A brand new frontier has been opened in Africa for the usage of stablecoins, that are blockchain-based ‘tokens’ backed by steady belongings, such because the US greenback, euro and even gold.
“It was inevitable that African companies beset by a scarcity of fiat US dollars would seek out ways to solve this shortage of liquidity. Stablecoins are proving to be that solution,” says Omer Iqbal, CEO of Cape Town-based crypto firm Fivewest.
Stablecoins are the fastest-growing subset inside cryptocurrencies, accounting for 2 of the 5 largest cryptos as measured by market cap.
The two stablecoin frontrunners are USD Tether (USDT) and USD Coin (USDC), which collectively account for a complete market worth of about $37 billion (R663 billion).
Crypto ‘the default bank of Africa’
“There is a massive demand [for stablecoins]. Crypto has become the default bank of Africa,” says Jon Ovadia, head of crypto firm OVEX.
“Opening a USD account for most Africans was out of reach until now.”
While the demand is there, regulators are lagging behind. “We’re treading with extreme caution in each market while we engage with regulators to understand the regulatory landscape in each market,” provides Ovadia.
In central Africa, companies like Eversend, a Ugandan start-up barely three years previous, is on a fund-raising drive after rising transaction volumes 46-fold in 2021, in accordance with Bloomberg.
It provides its greater than 350 000 prospects the power to purchase and promote crypto, together with stablecoins, with a multi-currency e-wallet that allows cross-border transactions in seconds and at a fraction of the speed charged by banks.
The improve within the firm’s transaction volumes follows a shift in focus from remittances to cross-border companies and cryptocurrency merchants.
World Bank data exhibits that remittances from Africans working overseas accounted for two.5% of sub-Saharan African GDP in 2020.
Lower prices
Traditional technique of remitting cash by means of banks and cash switch companies comes at typically large prices – chopping 15% and even 20% off the transferred funds earlier than they attain the recipient.
Crypto-based options resembling that supplied by VALR, Binance Pay, Yellow Card and others scale back this price to a fraction of a p.c.
In a word to purchasers this week, Iqbal says section one of many crypto adoption was techies shopping for bitcoin. Phase two was adoption by retail buyers shopping for a broader unfold of cryptos. Phase three takes us in a completely new course, commensurate with the rise of stablecoins, into company treasuries and institutional adoption.
Take Malawi, for instance, which devalued its currency (the kwacha) by 25% in latest months. That’s an enormous hit to the monetary statements of companies whose bills are priced in USD.
Allowing them to transform their kwacha into USD-backed stablecoins and maintain these on their steadiness sheets as a near-cash asset protects them from local currency weakness.
Those USD-backed stablecoins can then be transformed again into local fiat currencies when they’re wanted for the fee of salaries, local taxes and different bills.
Iqbal says this isn’t an answer for companies making an attempt to bypass local central financial institution laws limiting currency export.
Read: Stablecoins not prepared for shopper funds, US watchdog says
“What we are seeing is a growing number of companies in Africa who want to hold crypto on their balance sheet, not to remit abroad, but to hedge against local currency weakness, and then convert back to the local currency when it comes time to pay expenses, such as salaries. This is proving to be an extremely effective hedging tool in countries with limited access to USD,” says Iqbal.
Fivewest has began rolling its treasury administration answer to international locations throughout Africa and Asia.
Weakest currencies
Nigeria is one other fascinating instance, the place the naira has been rated the 11th worst performing currency on the planet, in accordance with Hanke’s Currency Watchlist. Ghana’s cedi got here in 13th worst on the planet. Zimbabwe’s actual time gross settlement (RTGS) greenback is the second worst, simply behind Venezuela’s boliver.
This makes monetary planning a each day hazard for monetary managers working in these international locations.
Allowing companies to transform naira to USD-backed stablecoins, then again to naira when they’re wanted to pay bills, is a sport changer for companies in Africa. It permits them to construct up a USD-pegged money reserve and solely convert again to local currencies when it’s time to pay payments in local currency.
This is how the hedging works:
- Convert local currency to USDT or USDC;
- The firm holds USDT or USDC on their steadiness sheets; and
- At the top of the month, or quarter, the corporate converts USDT/C again to the local currency to pay salaries, settle invoices and so forth.
Blockchain-based central financial institution digital currencies (CBDs) are already being rolled out in international locations like Nigeria, the place it’s known as the e-naira, as a regulatory response to the proliferation of personal currencies resembling cryptos. The inevitable drawback they face is they continue to be beneath the management of central banks and regulators, with no indication they are going to be any higher at fixing the inflation drawback embedded into the prevailing fiat-based programs.
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