Stablecoins: Africa’s Gateway to Economic Growth and Global Integration
Introduction
Stablecoins are a revolutionary force in the quickly changing landscape of blockchain technology, especially in Africa where they are widely used. These digital assets, although not the most popular cryptocurrencies, have risen to a market worth $161 billion, with the top three stablecoins collectively valued at over $39 billion (Coinmarketcap).
Stablecoins have emerged as the most useful cryptocurrency in Africa as a dependable alternative to traditional banking systems, which are struggling with economic volatility and a lack of liquid assets for foreign trade. Despite the fact that the majority of countries on the continent approach the use of cryptocurrency with caution and lack comprehensive regulatory framework, their significant market presence highlights their potential to promote inclusion and economic stability. Africa is showing the world how cryptocurrency use case for global interoperability can work.
This article delves into the profound use of stablecoins in Africa, revealing their role in propelling economic growth, fostering global connections, and reshaping the financial landscape in ways that could leave a lasting impact on the continent’s future.
Rise of Stablecoin Adoption in Sub-Saharan Africa
Cryptocurrency adoption in Africa has been on a significant rise over the past decade, driven by the crypto boom of 2018, as the mostly youth population entered the market for speculative use, and at the end of the first major bull market, speculative desires gave in to actual curious use of cryptocurrency, especially as there is major need for more a more accessible and reliable financial services.
The depreciation of most Sub-Saharan African currencies against major global currencies like the pound sterling and the US dollar has led to a significant loss in value and purchasing power on the continent. Countries like Nigeria and Zimbabwe have prioritized saving in US dollars due to their volatile local currencies. While various forms of digital currencies such as Bitcoin have gained traction over the last decade, Stablecoins continue to lead in usage, especially in the wake of pandemic-induced economic turmoil.
The above chart further illustrates this point, showing stablecoins as the dominant share of cryptocurrency transactions over a year, indicating their pivotal role in the economic activities across Sub-Saharan Africa. This data exemplifies how stablecoins are not only used as a medium of exchange but are also increasingly trusted for savings and remittances, marking a shift in the region’s financial landscape.
What are Stablecoins and What are they used for?
Stablecoins are a type of cryptocurrency designed to minimize price volatility. Unlike other cryptocurrencies such as Bitcoin and Ethereum, whose values can fluctuate wildly, stablecoins are typically pegged to a stable asset, such as the US dollar, Euro, or a basket of commodities. This pegging mechanism ensures that the value of stablecoins remains relatively constant over time. This stability makes them useful for everyday transactions, remittances, and as a store of value. Popular examples of stablecoins include Tether (USDT), USD Coin (USDC), and Binance USD (BUSD). These digital assets can be bought, stored, and used just like other cryptocurrencies, but with the added benefit of reduced volatility.
Stablecoins Applications:
- Transactions and Payments: Cryptocurrency has improved digital international trade. Thanks to stablecoins’ worldwide payment gateway that circumvents legal limitations, transatlantic payments are at an all-time high. Stablecoins are becoming more and more popular worldwide, and big payment businesses like PayPal and Stripe are creating their own stablecoin solutions. This is also reflected in Africa, as many merchants are incorporating stablecoin in their payment options.
- Remittances: Sending money across borders can be costly and slow with traditional banking systems. Cross-border payments, typically denominated in USD, are vital financial flows supporting millions worldwide, as highlighted by JP Morgan. These transactions, which total approximately $23.5 trillion annually, constitute roughly 25% of global GDP. Yet, current methods often involve slow offshore bank transfers through intermediaries, taking anywhere from 2 working days to a week. Stablecoins are addressing these inefficiencies by offering faster and cost-effective alternatives for cross-border transfers.
- Decentralized Finance (DeFi): In the DeFi ecosystem, stablecoins play a crucial role in lending, borrowing, and generating interest. They offer liquidity and stability, allowing users to engage in financial activities without exposure to price volatility. The DeFi market is expected to see revenues surge to US$26 billion by 2024. Moreover, beyond individual lending pools, traditional financial institutions are increasingly integrating stablecoins into their operation.
- Hedging Against Volatility: In regions with volatile local currencies, converting into stablecoins pegged to stable assets like the US dollar shields against currency devaluation and inflation. Likewise, Traders of digital currencies and aiming for low risk assets find stablecoins invaluable. This strategy helps maintain asset value and supports seamless transactions, underscoring stablecoins’ role in managing financial risks in fluctuating economies and bolstering economic stability.
- Investment: Stablecoins offer a stable store of value for investors seeking to avoid the volatility of other cryptocurrencies. They act as a safe harbor during market downturns, allowing investors to maintain stable assets without leaving the crypto ecosystem. Ideal for both long-term and short-term strategies, stablecoins can also be used in interest-earning accounts and yield farming, providing returns without exposure to price swings. Their stability and reliability make them essential in diversified investment portfolios, balancing growth potential and risk management.
Top 3 Countries Embracing Stablecoins in Africa
Nigeria: Leading the Charge
Nigeria leads Africa in stablecoin adoption, driven by a dynamic fintech sector and a sizable unbanked population finding secure and efficient financial solutions through stablecoins. Recently, Nigeria introduced its first regulated Naira stablecoin, cNGN, amidst regulatory fluctuations. The government and local fintech startups, such as YellowCard, Bitmama, BoundlessPay, and Afriex, are pioneering stablecoin-based remittances. While the general ban on cryptocurrency transactions was lifted by late 2023 to allow institutional crypto-native transactions, peer-to-peer cryptocurrency trading has since been restricted. Despite these regulatory challenges, Nigeria remains the continent’s leader in crypto and stablecoin usage, with the cryptocurrency market forecasted to generate US$32.58 million in revenue by 2024.
Kenya: Technological Integration
In Kenya, stablecoins have seamlessly integrated into the everyday financial landscape and its boasts as the biggest cryptocurrency market in East African countries. Mobile money services like M-Pesa paved the way for digital currency, which are already widespread, and some of them have incorporated stablecoins to enhance transaction efficiency and security. This integration has particularly benefited rural communities, providing them with access to reliable financial services and contributing to overall economic stability. Notable platforms driving financial innovation in Kenya include Fonbnk, which converts airtime to mobile money and enables global payment access through stablecoins.
South Africa: Regulatory-Friendly Environment
South Africa distinguishes itself with a robust regulatory framework for cryptocurrencies, classifying them as financial products. This proactive approach by the South African Reserve Bank, alongside efforts from the FSCA and FIC, fosters a supportive environment for crypto adoption. Discussions on including stablecoins in the 2024 budget highlight ongoing integration into the financial landscape, bolstering confidence and benefiting the local economy. Startups like Altify are pivotal, helping South Africans diversify investment portfolios with assets such as cryptocurrencies.
Market Impact of Stablecoins in Africa
As established, Stablecoins are significantly transforming multiple economic sectors in Africa by improving financial inclusion through accessible banking services for the previously unbanked. The ownership of financial accounts among adults in Sub-Saharan Africa has doubled since 2011, marking a huge change in some countries such as Kenya and South Africa, according to the World Bank. This increase highlights a notable stride towards broader financial access and underscores the impact of innovations like stablecoins in facilitating secure and efficient digital transactions.
Mobile money services integrated with stablecoins are bridging this gap, offering financial services to individuals in remote and underserved areas. Stablecoins also reduce transaction costs, particularly for cross-border remittances. Traditional remittance services charge high fees, often exceeding 6% per transaction, while stablecoins enable near-instant transfers at a fraction of the cost. For instance, the average cost of sending $200 via stablecoins is less than 1% on crypto payment platforms.
In regions with currency instability and high inflation rates, such as Zimbabwe and Nigeria, stablecoins provide a viable hedge, allowing individuals and businesses to convert volatile local currencies into stablecoins pegged to the US dollar or other stable assets. This helps protect savings and ensures more predictable financial planning. Stablecoins are also revolutionizing cross-border trade by simplifying transactions and reducing the reliance on traditional banking systems. This is particularly beneficial for small and medium-sized enterprises (SMEs) that face challenges in accessing international markets.
Transatlantic Connection
While stablecoin adoption in Africa focuses on providing fundamental financial access and stability, in developed regions like North America and Europe, the emphasis is on enhancing the efficiency of existing financial systems. Stablecoins in these regions are primarily used for quick settlements in trading, managing liquidity, and reducing counterparty risk in cross-border transactions. They are widely used in decentralized finance (DeFi) platforms to facilitate lending, borrowing, and yield farming.
A comparative analysis reveals that while only about 10% of stablecoin transactions in North America are for hedging purposes, this figure is significantly higher in African countries experiencing economic instability.
Challenges and Future Outlook
Collaborations and international partnerships are crucial in overcoming the challenges hindering stablecoin adoption in Africa. Regulatory uncertainties, limited infrastructure, and technological barriers pose significant obstacles, but foreign investments in African startups, especially those leveraging stablecoin technologies, are imperative. These investments can spur innovation, improve infrastructure, and enhance technological capabilities, thereby accelerating the adoption and integration of stablecoins across the continent.
Despite these hurdles, the future outlook for stablecoins in Africa remains positive. Continued growth and integration are anticipated to yield substantial economic benefits, fostering financial inclusion, enhancing cross-border trade efficiency, and providing a stable financial alternative in volatile economic climates. As Africa navigates these challenges with collaborative efforts and strategic investments, stablecoins have the potential to revolutionize the financial landscape, driving sustainable economic development and global connectivity.
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