A large number of Kenyan firms are now using cryptocurrencies for payments to foreign suppliers whenever there are dollar shortages or a weakening of the shilling, the International Monetary Fund (IMF) has revealed.
Cryptocurrencies or crypto assets are digital forms of money that are not issued or regulated by any particular monetary authority and are traded online.
They include bitcoin and USDT, which is backed by the US dollar.
A market survey commissioned by the IMF found extensive use of such digital assets in Kenya, especially in the private sector—an indication that the use of the payment option is wider than earlier projected.
The survey was conducted by a technical working group comprising officials from the Capital Markets Authority (CMA) and the Central Bank of Kenya (CBK).
“Domestic companies are said to be making regular use of stablecoins such as USDT as a means of payment to settle contracts with foreign suppliers, in particular in times of domestic USD of domestic USD shortages,” the IMF revealed in a report following a visit to Kenya by its technical team on the request of the CMA.
Stablecoins like USDT are a type of cryptocurrency backed by a physical asset. USDT, backed by the American dollar, is the world’s most popular, with a total market value of Sh17.76 trillion.
It is also the most used stablecoin currently, used by about 49 percent of Kenyans that own cryptos, followed by USDC (31 percent) and BUSD (9 percent). All three Stablecoins are backed by the US dollar.
The IMF survey found that companies are also using the stablecoins as a hedge against the weakening shilling, further driving the use and adoption of unconventional assets in the Kenyan economy.
“In addition, private sector actors mentioned that they have seen the use of stablecoins as a store of value and hedge against the depreciation of the shilling as a rather common driver for crypto asset adoption among Kenyan citizens,” the lender said.
The survey found that the typical cryptocurrency user in Kenya is aged below 40, and primarily invests in Bitcoin, Ethereum, and USDT.
The majority of individual users invest less than Sh100,000 and, just like the corporates, use digital assets as a hedge against the depreciation of the Kenyan shilling and for international settlements.
The CMA-CBK technical working group has been tasked with further researching the extent to which cryptos are entrenched in the Kenyan economy, and to develop regulations for the sector to tame its negative impacts on the market.
The CBK has prohibited banks from doing business with any entities or individuals dealing in cryptocurrencies, but due to the lack of clear rules governing the sector, people have found a way to circumvent the ban.
“Private actors have indicated that the circumvention of the CBK’s soft ban on the provision of fiat payment rails for crypto asset sector actors could be rather widespread,” noted the IMF.
Dollar shortages and steep shilling depreciation, which are the key drivers of crypto use in the country, have been a common occurrence over the last two years.
In 2023, for instance, Kenya experienced at least three episodes of prolonged dollar shortages, while the shilling depreciated by over 40 percent, forcing many to find hedges and alternatives for international settlements.
Rough estimates put the total number of crypto users in Kenya at more than 730,000, but the IMF says the number could be bigger.
Anecdotal evidence indicates deep-rooted use of the assets in Kenya.
Globally, Kenya is one of the most active crypto markets. Blockchain analysis firm Chainalysis ranked Kenya 21st of 155 countries in its global crypto adoption index.
The widespread adoption, despite the lack of regulation, has been beneficial to the government to some extent. Last year, the Kenya Revenue Authority (KRA) reported that it collected Sh10 billion from crypto users in the country, marking the very first time the sector contributed to the national tax bracket.
The IMF has always cautioned countries not to ignore digital assets and the threats they pose to their monetary sovereignty and financial markets, urging for regulation to control the fast-growing industry.
The KRA has taken note of the huge activity in the crypto industry in the country and now targets integrating a new revenue system with cryptocurrency exchanges and marketplaces to track and record all transactions as part of a strategy to catch tax cheats in the largely secretive market segment.
The taxman estimated that between 2021 and 2022, Kenya’s cryptocurrency market transacted about Sh42.4 trillion—representing close to 20 percent of the country’s GDP and a huge potential for revenue collection.