Kenya will start taxing cryptocurrency exchanges for commissions they receive from the over four million people dealing in digital currencies in the country if fresh regulations are adopted.

The new regulations guiding the payment of the digital service tax require platforms that facilitate the buying and selling of cryptocurrencies and other digital assets to pay a 1.5 percent duty.

“For the purposes of these Regulations, a taxable electronic, Internet or digital marketplace supply include facilitation of online payment for exchange or transfer of digital assets excluding services exempted under the Act,” say the Value added Tax (Electronic, Internet and Digital Marketplace Supply) Regulations, 2023 published by Treasury Cabinet Secretary Njuguna Ndung’u.

A digital asset is anything that is created and stored digitally and has or provides value. Digital assets include cryptocurrencies such as bitcoins, data, images, video, and written content.

In January 2021, Kenya implemented the 1.5 percent digital service tax, which officials say has already helped curbed tax avoidance by some multinational companies.

It is levied on foreign businesses not registered in Kenya but offer services to Kenyans through a digital marketplace. Fees charged by the popular online exchanges for selling and buying crypto range from a low of 0.9 percent to 4.9 percent.

Crypto exchanges are platforms operated by companies where investors buy and sell digital tokens such as Bitcoin, Ethereum and Tether among other coins. The exchanges include Binance, Coinbase, Bitstamp, Bitpanda, Kraken, Coinmama, UpBit and eToro.

They were late last year forced to reassure clients that their funds are safe as the collapse of Sam Bankman-Fried’s FTX crypto exchange ricochets through the industry.

Binance, the world’s biggest crypto trading venue, and smaller rivals like Crypto.com, OKX and Deribit, have vowed to publish proof that they hold sufficient reserves to match their liabilities to customers.

Coinbase, the US-listed exchange, also sought to distance itself from the crisis that has engulfed FTX, the digital asset venue founded by Bankman-Fried.

The sudden collapse last November of FTX and Bankman-Fried’s trading shop Alameda Research, once viewed as pillars of the industry, has severely eroded confidence in the digital asset market.

FTX had less than $1 billion in easily sellable assets against $9 billion in liabilities before it went bankrupt. The sector is not regulated in Kenya and remains largely unregulated even in the developed world.

This makes it difficult to establish the value of digital assets held by the mostly tech-savvy Kenyans, but the amount could run into billions of shillings.

A United Nations Conference on Trade and Development report released in June last year said that 8.5 percent of the population or 4.25 million people own cryptocurrencies in the country.

This places Kenya ahead of developed economies such as the United States, which is ranked sixth with 8.3 percent of its population owning digital currencies.

The crypto market, known for its wild price swings, recently shed more than half of its value since last November as investors pulled out money from riskier assets amid worries over soaring inflation and rising interest rates.

Young and small traders have in recent years flocked to cryptocurrencies in the hope of quick returns, despite warnings from regulators such as the Central Bank of Kenya (CBK) that emerging assets can be high-risk.

CBK governor Patrick Njoroge in an advisory to Kenyans said cryptocurrencies posed risks to financial stability but they could be used to solve problems such as bringing the poor into the financial system or cutting transaction costs.

Kenyan investors buy cryptocurrencies to preserve their savings, and carry out international transactions either for individual remittances for those working in places like Europe and North America or for commercial use such as purchasing goods to import and sell, says Chainalysis.

Payment for imports through cryptocurrency is seen as convenient and quick because the traders don’t have to buy dollars using Kenya shilling or fork out fees to money transfer firms such as Western Union.

UNCTAD in a policy brief in June asked Kenya and other developing countries to regulate and tax the cryptocurrency industry to limit exposure to the meltdown in the crypto market and risks of financial instability.

The UN body proposed enforcing mandatory registration for crypto exchanges and digital wallets and tax transactions to make the sector less attractive.

The crypto industry has made a stab at a piece of the tax haven pie since it is largely unregulated despite its growing popularity.