Virtual asset service providers in Kenya are contesting a proposed Treasury rule that would require them to hold reserves in Kenyan shillings equal to the value of any stablecoins they issue. The dispute, detailed in a recent report by the Business Daily, centers on a clause within the draft Virtual Asset Service Provider (VASP) regulations that mandates a 1:1 reserve ratio for fiat-backed stablecoins, specifically requiring the reserves to be held in local currency. Industry representatives argue this requirement is impractical and could stifle innovation in the nascent sector.

The proposed regulation forms part of Kenya's broader effort to establish a formal framework for crypto-assets, a move that follows the Central Bank of Kenya's (CBK) earlier cautionary stance on cryptocurrencies. Proponents of the rule, including Treasury officials, contend it is a necessary consumer protection measure designed to ensure issuers can meet redemption requests and maintain stability. "The primary objective is to protect consumers from potential insolvency of issuers," a Treasury source familiar with the discussions told the Business Daily. The regulator's position is that holding reserves in the local currency of operation is a fundamental prerequisite for stability and trust.

However, virtual asset providers have pushed back forcefully. They assert that the majority of stablecoins in global circulation, such as USDT or USDC, are pegged to major reserve currencies like the US dollar, not to local currencies like the Kenyan shilling. Industry lobbyists argue that forcing a conversion and holding of shilling reserves introduces unnecessary foreign exchange risk and operational complexity. They suggest that a more viable model would allow reserves to be held in the currency to which the stablecoin is pegged, which is typically the US dollar. "A stablecoin pegged to the US dollar should logically be backed by US dollar reserves, not shillings," one industry executive was quoted as saying. The providers warn that the current draft could deter international stablecoin issuers from operating in Kenya and limit the tools available for cross-border payments, a critical use case in the region.

The Kenyan debate unfolds against a backdrop of increasing regulatory activity across Africa concerning digital assets. In Nigeria, the Securities and Exchange Commission (SEC) recently expanded its regulatory oversight by admitting seven new firms into its regulatory sandbox program, as reported by ThePointNG. This move is part of a deliberate strategy to bring crypto-asset trading platforms and custodians under a supervised environment to test innovative products while managing risks. Meanwhile, in the Democratic Republic of Congo (DRC), a pilot program is exploring a different application of stablecoin technology. Payments giant Visa, in partnership with mobile money operator M-Pesa, is testing the use of stablecoins to settle cross-border transactions for mobile money payments, according to reports from Bitcoin.com and BitKE. This pilot aims to assess whether stablecoins can improve the speed and reduce the cost of international transfers between mobile money wallets.

The contrasting approaches in Kenya, Nigeria, and the DRC highlight the diverse regulatory philosophies emerging across the continent. Kenya's Treasury is pursuing a prescriptive, reserve-backed model focused squarely on issuer liability and local currency stability. Nigeria's SEC is taking a more iterative approach through a sandbox, while industry-led pilots in the DRC are testing the utility of existing global stablecoins for specific payment corridors. The outcome of the Kenyan consultation will be closely watched, as it could set a significant precedent for how African nations treat the reserve composition for fiat-referenced crypto-assets, with implications for financial inclusion and the integration of local markets into the global digital economy.