Stablecoins for emerging countries, opportunities and impacts on monetary sovereignty Part 2/3

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

Local stablecoin, definition and implementation

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 offered an overview of the state of the art of stablecoins, particularly in emerging countries. This 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 will examine the various uses of stablecoins and compares the differences between dollar-indexed stablecoins and those indexed to local currencies or assets.

Before comparing dollar-backed stablecoins and local stablecoins, it is essential to clearly define the latter. Let's look at key aspects of how they work, including the type of blockchain they're available on, potential issuers, and the nature of the reserves behind them.

Reminder: the benefits of blockchain for a digital currency

Before choosing a blockchain, let's identify the advantages that this family of technologies brings to operating a digital and programmable currency legally recognized in a country, which could be the case of a local stablecoin.

The blockchain has unique characteristics, which have enabled the emergence of Bitcoin on the international monetary scene. Although Bitcoin is not considered a traditional currency, it is accepted as legal tender in El Salvador. Its success lies in its ability to enable secure, intermediary-free exchanges of value on a global scale.

The underlying technology — based on an ingenious assembly of features and protocols developed over approximately 40 years, initiated by the emergence of digital cryptography with the RSA public key cryptography protocol in 1974 — gives the blockchain all the characteristics necessary to establish a reliable digital currency.

In this context, blockchain offers trust, availability, security, universality, tamper-proofness, and low implementation cost, all essential for good money.

Trust arises from the fact that transactions are controlled solely by an algorithm. If we trust this algorithm, we trust the currency it governs. However, the security inherent in the system makes the currency unfalsifiable thanks to cryptography. Digital assets are under the total control of their owner if they manage their private keys themselves.

The availability is total, since the blockchain operates 24/7, all year round.

Universality results from the wide diffusion of mobile internet technologies, particularly in emerging countries where there are often more mobile phones than bank accounts.

The minimal cost creation and operation of a cryptocurrency is much lower than that of a traditional physical currency, which requires significant natural resources for its production and infrastructure (safes, cash transport, ATMs, etc.).

Blockchain also adds the immutability of transactions and programmability. The immutability of transactions is the fact that it is impossible to modify past entries and transactions, as this would be immediately detected by the algorithm. Beyond being the means of transporting value, the blockchain will also serve as a universal accounting book, with everyone having the possibility of reviewing all the transactions that have been carried out, from the beginning.

The programmability is a major difference from previous monetary systems, allowing a programmable monetary system with precise characteristics. For example, it is possible to program the yield of the currency, its collateralization rate, its inflation/deflation mechanisms, etc. The rules are concretized in smart contracts executed on all the machines of the decentralized network.

As we can see, blockchain opens up very important perspectives, which have the power to profoundly modify the monetary systems of the global economy, based on a paradigm very different from all previous systems. We are at the dawn of a true monetary revolution.

However, this technology also poses challenges such as possible anonymity, monitoring of illicit transactions, technological sovereignty, respect for privacy, interoperability of blockchains and fraud prevention. These risks must be taken into account to launch a digital currency using blockchain. Appropriate regulation can anticipate many of these problems, as shown by the MiCA initiative in Europe or Vara in the United Arab Emirates.

Which blockchain for a local stablecoin ?

A local stablecoin is ideally issued on a public blockchain, even if it is not necessarily sovereign, that is to say that all of its nodes are not necessarily located in the issuing country.

Some States will prefer an entirely locally controlled infrastructure (local blockchain). This remains unrealistic in the short term in many countries, where dollar-based stablecoins are already well established. Modern blockchains, offering very low transaction fees, high scalability and a sufficient level of security, are mainly large global public blockchains.

Today, the Ethereum and Tron blockchains dominate the market. Ethereum was the first to welcome stablecoins, while Tron quickly took second place, offering transaction fees of less than $1 regardless of the amount sent.

It is important to note that the same stablecoin can be available on several blockchains, which contributed to the success of Tether (USDT), the first to be deployed on various networks, which holds more than 60% of the total capitalization of stablecoins.

Local stablecoins will likely follow this trend: their success will depend on their availability on several blockchains, especially the most used ones.

Interoperability and multi-chain adoption are crucial to ensuring the sustainability of local stablecoins. By leveraging proven and widely adopted blockchains, these currencies can benefit from enhanced security and global reach, while allowing states to exert influence on their local monetary policy. However, this requires robust technological infrastructure and adequate regulation to manage the challenges associated with the use of stablecoins in a globalized economic context.

Who issues and operates the local stablecoins ?

A local stablecoin could be issued by different types of organizations, depending on local crypto asset regulations.

Theoretically, a local stablecoin could be issued by private institutions or by a public institution such as a Central Bank. In the latter case, it would be closer to a central bank digital currency (CBDC), depending on the level of delegation granted by the central bank for its management to other actors (banks, fintechs, etc.) and the technology used for its deployment, particularly if it is a public blockchain not subject to permission or a completely private blockchain.

In this respect, it is interesting to observe the governance which preceded and led the Brazilian PiX system of instant payments via mobile. This system is not based on blockchain, but it was designed by a group of 700 players in the Brazilian financial and payment world, under the coordination of the central bank. She defined the APIs, she built the customer on boarding infrastructure (KYC, etc.), which she makes available to everyone. It completely delegates the marketing of the PiX service to financial players, whether large groups or fintech startups who innovate on top of the PiX system, which is a big success in Brazil after 4 years of service. This type of governance model could be used in certain emerging countries for the management of a local stablecoin.

However, the urgency of reducing the use of dollar stablecoins provides a strong incentive to encourage innovation in this area, and therefore to authorize private players to issue local stablecoins. The main challenge in this context will be interoperability if several stablecoins coexist on the market. This interoperability is generally facilitated by exchanges or digital wallets that allow easy switching from one stablecoin to another with reduced fees, as is the case with dollar-based stablecoins.

Blockchain is revolutionizing the monetary system by allowing the coexistence of several currencies without major problems, thanks to almost always available liquidity and fixed, low exchange fees, unlike fiat currencies.

Competition between different local stablecoins could lead to market concentration, as it is not easy to ensure the profitability of a stablecoin project and build up the necessary reserves. It is a safe bet that banks will join forces to issue a common stablecoin as recently in Philippines, they would benefit from it. However, we can envisage scenarios of coexistence in large countries between different stablecoins denominated in local currency for various uses: money transfers, savings and loans (with incentives), local payments or trading with other crypto-assets (Bitcoin , altcoins).

What collateral reserves for a local stablecoin

The collateral reserves of a local stablecoin must be constituted according to the possibilities offered to issuers by local regulations, which often remain underdeveloped in emerging countries.

Nature of Stablecoins

For reasons of sovereignty and control, local stablecoins would probably be “centralized” i.e. created and monitored by a single entity which would constitute and ensure “off chain” collateral reserves (managed outside the blockchain). Tether and Circle are the first examples. In fact there are also decentralized governance stablecoins and, whose stability is guaranteed by collateral in “on-chain” crypto-assets, or algorithmic stablecoins (for example DAI), stabilized by smart contracts. The latter are often perceived as too risky and difficult for monetary authorities to control.

It therefore seems natural that a local stablecoin would be backed by the country's economic assets, such as gold reserves. local currency or natural resources specific to the country. Decentralized approaches could have a long-term future, but they seem ruled out in the short term, even if they have certain advantages, the main one being allowing decentralized or community governance, preferable in certain cases to a centralized actor.

Role and Nature of Possible Reserves

The creation of concrete collateral reserves is essential to establish confidence in these new means of exchange. A stablecoin has a limited lifespan, which ends when it is converted into fiat currency. Issuers must therefore block these reserves and prove their existence permanently. The regulatory framework must secure these reserves by defining the acceptable nature of the reserves (monetary, sovereign debt securities but which can be resold in the short term, stocks of raw materials) and ensuring their stability and transparency. A certain level of over-collateralization (having a level of reserves higher than the value in circulation) could also be taxed.

In conclusion, although local stablecoins offer a potential avenue for maintaining local monetary control in the country, their success will depend on having robust regulations in place and the ability to build strong and transparent reserves.

In theory, the collateral reserves of a stablecoin local can be constituted in several ways, which will depend on the possibilities offered to stablecoin issuers.

Let's compare the possibilities of collateral reserves:

This table highlights that there is no ideal value guarantee solution for stablecoins, and that there is room for several types depending on their use and the specific economic conditions of each country.

The programmability of the blockchain makes it possible to combine various types of reserves.

Influence of a country’s economic weaknesses and instabilities

The use of local currency reserves is not recommended in countries suffering from high inflation, because a stablecoin based on such a currency would probably not be competitive with a dollar-backed stablecoin, particularly for savings.

The term “stablecoin” can be misleading. A token pegged to a volatile or inflationary currency is not stable from an end-user perspective. The terms “backed coin” or “realworld asset coin” would be more appropriate, indicating that the token derives its value from another asset, whether stable or not.

Some countries face a significant gap between the official exchange rate and that of the black market, due to strict exchange controls and demand for foreign currencies exceeding supply. For example, in Algeria, this gap reaches 40%. Nigeria, Iran, Argentina, Venezuela and Zimbabwe are experiencing similar situations, often due to local inflation. Using local currency as a reserve for a local stablecoin clashes with this reality.

If the stablecoin can only be exchanged at the official rate, it will be unattractive for international money flows, which are crucial for these economies. Other warranty methods may not be more reassuring. However, backing a stablecoin to commodities could solve some structural problems, such as the lack of currencies.

Stablecoins collateralized by mining resources

The possibility of issuing stablecoins whose value would be based on natural resources presents interesting potential. This could encourage certain emerging countries with proven reserves of raw materials to launch experiments, in particular those which suffer from high inflation or a significant difference in exchange rates, or whose economy relies on mainly informal cash exchanges.

Many tokenization projects on blockchain already exist for valuable or profitable raw materials, which amounts to issuing stablecoins based on these resources. Tokens have been created based on gold, diamonds, natural hydrogen, solar energy, etc., and this market is growing strongly. These projects are often initiated by small private startups and do not have the primary objective of solving problems in national monetary systems. However, some interesting projects are emerging, such as the issuance of a stablecoin based on gold or diamonds, intended for small savers in countries subject to high inflation, or others aimed at getting the community of stablecoin holders to finance impactful projects.

At the state level, such a stablecoin could attract investors in commodity markets and inject foreign exchange into the country. This will of course require that investors have confidence in the mechanisms for proving and securing the stocks of natural resources constituting the counterpart of the stablecoins issued, as well as stable regulations regarding these digital assets.

It is also crucial that this stablecoin is not only considered as a debt instrument intended for foreign investors who would be reimbursed on future extractions and sales of these resources. Indeed, once issued and sent to investors, this stablecoin should be able to be reinjected into the country's economy in one way or another.

To do this, the stablecoin whose value would be defined by a certain quantity of natural resources – for example a gram of gold (around $80) – should be able to be exchanged at any time for local currency. This would require the stablecoin issuer to sell the amount of gold corresponding to the user's need to provide this liquidity. This, however, poses practical challenges in managing the sale of the collateral asset, which could be difficult to manage but not impossible. We can even imagine that gold (or other minerals)  still in the ground and not yet discovered can serve as a guarantee, since we can prove today with fairly great precision the quantity of ore in the ground. Which could perhaps allow it to avoid extracting this gold, which would otherwise be stored and immobilized in a central bank. Selling the gold to another central bank would simply be the execution of a single transaction on the blockchain.

In any case, it can be observed that such a stablecoin could find its market as a local savings product, provided that the practical problems related to regulation and its reinjection into the economy are resolved.

Crypto assets guaranteed by energy resources

It is also possible to create tokens (or tokens) based on present or future renewable energy resources in the country. Indeed, it is relatively easy to guarantee future income from a hydroelectric plant or a field of solar panels.

We cannot strictly speak of stablecoins in this case, but rather of a financial product of the tokenization type of real world assets (Real World Asset). But these tokens could serve as collateral for the issuance of local stablecoins.

An additional advantage is that it is possible to completely automate the measurement of the energy produced which gives the value to the token issued. The investor could repay their investment with interest or capital gains if the value of the underlying energy increases — which is likely in an increasingly energy-hungry world.

Revenue generated from Bitcoin mining could also serve as a reserve for these local stablecoins. Provided you invest at the right level, income is guaranteed and without risk linked to the country's electricity production, thus constituting a solid guarantee for a stablecoin. Ethiopia recently understood what it could get from blockchain by enabling massive investments in Bitcoin mining and becoming the first African player with 600 MW of installed power mainly from hydroelectric origin. This has already enabled him to generate $55 million in revenue in 2024.

The possibilities are therefore vast and vary in terms of implementation time and effort amount. While there is still much work to be done to turn these ideas into reality, recent announcements in the United States regarding the establishment of strategic Bitcoin reserves will likely prompt several states to take an interest in the potential benefits offered by blockchain. Furthermore, the fact that certain emerging countries are already adopting detailed and non-restrictive legislation concerning crypto-assets also creates a favorable environment for initiatives around stablecoins.

Stablecoins resulting from a multilateral initiative

Before exploring the possible uses of stablecoins for citizens, it is crucial to mention the idea of supra-national, non-dollar-based stablecoins, initiated by several countries. This idea has gained notoriety thanks to initiatives Brics Pay and Brics Bridge, launched in 2018 by BRICS member countries (Brazil, Russia, India, China and South Africa) to strengthen their economic and financial cooperation.

BRICS Pay et BRICS Bridge

Brics Pay aims to establish an interbank digital payment system, facilitating transactions between member countries while reducing dependence on Western financial systems. This platform enables faster and cheaper trade, thereby promoting intra-BRICS trade. Brics Bridge focuses on integrating digital infrastructure to improve connectivity between member nations, strengthening not only trade but also collaboration on technology projects.

Together, these initiatives aim to promote the economic sovereignty of the BRICS, to create an alternative financial ecosystem to the dominant system, and thus ensure greater autonomy and resilience in the face of geopolitical uncertainties. The use of blockchain technology is envisaged as a main component of the infrastructure of these services, with the issuance of a stablecoin guaranteed by a basket composed of the sovereign currencies of the BRICS countries.

Economic Benefits and Challenges

Although this initiative can be seen as a political move to accelerate the de-dollarization of trade, it also has clear economic benefits for its members. Such a system would reduce the actual exchanges of sovereign currency by deferring them to the end of the period in the form of compensation transfers after the blockchain has synthesized all exchanges between countries. This mechanism was implemented in Europe between 1950 and 1958, before allowing dollar convertibility to European currencies.

If this initiative results in a non-dollar-based payment system accessible to all BRICS members, it could offer an efficient solution for money transfers between countries, both for individuals and for businesses, which are currently often slow and expensive. However, several years will be necessary for its implementation due to the complexity of coordinating several countries. It is also envisaged that this system can coexist and be interoperable with local stablecoins previously launched by member countries.

Future Perspectives

We can imagine the issuance of monetary stablecoins serving as a pivotal currency between geographical areas having intense commercial exchanges or wishing to develop their exchanges within existing or new economic communities.

In the meantime, dollar-based stablecoins continue to thrive. The question remains open: will they be able to be challenged by local stablecoins?

The last article will attempt to provide an answer.

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