East Africa is rapidly emerging as a testing ground for the future of digital finance, where the promise of cryptocurrencies collides with the realities of governance, taxation, and economic ambition.

As digital assets gain traction among millions of users and entrepreneurs, the region’s three largest economies — Kenya, Tanzania and Uganda — are charting sharply divergent courses on how they regulate and tax the $14 billion crypto sector.

This policy divergence is reshaping everything from cross-border trade to tech investment, exposing both the opportunities and the risks of a fragmented approach at a time when global interest in Africa’s digital economy has never been higher.

From Kenya’s progressive legislative push, taking the lead through its Virtual Asset Service Providers (VASP) Bill, Uganda’s legal vacuum mired in bureaucratic inertia, to Tanzania’s tax-first approach without legal frameworks, the region offers a complex and contradictory snapshot of how governments are attempting to harness the promise, and tame the perils of decentralised finance, striking a delicate balance between innovation and regulation.

Kenya leads the region in crypto transaction value ($7 billion), Uganda follows at $5 billion, while Tanzania recorded around $2 billion, according to the 2024 Geography of Crypto Report by New York-based blockchain analysis firm Chainalysis.

But Tanzania and Uganda have recorded higher stablecoin growth in the past year at 53 percent and 50 percent respectively, compared with Kenya’s 30 percent, but lead in transaction volumes, owing to Kenya’s near-maturity crypto status. There are more crypto users in Kenya -- around four million -- compared to Uganda’s two million and Tanzania’s 1.5 million, according to Chainalysis.

It builds on the three percent digital asset tax introduced in 2023 and aims to bring virtual asset exchanges, wallet providers and traders into a formal regulatory fold. This tax rate was later halved to 1.5 percent.“With clear legislation, investor confidence is bound to grow,” said Victor Kyalo, a crypto trader and digital assets community moderator based in Nairobi. “Whether you’re a day trader or an institutional investor, the rules apply equally. That levels the playing field.”Proponents argue the bill will not only enhance Kenya’s compliance credentials on anti-money laundering (AML) and counter-terrorism financing (CTF) but also boost its appeal to foreign investors. Kenyans lost $120 million to several crypto scams in 2022, the government said.

But there has been caution that the bill could create unnecessary barriers for entry and stifle innovation.“This bill risks stifling day trading,” Kyalo added. “Overregulation will create barriers that keep new investors out. Kenya could end up losing its competitive edge.”Global crypto exchange Binance has also weighed in on Kenya’s legislative efforts.“We view the VASP Bill as a major step forward and have welcomed it as a foundation for a more transparent and secure digital asset environment,” Larry Cooke, Legal Counsel at Binance Africa, told this writer. “However, we’ve also emphasised the need for a balanced tax framework to ensure that regulation fosters growth, rather than hindering it.”This reflects a broader industry consensus: Legal clarity is crucial, but regulatory overreach can push innovation into the shadows.“The challenge is not taxation itself. It’s about taxing the right things, at the right time, in a way that makes sense,” said Cooke. “Blanket taxes on every crypto transaction, regardless of its nature, are unworkable and risk driving innovation away.”Kenya’s government is now asking platforms to assess, convert, and remit tax on all asset movements within five working days, a process that industry players say is technically and financially difficult even for large global exchanges. Local start-ups face even steeper hurdles, they say.“What is taxable? Who is the taxpayer? What counts as a taxable event? These are still unresolved questions,” said Allan Kakai, cegal Chief at Steakhouse Financial and director at the Virtual Assets Chamber of Commerce in Nairobi. “Unclear laws lead to overcompliance or exit, and both hurt the ecosystem.”

Just like in Kenya, this tax is a three percent withholding tax on payments made for the exchange or transfer of digital assets to a resident person by a non-resident who owns a digital asset exchange platform or facilitates such transactions. The term "digital asset" is broadly defined to include cryptocurrencies, tokens, and non-fungible tokens.

But Dodoma has yet to provide a legal framework defining or recognising cryptocurrencies. The Bank of Tanzania maintains a cautious stance on cryptocurrencies, having cautioned the public against trading, marketing, and using cryptocurrencies.“The tax rate being flat for all cryptos is not right,” said Sandra Chogo, a blockchain consultant based in Dar es Salaam. “We still don’t have the regulations, so practically collecting tax is almost impossible.”Ms Chogo points to the recent court case involving Yellow Card, a crypto trading platform, as a wake-up call.“It showed just how much money is being moved through crypto. But we don’t even have a database of taxpayers in this space,” she said.

In the case that arose from a dispute over a settlement agreement where the Yellow Card was to repay a former employee $1.193 million for alleged misappropriation of funds related to cryptocurrency transactions, the court ruled that the cryptocurrency transactions were not illegal, as they are subject to taxation under Tanzanian law, effectively validating the settlement agreement.

The court noted that the lack of a legal framework on cryptocurrencies does not render them illegal in the country. It pointed out that the regulatory framework on cryptocurrencies is still evolving in Tanzania and that the government and the Bank of Tanzania have issued guidance on the matter.

The Tanzania Revenue Authority’s approach has emboldened some users who equate taxation with legitimacy. But, without regulatory backing, enforcement and investor protection remain elusive.

Despite progress, challenges remain in refining the legislation to balance innovation with consumer protection and risk management. Tanzania faces the task of adapting Kenya’s model to its local context while building regulatory capacity.

Dr Bravious Kahyoza, a lecturer at the Dar es Salaam campus of Kampala International University, points to Kenya’s experience, which recorded an impressive $1.5 billion in peer-to-peer crypto trades in 2021.“With the right regulatory strategy and public awareness, Tanzania has the potential to match, or even exceed, this figure without jeopardising its substantial $5.6 billion in foreign reserves,” he said.

He emphasised that effective regulation cannot happen in isolation, urging Tanzania to collaborate with its EAC partners under the 2024 digital finance plan and to align its policies with the 134 countries already adhering to International Monetary Fund 1(IMF and Financial Action Task Force (FATF) crypto standards.

Uganda’s legal vacuumUganda presents a paradox. Despite a crypto market, the country has no formal legal recognition of digital assets.

The Ugandan government is mulling regulating the industry but it’s not clear when and how. In January this year, ​​Uganda’s State Minister for Planning Amos Lugoloobi announced that over Ush2.5 trillion ($700 million) in crypto transactions occurred in Uganda in 2024, highlighting a rapidly growing but unregulated market.“Using bitcoin, a lot of transactions are happening and these transactions are not being managed anywhere because they are not regulated,” he said. “I was surprised to see that even in Uganda there are a number of operators. Just from a few that were reported from one of the member countries because we are members of that global network.”The Bank of Uganda has warned against using crypto through mobile money platforms, and a High Court ruling has denied legal status to cryptocurrencies.

In 2022, the Ugandan government conducted a countrywide crackdown on digital payment providers facilitating cryptocurrency businesses in the country, with the central bank issuing a stern warning to all payment service providers, including mobile money operators.

It said allowing crypto transactions opened up the country to fraudulent deals, money laundering, sale of illicit goods, and online scams. Ugandans lost about $1 billion between 2018 and 2020 according to Robert Bakalikwira, a criminal investigations officer looking into the cases.“Uganda’s delay falls largely into three categories: ignorance, lack of political will, and absence of pressure from international financial institutions like the IMF or World Bank,” Louis Kizito, a Kampala-based commercial lawyer with experience in Web3 compliance and partner at Pentagon Advocates told The EastAfrican.

The Financial Services Authority calls for regulation, the Bank of Uganda issues warnings, and the Ministry of Finance says it’s not ready,” he lamented.

The result is a brain drain.“Most trained developers I know are in Dubai, Botswana or Mauritius, places with legal clarity,” Kizito said. “Even fund managers and asset managers don’t want to touch crypto without legal certainty.”Uganda’s fragmented regulatory structure, with different bodies for banking, insurance, and capital markets, is ill-equipped to handle the borderless nature of crypto. Kizito suggests the adoption of a twin-peaks regulatory model similar to South Africa’s, which separates market conduct from financial stability.

Uganda’s current approach, characterised by warnings, prohibitions and legal ambiguity, risks stifling innovation and leaving investors exposed to scams and losses. Without a clear regulatory framework, Ugandan consumers lack legal recourse if their crypto holdings are lost or stolen, and legitimate businesses face uncertainty and potential sanctions.“We anticipate a crypto law in Uganda only after Kenya passes its VASP Bill. The earliest that could happen is 2027,” he predicted.

Uganda has recorded the highest growth in bitcoins received in the past year (over 75 percent), compared with Kenya and Tanzania (below 50 percent), according to Chainalysis. The country also leads East Africa in the value of decentralised finance (DeFi) services received last year, at $4 billion, followed by Kenya $2 billion, with no data for Tanzania.

The case for harmonisationThe lack of a unified East African approach to crypto regulation is beginning to affect regional commerce. Entrepreneurs, especially those engaged in cross-border remittances and DeFi, face a maze of conflicting rules.“It’s very hard to build a crypto start-up in Uganda and raise capital,” Kizito said. “Venture capitalists will only fund you if you’re also operational in regulated markets like Kenya or Mauritius. Otherwise, the regulatory risk is too high.”Even Kenya, which is lauded for its legislative initiative, risks losing talent if its regulatory regime becomes too restrictive.“Fear of excessive taxation is already discouraging innovation,” Kyalo warned. “Developers and start-ups may move elsewhere.”Binance’s Africa strategy reflects the complexity of the region.“We approach each East African market individually, engaging with regulators and stakeholders to support frameworks that balance innovation with user protection,” Cooke said. “In Kenya, we’ve filed all required user data and taxes, while advocating practical, enforceable policies.”As each country pursues its own strategy, industry insiders and legal experts are calling for regional harmonisation. An East African digital asset framework could standardize compliance, improve consumer protection, and attract global investment.

Kizito argues for a local-first policy.“We must stop waiting for the IMF. Crypto is not just Bitcoin -- it’s tokenised bonds, decentralised finance, and digital entrepreneurship. East Africa must chart its own path.”Binance sees potential in a hybrid ecosystem.“CBDCs and decentralised assets can coexist. But success depends on regulatory clarity, consumer education, and infrastructure that protects users,” Cooke said.

Crypto regulation across the continent is fragmented. According to this year’s Africa Blockchain Report released on June 26 by CV VC and Absa Bank, only seven countries in Africa have enacted well-defined crypto laws. There are 35 countries with uncertain regulatory environments, seven have implicit bans and five have absolute bans.“Nigeria has since legalised digital assets, while four countries - Kenya, Ghana, Rwanda and Morocco - have prepared draft regulations set to be passed into law by the end of this year,” says the report. “Still, some countries continue to grapple with outright bans and restrictive measures. Angola, for instance, now has a law that bans all crypto activities, joining four other nations.”East Africa stands at a pivotal moment. Kenya’s VASP Bill may serve as a blueprint for neighbouring countries. But without careful calibration, it risks triggering a flight of capital and talent. Uganda’s laissez-faire approach could breed innovation -- or chaos. Tanzania’s taxation without regulation is bold but brittle.

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