Kenya Bans Interest on Stablecoins Amid Bank Deposit Concerns

The Kenyan government has introduced new regulations on virtual assets, specifically targeting stablecoins. The Treasury Cabinet Secretary John Mbadi has published final Virtual Asset Service Providers regulations that prohibit payment of interest on stablecoins by issuers and exchanges.

This move is aimed at preventing stablecoin issuers from acting as unregulated banks. Stablecoins are digital currencies tied to relatively stable assets, such as the US dollar or the Kenyan Shilling, to minimize price swings common in cryptocurrencies like Bitcoin.

The regulations deviate from global standard practice, allowing major exchanges and issuers to offer interest or returns through various activities. 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.

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. The Central Bank of Kenya shows that as of April, banks held deposits totalling Sh6.5 billion.