Stablecoins for emerging countries, opportunities and impacts on monetary sovereignty Part 1/3

Proofreadngs : Matthieu Chassagne, Laurent Hanout, Pierre-Yves Dittlot, Greg Scullard

State of the art of stablecoins, especially in emerging countries

This article is part of a series of three that explore how public authorities in emerging countries can take advantage of the stablecoin opportunity, while preventing the associated risks. Rather than opting for a simple ban like China and others did, which is often difficult to enforce, emerging countries have an interest in adopting other strategies.

Stablecoins are a special type of crypto asset: their value is set to match a real asset, such as traditional fiat currency or natural resources.

The majority of current stablecoins are pegged to the US dollar backed by a collateral reserve which guarantees their liquidity. However, as we will see, other methods can be used to ensure this stability.

The main advantage of stablecoins is their low volatility compared to other crypto-assets, which opens the way to many potential uses.

The first article offers an overview of the state of the art of stablecoins, particularly in emerging countries. The second article aims to define what local (or national) stablecoins could be based on local currencies or real assets (RWA) specific to the issuing countries. The third article examines the various uses of stablecoins and compares the differences between dollar-indexed stablecoins and those indexed to local currencies or assets.

The context of financial inclusion

Emerging countries face many challenges in terms of economic and monetary management. They are under considerable pressure to digitize their economies, so as not to be left behind in global trade in a changing world.

One of the main challenges is to improve the financial inclusion of their citizens, to reduce poverty and reduce the share of the informal economy, which can represent up to 80% of internal trade in certain countries.

In 2021, 28% of adults worldwide did not have access to a bank or mobile account, with a majority of these people living in emerging countries.

Even among those with bank accounts in these regions, access to services remains limited. Often, they only have a checking account and a debit card. Banking services are expensive, traveling to a branch obligatory for most transactions, with long waiting times at the counter and the production of uncontrollable paper archives.

Cross-border transfers are uncertain, with frequent failures, unreliable, very slow, with high fixed and variable bank fees.

The adoption of crypto-assets

Faced with these limitations, many citizens have adopted crypto-assets without waiting for concrete government initiatives. This adoption is particularly marked in certain countries where regulation is lacking. In 2024, growth in crypto-asset activities is mainly driven by Latin America and sub-Saharan Africa, the least banked regions in the world, with notable use of stablecoins.

Development and uses of stablecoins

The evolution of the use of crypto-assets in emerging countries has undergone a significant transformation since the appearance of stablecoins in 2017. Initially dominated by Bitcoin, mainly used as protection against local inflation, the crypto landscape has considerably diversified. El Salvador, by introducing Bitcoin as legal tender in 2021, constituting a standard of value, anticipated a movement which should spread. El Salvador regularly buys Bitcoin and today has a reserve valued at more than 600 million US dollars, more than double what they invested.

Today, stablecoins occupy a prominent place in many emerging countries, often surpassing the use of Bitcoin and other crypto assets. Countries like Colombia, Argentina and Brazil perfectly illustrate this trend, with more than 50% of crypto-asset transactions carried out in stablecoins.

This remarkable growth is particularly pronounced in three key regions:

• Latin America
• Sub-Saharan Africa
• Eastern Asia

These regions have become key drivers of stablecoin adoption, reflecting growing demand for stable and accessible financial solutions in emerging economies.

This transition to stablecoins reflects an evolution in user needs in these markets, moving from a simple tool to protect against inflation for those denominated in dollars, a versatile way to make everyday transactions and international transfers, and to access more sophisticated financial services.

A study published in September 2024, sponsored by Visa and entitled "Stablecoins : The Emerging Market Story", offers new insight into the adoption of crypto-assets in emerging markets.

This survey, conducted among 2,541 crypto-asset users in Brazil, Turkey, Nigeria, India and Indonesia, reveals fascinating trends in the use of stablecoins.

These countries, which are among the most populous in the world, also rank in the top 10 in terms of adoption of crypto assets.

Beyond this rapid growth in the use of stablecoins, the study highlights a diversity of uses which goes far beyond the framework of decentralized finance (DeFi), the main driver of use in developed countries, cas shown in the graph below.

Unlike the United States and Europe, where stablecoins are mainly used in DeFi as a pivotal asset or safe haven for loan collateral, emerging countries present a wider range of uses:

• Protection against inflation
• Trading
• Peer-to-peer money sending
• Currency exchanges with the dollar
• Reduction of exchange rate gap
• Generation of returns
• Purchases of goods and services

This diversity of uses demonstrates the adaptability of stablecoins to the specific needs of emerging economies:

The growing adoption of stablecoins in these markets raises important questions about the evolution of traditional financial systems and the potential role of crypto assets in overall financial inclusion.

The third article in this series will explore each of these uses in detail, providing an in-depth perspective on the impact of stablecoins in emerging economies.

Central bank digital currencies (CDBCs)

The CBDCs as their name indicates are issued by a central bank. There are two types of CBDCs:

• The CBDC in a so-called “retail” version, accessible to the general public in addition to fiat money.
• CBDC in a so-called “wholesale” or “interbank” version, accessible only to banks to settle transactions on financial assets. The development of this form of CBDC could accelerate the integration of distributed ledger technologies into current market infrastructures and their transformation.

Despite the active promotion of Central Bank Digital Currencies by many governments as the future of payments, their adoption remains limited. Many projects have been launched in recent years, but few are operational, and even fewer have reached widespread use.

China, a pioneer since 2020, still struggling to generalize the use of its CBDC. Nigeria has experienced one clear failure with the launch of e-Naira, pushing local banks and fintechs to develop an alternative stablecoin.

Retail CBDCs face major practical obstacles, the main ones of which are:

• Difficulty of establishment in countries where the use of cash predominates
• Need for massive technical and marketing deployment to ensure widespread acceptance.
• Risk of user distrust of a currency that could be controlled or even frozen for certain citizens, even if European regulations are already partly restrictive, since regulated crypto players are normally obliged to freeze wallet funds upon judicial request.

In comparison, stablecoins offer a more agile solution, running on any digital wallet that can be quickly installed on a smartphone.

One of the main differences between private stablecoins and CBDCs today is their practical availability: private stablecoins are available and usable immediately, while CBDCs remain largely in the experimental stage.

Assuming that retail CBDCs eventually emerge in some countries, they will remain local in scope, aimed at domestic payments, where stablecoins are available potentially globally.

Over a 5-year horizon, CBDCs seem unlikely to become widely established, except potentially in the wholesale market for interbank and international transactions, where their implementation poses fewer challenges.

The dominance of the dollar in stablecoins

The question of whether stablecoins used in emerging countries will remain predominantly dollar-based, such as Tether's USDT and Circle's USDC, is crucial.

It seems difficult to dethrone the dollar due to its near-total dominance among stablecoins.

From the moment when crypto-asset exchanges are starting to represent a significant part of the economy of an emerging country, it becomes crucial to promote local stablecoins to maintain control over monetary policy.

Indeed, in the absence of an accessible local offer, dollar stablecoins could become the main source of individual savings, thus subjecting the economy to fluctuations in American interest rates, without the country's control over Federal Reserve policy, of course.

Such a development would inevitably destabilize the local currency in the long term. In a context of high inflation, the transfer of savings to the dollar could worsen the situation, as savers seek to flee their local currency. What proportion of dollar stablecoin savings compared to total savings would begin to destabilize the sovereign local currency?

This complex question depends on many factors: size of the economy, stability of the local currency, speed of adoption of stablecoins, share of the informal economy, etc. No serious study seems to model this subject, although several reports from international organizations (BIS, World Bank, IMF) highlight the risks associated with stablecoins and recommend strict regulation.

Faced with this risk, what can emerging countries do to protect themselves?

Two solutions are available to them: try to ban dollar-based stablecoins or promote local stablecoins whose reserves and value are based on the local currency or on the country's natural resources.

Banning dollar stablecoins is difficult to implement, especially in emerging countries where public bodies often lack resources and technical skills, and it would amount to banning the use of crypto-assets in general. Additionally, this could have a detrimental effect if these stablecoins are already a significant source of capital inflow. Note that their use remains high in many emerging countries where the use of crypto-assets is nevertheless prohibited by law. History has repeatedly demonstrated that prohibition is a losing war against what a large part of the population wants, and that it encourages organized crime.

The following article will therefore examine the other possibility, which seeks to preserve a certain monetary sovereignty: the development of local stablecoins.

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