- Stablecoins remittances in Sub-Saharan Africa can be up to 20 times cheaper than standard money transfers.
- Because stablecoins link fiat currencies or physical assets such as gold, they are less volatile than cryptocurrencies such as Bitcoin or Ethereum.
- Stablecoins popularity has skyrocketed due to its effectiveness in cross-border transfers in Africa.
For several decades, Africa has demonstrated consistent economic progress. Many African countries have emerged as bright beacons of growth. This affluence and economic progress are fueled partly by a rise in remittance payments to the continent.
Cost-efficient cross-border remittances raise stablecoins stake in Africa
Africa is a FinTech haven, particularly in the global remittance market. Factors such as a large unbanked population, significant smartphone penetration, and a rising migrant population make it an ideal location for the digital remittance sector to develop.
Cross-border remittances have traditionally been expensive, delayed, and bureaucratic. High transaction costs, particularly for lesser payments, imply that users frequently lose a large portion of their profits (with a global weighted average price of 4.71 per cent but sometimes up to 30 per cent of gross earnings).
Cryptocurrency, particularly stablecoins, eliminates this expensive barrier and has the potential to provide new methods for individuals to earn, spend, save, and transmit money. As Africa emerges from the era of the Covid-19 epidemic, it is apparent that the pace of digital change seen by businesses throughout the continent is here to stay.
Although there is still friction when transactions happen in various currencies, the rise of stablecoins will possibly tackle an issue encountered across borders. Stablecoins might promote additional payment innovation, responding to the demand for more efficient and cost-effective cross-border payments and remittances.
Stablecoins provide borderless payments that are irreversible and almost free. Furthermore, stablecoins are safe and can be considerably faster and more efficient than transmitting money through conventional channels, particularly in regions with limited payment infrastructure.
According to the research, the worldwide stablecoin market attained a total market valuation of $107 billion in the summer of 2021, as digital currency use cases became increasingly popular. Stablecoins may soon emerge as a dominant asset in leveraging transactions over borders, without the costly need for intermediaries to broker agreements, as their benefits throughout the corporate sector become evident.
What are stablecoins?
Stablecoins, such as Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), are cryptocurrencies that are often backed by conventional assets such as the euro or the US dollar. Because stablecoins link fiat currencies or physical assets such as gold, they are less volatile than cryptocurrencies such as Bitcoin or Ethereum.
The low volatility implies that the money sent in a stablecoin transfer keeps its value for the recipient to get the same amount, less any modest costs for brokering the transaction.
Tether was the first stablecoin established in 2014 and has served as a blueprint for many that have followed. Users earn one token for every $1 deposited. In principle, the tokens may then be traded for the original currency at any moment at a one-to-one conversion rate.
Stablecoins are promoted globally as a straightforward method to enter the bitcoin ecosystem without fear of losing money and as a cheaper way to transfer payments. Stablecoin remittances in Sub-Saharan Africa can be up to 20 times cheaper than standard money transfers.
Transfer costs for USDT and USDC are sometimes as low as 0% to 1%. “Stablecoins give a method to skip the exorbitant expenses associated with legacy institutions, to transmit and receive money faster, and to preserve the majority of the monetary value,” said Marius Reitz, general manager for Africa at Luno, a cryptocurrency trade platform.
Chainanalysis, a blockchain analytics platform, claimed that Africa received $105.6 billion in cryptocurrency in 2021, a 1,200 per cent increase from the previous year’s $8.8 billion as crypto expanded across the continent. Stablecoins, a relatively recent creation in cryptocurrency, account for a sizable share of these crypto transactions.
Stablecoins are uncontrolled digital assets in practice. No legal regulations prevent the businesses that power these cryptocurrencies from investing in risky investments. Furthermore, unlike banks, fiat money exchanged to USDT, BUSD, and USDC is not guaranteed by any central bank anywhere in the world. As stablecoin use grows, these challenges raise the stakes.
Eased remittances have enhanced stablecoins adoption in Africa
Stablecoin popularity has skyrocketed due to its effectiveness in cross-border transfers in Africa. Within the first five months of 2021, the aggregate market value of USDT and other stablecoins such as Celo Dollar (cUSD) and USDC surpassed $100 billion, indicating that more individuals are now holding these assets.
While Bitcoin is still the most prominent cryptocurrency, stablecoins are gaining appeal in Africa as users want to get foreign currency, conduct digital payments, and protect the value of depreciating local currency.
According to Emeka Madu, Africa regional director for Paxful, a popular cryptocurrency trading platform, Nigeria’s central bank put tighter limits on incoming and outgoing dollar transactions this year, and a rising number of Nigerians converted to stablecoins.
Paxful boasts 1.5 million Nigerian users, with USDT accounting for about 5% of overall trading volume on the site. The platform’s USDT trade volume increased 71% in June compared to the previous month.
Other sites like Buycoins and Quidax have seen tremendous growth in recent years, fueled by cross-border remittances. Quidax, which introduced USDT in mid-2020 in response to client requests, said stablecoin acceptance has surged, and it is now the platform’s second-largest currency, operating in five African nations.
CBDCs are a challenge to stablecoins adoption in cross-border remittances
Central Bank Digital Currencies (CBDC) or government-backed stablecoins are a potential cross-border remittance alternative. At least nine African nations are either exploring or preparing to use CBDCs, even though they are not explicitly designed to allow cross-border payments. E-Naira, already operational in Nigeria, is the first CBDC in the continent and the eighth overall.
As a result of failed attempts to outlaw cryptocurrency exchanges in Africa, CBDCs have been a source of controversy because of the fear that they would allow governments near-total control over private funds.
Some have argued that African CBDCs might be used as local stablecoins for crypto exchanges and functioning as financial inclusion ramps, as government spokesmen say.
In the same manner that banks undergo regulation to provide appropriate reserves, CBDCs pose a direct challenge to private stablecoins and private banks (where actual stablecoins reserves are deposited). Consequently, even banks are not enamoured with CBDCs.
Government-backed stablecoins, also known as CBDCs, have the potential to be a cross-border remittance option, but privacy issues and possible government overreach may prevent their widespread use.
Cross-border trading using CBDCs or privately produced African stablecoins still has a long way to go. These payments are now being driven by platforms like Eversend, which uses global stablecoins. It will not be easy to persuade informal traders to switch to mobile wallets.