The National Treasury has introduced a ban on interest payments linked to stablecoins, aiming to curb the risk of unregulated financial activities that could undermine Kenya’s banking sector.

Under the newly released Virtual Asset Service Providers regulations, Treasury Cabinet Secretary John Mbadi has mandated that neither stablecoin issuers nor virtual asset exchanges and wallet providers may pay interest to stablecoin holders. This policy diverges from practices in more mature crypto markets such as the United States, where exchanges may still offer returns.

Understanding Stablecoins and the Regulation

Stablecoins are cryptocurrencies pegged to stable assets like the US dollar or Kenyan shilling, designed to avoid the volatility common in coins like Bitcoin. The Treasury’s move is intended to stop stablecoins from being used as interest-bearing instruments, which could lure depositors away from banks, risking liquidity crises.

The regulations explicitly state that any form of remuneration or benefits tied to the duration a stablecoin is held will be considered interest and thus prohibited. This comprehensive ban extends beyond issuers to cover all virtual asset service providers, including major players like Binance and Yellow Card.

Implications for Kenya’s Financial Sector

  • By disallowing interest on stablecoins, the Treasury seeks to prevent scenarios akin to bank runs, where depositors might rapidly withdraw funds to invest in higher-yielding digital assets.
  • This contrasts with global norms where some platforms offer interest through lending, staking, or investment programs to encourage stablecoin holdings.
  • Bankers have warned that permitting interest on stablecoins could destabilize financial institutions by diverting liquidity away from traditional banks.

Data from the Central Bank of Kenya reveals that bank deposits rose from Sh5.7 billion to Sh6.5 billion over the past year, even as deposit interest rates fell from 8.87% to 6.88%. The Treasury’s regulation is a protective measure to maintain this deposit base and financial stability.