by a desire to exit the Financial Action Task Force's (FATF) grey list. However, she cautions, "Prioritizing taxation and multiple layers of compliance over growth runs the risk of making Kenya a domicile of last resort for VASPs."

Kenya’s financial system slowly catching up

On the preparedness of Kenya’s financial infrastructure, Sande notes that banks have quietly allowed crypto trading despite public caution.

"Bank clients have been accessing crypto silently with occasional bans. Banks want the revenue and deposits... but they have been cautiously awaiting regulatory clarity." His assessment hinges on clear coordination between the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA) once the Bill is enacted.

Arunda paints a more cautious picture, describing "a huge knowledge gap" in traditional banks, which mostly treated crypto as passing hype, adhering to CBK's 2015 cautionary notice that effectively restricted crypto processing. "Most traditional banks see crypto as a hype that is passing away," he says. Yet fintech startups that embraced crypto early could "leapfrog significantly" as banks scramble to catch up.

Wanjiru adds that while some banks, like Standard Chartered, are privately piloting crypto-based payment solutions, official acknowledgment awaits the lifting or revision of the 2015 cautionary notice.

Victor Kyalo says regulators have made progress with frameworks and licensing but that banks remain hesitant. "All eyes are on them," he says.

Decentralization and enforcement challenges

Implementation challenges loom large, especially regarding decentralized finance (DeFi) platforms and cross-border actors that lack clear local jurisdiction. Cooke calls them "the elephant in the room," noting that "most serious DeFi platforms do not have a local representative," making direct regulation impossible.

He suggests a possible solution might be to require local intermediaries—wallets and exchanges—to restrict user access to non-compliant services, but this approach "gets thorny fast."

Arunda highlights difficulties in regulatory assessments, stating that the "Fit and Proper" tests for licensees require regulators to have deep virtual asset expertise. Physical office requirements for VASPs may be impractical for decentralized or remote-operations, and heavy reliance on self-reporting coupled with a ban on anonymity-enhancing services might be incompatible with essential Web3 principles.

Wanjiru points to technical literacy gaps in centralized organizations integrating decentralized platforms, as well as the need for policy that balances taxation and compliance with growth incentives. She believes stronger collaboration between legacy financial institutions and VASPs could ease onboarding and solutions delivery once the cautionary notice is lifted.

Kyalo stresses ongoing concerns over data protection, low trust in user privacy safeguards, and "licensing challenges and various requirements" as major hurdles.

Additional next steps, according to Cooke, include a balancing act of “not having too many hands in the pot to spoil the dish,” but also having the diverse interests appropriately represented.

“This is said against the formation of the Virtual Assets Regulatory Authority (VARA) in the VASP Bill, which should be celebrated as it includes Tradfi regulators joining forces and local industry representation,” he noted.