Kenyans received stablecoins worth Sh426 billion ($3.3 billion) in 12 months to June 2024 revealing a growing appeal for the cash-backed cryptocurrencies in day-to-day local transactions.
This largely quiet entry of stablecoins to the mainstream has raised interest among not just banks and other payment providers but also businesses and individuals.
Stablecoins are a form of cryptocurrency whose value is pegged on another asset such as cash, giving it the allure of ‘stability’ as volatility in price movement is minimised allowing it to work as an alternative to legally issued currency.
What assures that stablecoins work as a means of payment?
Stablecoins, most of which are pegged to currencies such as the US dollar, are backed by physical holdings of near cash assets such as Treasury bills, demand/term deposits and money market funds.
The backing ensures that every token or unit of a stablecoin issued has its equivalent backing in cash. This makes the value of one stable coin to be equivalent to one unit of currency such as a unit of the USD coin being equivalent to $1 (Sh129.23).
What is the difference between a stable coin and bitcoin or other cryptocurrencies?
The peg to real world assets such as cash differentiates stablecoins from Bitcoin and other types of cryptocurrencies as its value remains relatively stable mimicking the nature of currencies.
Bitcoin, the top cryptocurrency, has become more of an asset class whose value is determined by demand and supply in the marketplace.
Who can issue a stablecoin?
While stablecoins remain in a regulatory limbo in most jurisdictions, any person can technically be an issuer of tokens on condition that they can provide the backing of physical assets such as cash, government paper.
How would a stablecoin issued in Kenya work?
A local issuer in Kenya would create tokens that are pegged on the Kenya shilling. As standard practice, each token would be equivalent to one shilling.
The issuer would be required to keep cash assets equivalent to the value of the tokens including Treasury bills, bank deposits and money market funds.
Why are stablecoins gaining in popularity and usage?
The appeal of stablecoins has been attributed largely to their ability to bypass traditional payment networks such as banks. This has ensured speed and cost efficiencies.
Senders of stablecoins are not required to fill elaborate Know your customer (KYC) paperwork while the cost of sending the tokens is a fraction of the charges passed on by payment service providers (PSPs). The lower level of intermediation also means that stablecoins can be quickly sent to any part of the world in minutes.
In Africa, use of stablecoins has been driven by local currency volatilities, a need for cross-border transactions spanning multiple currency jurisdictions and difficulties in obtaining hard currencies.
Kenya’s use for the tokens started with the dispatch of diaspora remittances and adoption has grown among cross-border import and export businesses.
How are stablecoins used in real world transactions?
Stablecoins can be used in directly settling payment obligations for businesses or individuals accepting the tokens as legal tender. Alternatively, stablecoins can be converted through exchange platforms into local currency for use in settlements.
How would a stablecoin transaction work in a real case scenario?
A trader paying for supplies using stablecoins from the US in Kenya can obtain them using local currency at an exchange such as YellowCard.
The same rate would allow them to wire the tokens to the merchant in the US who would then opt to keep the stablecoins in their digital wallet or liquidate them on the same platform.
Are stable coins regulated in Kenya?
While the simple answer is no, Kenya through a multi-regulatory taskforce including the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA) has explored developing a framework for the regulation and adoption of cryptocurrencies.
The Virtual Assets Bill has been a major development out of the process, which seeks to establish a framework to regulate players in the industry even though it fails to explicitly mention stablecoins.
How are other markets embracing stable coins?
The United States has moved ahead of peers in developed economies to establish a framework for the regulation of stable coins through the Genius Act with President Donald Trump being seen as a cheerleader for decentralized finance and private issuances of stable coins.
Players in the private sector are gearing to issue their own stable coins including Amazon, JP Morgan, Mastercard and Visa as they push not to fall behind in a quickly changing payments landscape.
What are the risks associated with stable coins?
Loose controls and the lack of regulation have made stable coins a potential conduit for crime including drug trafficking and money laundering.
For traditional players in the payment systems, stable coins have been viewed as an existential threat as the kingpins are upended in what they have wanted could be a race to ‘free banking’- payment services offered at no or next to no cost.
The popularity of dollar backed USDC and USDT has given rise to fear of an even more exacerbated dollar dominance as issuers hold stockpiles of US Treasuries and physical dollars to back the most usable tokens.
There is also the fear of some issuers going bust and not honouring their liabilities. These can occur when the loose oversight allows an issuer to sell more tokens than it can back up with physical assets in its vault.
Such fears were realised in 2022 when algorithmic stable coin UST/Terra-Luna crashed after losing its peg to the US dollar as the unique mechanism of the stablecoin’s peg which relied on a speculative cryptocurrency Terra (Luna) was tested by speculative demand.
