On 12 November 2029, the Bank of Tanzania issued a public notice cautioning the public against the trading, marketing and usage of virtual currency because doing so was contrary to existing foreign exchange regulations ,and reiterating that the only acceptable and legal tender in the country was the Tanzanian Shilling. However, a recent decision delivered by the High Court of Tanzania on 13 December 2024, Yellow Card Tanzania Limited v. Nyamwero Michael Nyamwero, Commercial Case No. 12171 of 2024 HCTZ, has sparked and refuelled discussion concerning the legality of the use of virtual assets such as cryptocurrency in Tanzania.

Summary of the case

The case involved a company engaged in virtual currency trading (the Plaintiff), which sued its former employee (the Defendant) for breach of contract under a deed of Settlement. The deed of Settlement was executed by the parties after the employee was accused of misappropriating funds and agreed to repay the company USD 1.193 million. In defence, the defendant contested the claim, arguing that the deed of Settlement was void, as its object and consideration pertained to cryptocurrency businesses that were banned in Tanzania.

While refuting the defendant’s argument, the Court noted that most countrie,s including Tanzania, have been operating on digital PR cryptocurrency through service providers. All operators of cryptocurrency and service providers who facilitate such electronic transactions must pay the necessary taxes. The Court ruled since the parties that are involved in digital money and digital assets have been paying tax under the tax laws, their transaction cannot be declared illegal. After concluding that trading cryptocurrency is not illegal, the Court went on and proceeded to hold that the Defendant had breached the terms of the deed and awarded the Plaintiff, among other reliefs USD 1.193 million, being the balance due pursuant to the terms of the Settlement deed.

Taxation of virtual assets (VA)

The Finance Act, 2024, which became effective on 1 July 2024, amended the Income Tax Act, 2019 by introducing a 3% withholding tax on payments by resident persons or non-resident persons who own a digital asset exchange platform or facilitate the exchange or transfer of a digital asset to a resident person in respect to the exchange or transfer of the digital asset. The same law recognises digital assets as anything of value that is not tangible including cryptocurrencies, token codes, and numbers held in digital form and generated through cryptographic means or any other means. It is worth noting that, for taxation purposes, this marks the first recognition of virtual assets and virtual assets service providers (VASPs).

However, it should be emphasised that, while VASPs are required to pay taxes under the law, as highlighted in the High Court decision, many VASPs lack a physical presence in the country due to the borderless nature of virtual asset trading and the accessibility of their platforms over the internet. This creates concerns regarding the effectiveness of monitoring and enforcement measures against them. Notably, other jurisdictions, such as Kenya, have proposed legal frameworks that restrict individuals from acting as VASPs, reserving this role for legal entities (corporations) with registered local offices, and imposing other obligations, including the requirement to operate and maintain a local bank account.

Conclusion

The High Court decision comes as a wake-up call for Tanzania to embrace financial innovation and introduce a legal and regulatory framework for the registration, licencing or supervision of VA-related activities and VASPs. Currently, the Bank of Tanzania (BoT) has been researching and exploring the potentiality of issuing its Central Bank Digital Currency (CBDC). If successful, the CBDC shall become a legal tender similar to the notes and coins and with the jurisdiction of the Central Bank.

It is evident that the world and the economy are evolving, requiring a legal and regulatory framework in Tanzania that is both dynamic and responsive. Such a framework must foster seamless domestic and international cooperation while balancing the need to manage risk, ensure compliance, safeguard consumer interests and promote financial innovation.

Written by Evarist Kameja, Senor Associate, Bowmans Tanzania