The National Treasury has banned interest payments on stablecoins, regardless of how long they are held, a strategy aimed at preventing issuers from acting as unregulated banks.
In the final Virtual Asset Service Providers regulations published last week by the Treasury Cabinet Secretary John Mbadi, payment of interest on stablecoins by issuers and exchanges will be strictly prohibited, a deviation from the practice in more developed crypto markets like the US.
Stablecoins are digital currencies whose value is tied to relatively stable assets, such as the US dollar or the Kenyan Shilling, to minimise the price swings common in cryptocurrencies like Bitcoin.
The move is expected to discourage their use as interest-earning assets, which would risk a bank run as depositors attempt to replace their bank deposits with US-dollar-based stablecoins.
“An issuer of stablecoin shall not grant interest to holders of stablecoin… A licensee shall not grant interest when providing virtual asset services related to stablecoin,” states the regulations.
Kenya’s regulation deviates from global standard practice, allowing major exchanges and issuers to offer interest or returns through various activities, including lending, staking, and other investment programmes.
Binance, for instance, one of the leading crypto exchanges globally, offers returns through its Earn programme, which allows users to earn from keeping stablecoins and other cryptocurrencies on the platform, much like a savings account.
In the US, only issuers are prohibited from paying interest to stablecoin holders, but exchanges and other virtual asset service providers are allowed to offer returns as a means of encouraging holdings.
In Kenya, no player will be allowed to offer any returns for stablecoins. The regulations further state that “any remuneration or other benefit related to the length of time during which a holder of a stablecoin holds such stablecoin shall be treated as interest associated with the stablecoin.”
As opposed to the US, Kenya’s regulations extend the ban beyond stablecoin issuers to virtual asset exchanges and wallet providers, which will include firms like Binance and Yellow Card.
Bankers argue that allowing interest on stablecoins is generally risky to the sustainability of banks as it can lead to a bank run, where a large group of people rushes to withdraw their deposits from banks.
“Stablecoins, even without paying interest, are already projected by some to reach dramatic levels of adoption, potentially redistributing significant amounts of liquidity away from the traditional banking sector,” argued US-based Bank Policy Institute in a research article.
“If regulations ever permitted stablecoins to pay interest, demand could plausibly double, magnifying these effects and elevating the threat of destabilising runs or contagion across banks and the broader financial system.”
Data from the Central Bank of Kenya shows that as of April, banks held deposits totalling Sh6.5 billion, up from Sh5.7 billion a year earlier. During the same period, interest rates on deposits declined from 8.87 percent to 6.88 percent.
