Stablecoins: An emerging solution for currency volatility in Africa
While hyperinflation and currency devaluation continue to be a challenge in many African countries, the US dollar (USD) has offered some stability against local currency volatility.
However, access to USD is restricted by central banks that limit or even block foreign exchange (FX) transactions, placing strict caps on the amount of USD that can be acquired.
Due to these limitations, stablecoins are emerging as a reliable alternative.
What are stablecoins?
Stablecoins are a form of cryptocurrency. However, cryptocurrencies such as Bitcoin and Ethereum are prone to price volatility, while stablecoins are designed to be more stable in value. According to Investopedia: “[their] value is pegged, or tied, to the value of another currency, commodity or financial instrument” without the need for traditional FX transactions.
African businesses, especially in countries like Nigeria and Zimbabwe, are increasingly using USD stablecoins, such as USDT (Tether) and USDC, to store funds and convert them as needed, benefiting from less volatility and enhanced accessibility.
Stablecoins and exchange control regulations
Besides restrictions by central banks, exchange controls further drive demand for stablecoins in Africa: Exchange control regulations limit the amount of funds individuals and companies can send abroad, making it challenging to access foreign currencies directly.
In South Africa, for example, there are ongoing discussions and workshops around how crypto might affect foreign exchange allowances. Some argue that using crypto assets, which aren’t denominated in local currency, should count against an individual’s foreign allowance since it effectively removes wealth from the South African Rand (ZAR) ecosystem.
Others maintain that buying crypto is more like purchasing an asset (such as art or collectibles); Rands merely move from buyer to seller in this transaction, and no FX transaction occurs.
This second school of thought suggests that since the ZAR market isn’t directly impacted, crypto transactions should not require FX reporting. The only necessity for cross-border reporting would be for tax and wealth-tracking purposes.
This debate highlights the evolving and sometimes contentious view of crypto within the scope of exchange control.
Stablecoins and cross-border transactions in South Africa
In South Africa, due to the current regulatory landscape, businesses face restrictions on using crypto (and stablecoins) for cross-border transactions. This limitation is a major obstacle for the industry, as numerous use cases demonstrate that crypto offers a more efficient cross-border solution than traditional banking methods.
How stablecoins solve practical problems
Here are some ways in which stablecoins could streamline international transactions:
Currency devaluation and speed of transactions:
Current international money transfer processes are usually slow and can easily take 2-5 days to reach the intended recipients. By purchasing USD-backed stablecoins, individuals or businesses can guard against devaluation without requiring permission or incurring delays. The funds can move instantly between digital wallets, taking minutes or even seconds, allowing for greater financial flexibility.
Liquidity concerns:
In countries with mature crypto markets, such as South Africa, where market makers and liquidity providers are prevalent, the availability of stablecoins ensures a robust ecosystem. This infrastructure mitigates concerns about liquidity and provides a reliable avenue for individuals and businesses to navigate an increasingly volatile financial landscape.
Cost of transaction:
Traditional cross-border transactions through banks often incur fees exceeding 9%. Making transfers using stablecoins reduces the cost and increases the speed of transactions substantially.
In conclusion: By using stablecoins in Africa, people are finding new ways to manage currency volatility, secure wealth, and gain access to USD-equivalent assets. These innovations are reshaping how value is stored and transferred, providing businesses and individuals with more control over their financial futures in challenging economic environments.
Xago’s stablecoin offering
Xago has developed a stablecoin exchange on the XRPL (XRP Ledger) to provide individuals and businesses with efficient, borderless access to stablecoins like USD, EUR, or AUD. By issuing stablecoins onto the ledger, Xago enables users to trade and manage their value creating a marketplace that allows an innovative way to move funds without directly impacting traditional FX markets.
Xago’s platform is not designed to circumvent exchange controls. Instead, it offers a regulated environment where users can transact in stablecoins while complying with applicable regulations.
Disclaimer: Always conduct extensive research before investing in or using cryptocurrency for financial transactions. Understanding the associated risks and benefits is crucial when exploring alternatives to traditional banking.