Kenya transformed global thinking on digital finance through mobile money. Blockchain, or distributed ledger technology (DLT), promises the next wave of change: faster cross-border payments, tamper-proof records, automated trade finance and tokenised assets. Kenyan banks are exploring these opportunities, but they operate in one of Africa's most closely supervised sectors. This article examines how Kenyan law treats blockchain in banking, the regulatory challenges banks face and where the opportunities lie.
In 2015, the CBK warned the public that virtual currencies such as Bitcoin were not legal tender and not regulated, and in 2018 it cautioned banks against dealing in them. These warnings concerned cryptocurrencies rather than the underlying technology. In 2022, the CBK published a discussion paper on a central bank digital currency and later concluded that a retail CBDC was not an immediate priority, while continuing to monitor developments. Banks wishing to use blockchain for internal processes or for payments in Kenya shillings must still comply with all existing prudential requirements.
Kenya's virtual asset law creates a licensing regime for businesses that provide virtual asset services, such as exchanges, wallet providers, custodians and token issuers. The CBK and the CMA share supervisory responsibility depending on the nature of the service. Banks that want to offer custody, trading or tokenisation services must assess whether a licence or regulatory approval is required, in addition to their banking licence. Read more in our article on cryptocurrency regulation in Kenya.
The CMA's regulatory sandbox allows firms to test innovative capital markets products, including blockchain-based platforms, under supervision and with time-limited relief from certain requirements. Several fintech firms have used it to test new models.
Under the Banking Act and the CBK Prudential Guidelines, banks must obtain CBK approval before introducing new products or significantly changing their systems. Exposure to volatile virtual assets also raises capital and risk-management questions, and international standards from the Basel Committee on the prudential treatment of crypto-asset exposures influence supervisors' expectations.
Pseudonymous transactions and cross-border transfers create AML risks. Banks must apply customer due diligence, transaction monitoring and the "travel rule" for transfers involving virtual asset service providers. Kenya's 2023 AML amendments brought virtual asset service providers within the reporting regime. See our AML compliance guide.
Blockchain ledgers are designed to be immutable, while the Data Protection Act, 2019 gives individuals rights to correction and deletion. Banks should avoid storing personal data directly on-chain, use hashing and off-chain storage, and carry out data protection impact assessments. Public, permissionless blockchains can also raise cross-border transfer issues because nodes may be located anywhere.
Many blockchain solutions rely on third-party technology providers and cloud infrastructure. CBK guidance on outsourcing and cybersecurity requires banks to manage these risks, retain control over critical functions and ensure the CBK can access information.
The Kenya Information and Communications Act recognises electronic records and electronic signatures, and the Evidence Act provides for the admissibility of electronic records. A smart contract can therefore be enforceable, provided the usual elements of a valid contract are present. Banks should, however, document the legal terms in natural language and address what happens when code operates in an unintended way.
Income and transfers involving digital assets may be subject to tax, including the digital asset tax introduced by the Finance Act, 2023 on transfers of digital assets.
Yes. Banks can use blockchain technology for lawful purposes, subject to CBK approvals and existing prudential, AML, data protection and outsourcing rules. Dealing in virtual assets raises additional licensing questions.
They can be, provided the elements of a valid contract are present. Electronic records and signatures are recognised under Kenyan law.
We advise banks, fintechs and technology providers on blockchain projects, licensing, regulatory engagement and technology contracts. Speak to our fintech team, and read our overview of banking law in Kenya.
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