State issues draft regulations for issuance of stablecoins

Kenya proposes rules requiring stablecoins to be fully backed by cash and low-risk assets. [File, Standard]

Stablecoins issued by virtual asset service providers in the country shall be backed by real cash or near-cash reserves as the government seeks to protect consumers in proposed regulations. 

Stablecoins are cryptocurrencies designed to maintain a fixed value, typically pegged to a stable asset like the US dollar or commodities like gold.

These reserves, the draft regulations say, should be separate from the operating funds of the virtual asset service provider business. 

Additionally, these reserves can only be invested in low-risk but high-quality assets. 

These stringent rules aim to ensure that a digital coin provider does not create and sell coins out of thin air, which could leave holders of the asset high and dry if the business collapses. 

“The issue of a stablecoin shall (a) fully back such stablecoins with reserve assets, such that the value of the reserve assets shall at all times be at least equal to the nominal value of all outstanding units of the stablecoin,” the regulations read. 

It further provides that issuers should issue only stablecoins whose reserve assets consist of cash, including reserves held with the Central Bank of Kenya (CBK) and bank deposits; government securities with a residual maturity of no more than 90 days; and repurchase agreements with a maturity of no more than seven days, backed by cash, including that held with CBK. 

Issuers should ensure reserve assets of each stablecoin are separate from their own operating assets and the reserves of any other stablecoin issued. 

These reserves, the regulations say, should be made available to the regulators – CBK and the Capital Markets Authority – upon request. 

“The issuer of the stablecoin shall ensure that the reserve assets are sufficiently liquid to enable the issuer to fund redemption requests,” the regulations say. 

The regulations stipulate that the reserve assets shall be held in custody by a custodian institution approved by CBK.

However, issuers of stablecoins, on their part, shall ensure that the reserve assets held in custody are protected against claims of the custodians’ creditors. 

Once the regulations are adopted, stablecoin issuers are expected to hold at least 30 per cent of the funds received in exchange for the virtual assets in commercial banks, segregated for processing issuance and redemption. 

“The remaining funds received are invested in secure, low-risk assets in Kenya that qualify as high-quality liquid assets with minimal market risk,” the regulations say.

“For fiat-referenced stablecoins, the reserve assets should be denominated in the same official currency as the one referenced by the fiat-referenced stablecoin.” 

It adds that all profits or losses, including fluctuations in the value of the financial instruments in which the reserves are invested, and any counterparty or operational risks arising from the investment of the reserve assets, shall be borne by the stablecoin issuer. 

These regulations are meant to operationalise the Virtual Asset Service Providers (VASP) Act, 2025, which came into effect late last year. 

The Act now permits the trade of virtual assets such as cryptocurrencies in the Kenyan market. 

While cryptocurrencies tend to be volatile, stablecoins stand out as a better option, as they are usually backed by other hard currencies. 

The government, through the regulations, aims to cover all possible loopholes in the sector that may leave consumers vulnerable.

Data protection, daily reporting and insurance have been emphasised in the draft document as mandatory for all licencees. 

Cognisant of the volatility associated with the virtual asset sector, the government, to further protect consumers, also demands that licence holders hold and maintain insurance cover for consumers’ assets. 

This cover should be commensurate with the level of risks and the scale of the proposed virtual asset service. 

These regulations apply to all business lines, namely: virtual asset wallet provider, virtual asset exchange, virtual asset payment processor, virtual asset broker, virtual asset investment advisor, virtual asset manager, virtual asset offering provider – initial coin offering, virtual asset offering provider – virtual asset tokenisation, virtual asset offering provider – token issuance platform, and virtual asset offering provider – stablecoin issuance. 

The regulations require every licensee to submit semi-annual financial statements to the relevant regulatory authority within one month of the end of the half-year period, monthly financial statements within 15 days of the end of the month, periodic capital adequacy or liquidity statements on a monthly and annual basis, and audited annual financial statements within three months of the end of the financial year.

“Promptly disclose any event that could materially affect solvency, the valuation of virtual assets, or consumer protection,” the regulations stipulate.

Those who issue stablecoins must report, monthly, the number of holders, the value of assets in circulation, the number of consumers and new account holders, the composition of reserve assets, and instances of de-pegging of the stablecoin.

“In addition to the reports under sub-regulation (1), a licensee shall, daily, report the average number and average aggregate value of transactions per day,” the regulations say.