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

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

Dollar or local Stablecoins ?

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 aimed to define what local (or national) stablecoins could be based on local currencies or real assets (RWA) specific to the issuing countries. This last article examines 10 possible uses of stablecoins and compares the differences between dollar-indexed stablecoins and those indexed to local currencies or assets.

After exploring the geostrategic and economic issues of stablecoins for emerging countries, as well as the principles, constraints and risks associated with the establishment of a local stablecoin, this final article aims to compare these two approaches. The objective is to assess whether the launch of local stablecoins could succeed in minimizing the impact of the dollar on a country's economy, thus allowing it to maintain its monetary and economic sovereignty.

For each possible use of stablecoins, we will examine whether it is possible to offer a sufficient advantage to users to encourage them to choose a local stablecoin rather than a dollar-backed stablecoin.

Indeed, institutional support is not enough: user adoption is crucial.

Usage 1 : Sending money through the diaspora

Money transfer occupies a prominent place among the possible uses. It is a service that brings currencies into the country and therefore constitutes a natural point for the issuance of new stablecoins, in the absence of local fez rez÷³³³

Using stablecoins for this service has an immediately understandable advantage for users: reduced transfer fees.

Fees for sending money to sub-Saharan Africa are often high with fiat currencies, but can be significantly reduced with stablecoins. For many emerging countries, capital transfers through the diaspora represent a significant share of GDP (up to 45%). Reducing fees by a few percent can generate hundreds of millions of dollars more for the country, rather than for financial intermediaries.

Stablecoins allow direct sending between sender and recipient, without an intermediary other than the blockchain which manages these transactions. Transactions are grouped over a given period, and at the end of the period (for example monthly), a clearing transfer is made between the country of origin and the country of destination. This saves on the fixed costs of each individual shipment and also significantly reduces variable costs through negotiation on large amounts sent each month.

For this purpose, a local stablecoin may be perfectly suited, as there is no particular advantage for the user in using a dollar-backed stablecoin. A local stablecoin also offers an exchange rate advantage by eliminating the conversion from the source currency (e.g. Euro) to the dollar to purchase the stablecoin, and then a conversion to the local currency of the receiving country.

However, it is essential that sufficient liquidity is available for the local stablecoin, which requires adjusting the collateral reserve to user-generated volumes.

Usage 2 : Cross-border payments

Development of Stablecoins for Entrepreneurs in Emerging Countries

Currently, trade between neighboring countries is limited by payment and exchange problems. It often happens that the payment between the two companies is made via an international currency such as the dollar or the euro, which causes a doubling of bank exchange fees and may be subject to slowdowns at the level of one of the central banks.

The use of stablecoins is growing rapidly in emerging countries because it allows entrepreneurs to purchase goods and services abroad and pay their suppliers more efficiently and at lower costs.

According to Chris Maurice, CEO of Yellow Card, a Nigerian startup facilitating the purchase and sale of crypto-assets in 20 African countries, stablecoins are experiencing strong growth among businesses, large and small. This is explained by their ability to compensate for the lack of availability of the dollar in many African countries, necessary to pay suppliers and import goods for resale or local processing.

The Role of the Dollar as a Pivot Currency

The dollar is often used as a pivot currency because it is even more difficult for an entrepreneur to find liquidity in the local currency of the exporting country. Replacing the dollar with a local stablecoin for this use is therefore complex, because the latter might not be accepted by the supplier.

However, if the local stablecoin is listed on exchanges present in exporting countries, it could be used for payment. The provider could then accept a payment in this stablecoin and convert it into its own currency via a platform that accepts it. This removal of an intermediate conversion could reduce transaction fees.

Customs and tax impact

The irrefutable traceability of transactions constitutes a guarantee of securing the tax base for various duties and taxes. This can allow an improvement in delivery times, by releasing the goods more quickly, without fear of recovering the sums due, which can be deducted at source.

Incentivizing trade with regional countries

We can also consider that national stablecoins, accepted between neighboring countries, will facilitate the emergence of trusted third parties for remote purchases by individuals and small professionals: the customer pays for his order to the trusted third party, which reassures the seller for ship their goods, the customer receives their order and either validates the conformity of the goods received, which releases payment by the trusted third party, or refuses the goods which are returned to the sender and the payment net of costs is refunded.

Conditions for listing a local stablecoin

For an exchange to list such a stablecoin, there must be enough buyers and sellers. This can be difficult in mainly exporting countries. For example, who in China would be interested in purchasing stablecoins in Moroccan dirhams?

Local stablecoin issuers will need to adopt marketing strategies to promote their new asset on different exchange platforms. These platforms will be demanding on several key parameters: the number of stablecoin users, the quality of the underlying or collateral asset, the actual and expected volume of transactions, and the capitalization of the stablecoin.

A difficult goal

Using a local stablecoin to compete with dollar-backed stablecoins in cross-border payments cannot be an initial ambition. It is crucial to first demonstrate sufficient local usage volume to reassure large global exchange platforms. These platforms have the advantage of being accessible in many countries; for example, Binance covers 196 countries as of November 2024.

This does not mean that this goal is unattainable. It is possible to start by targeting smaller exchanges but potentially better suited to certain regions. In West Africa, we can count on African companies like Obiex, YellowCard, Quidax, and many others, which are accessible in many African countries and are growing rapidly.

Usage 3 : Local payments, mobile money

Advantages of local stablecoins for Local Payments

A local stablecoin has a clear advantage over a dollar-backed stablecoin for local payments in the issuing country. It uses the same unit of account as the national currency, which facilitates transactions, because the prices of goods and services are expressed in this currency. On the other hand, using the dollar requires complex conversions in both directions, making transactions less convenient.

However, in the event of high inflation in the country, it will be difficult to prevent users from turning to the dollar-backed stablecoin for savings. They could then convert only what they need for their daily expenses. In this case, the local stablecoin could retain its place provided it is widely accepted in the country.

The Example of Mobile Money

Mobile money, launched in 2007, is an example of success in certain countries (mainly in Africa and South and Southeast Asia) where it coexists without problem with traditional fiat money. In these regions, it would be easier to deploy local stablecoins by creating simple bridges with mobile money services, which perfectly complement the services that stablecoins can offer.

Growth of Mobile Money Networks

Although mobile money has some limitations, such as relatively low monthly spending limits and limited interoperability between networks, it has seen significant growth. Stablecoins, on the other hand, are usable at scale worldwide without these restrictions even if local regulations could also limit the amounts exchanged.

In countries where mobile money is not present or limited for large payments, it will be necessary to develop an acceptance network so that the stablecoin received by a member of the diaspora can be used locally before being converted into legal tender.

Regulation and Acceptance

Establishing regulations for accepting stablecoin payments is essential. It must guarantee the viability of the stablecoin by certifying its issuer and auditing the quality of collateral reserves, while combating money laundering and the financing of illegal activities.

For merchants, accepting a stablecoin payment is relatively simple: a smartphone application is enough. They can choose to keep part of the payments received in crypto-asset, while the other part is automatically converted into legal tender and deposited into their bank account. In the event of partial retention of stablecoin payments, the merchant will have to keep accounts in crypto-assets and will be subject to potentially specific taxation.

Usage 4 - Bill payments

Bill payment is a service that can extend the lifespan of stablecoins digitally. It is relatively simple to offer a service that allows stablecoin holders to pay invoices, whether recurring or non-recurring, as long as providers publish an API to query a given customer's pending invoices. This functionality would, for example, allow a member of the diaspora to pay electricity, rent, insurance or telephone bills for their family back home.

In this context, the dollar-backed stablecoin is naturally excluded, since the prices of local providers are expressed in local currency.

Usage 5 - Crypto trading

Stablecoins play a crucial role in crypto-asset trading, often serving as a pivot currency for conversions between different tokens or as collateral to secure borrowing of more volatile assets.

A recent local stablecoin would be unlikely to be used for this purpose, as the majority of exchanges and trading protocols currently only accept dollar stablecoins.

Concerned citizens of emerging countries, and there are more and more of them (in Nigeria it is estimated that more than 25% of the adult population owns a crypto-asset portfolio), will therefore continue to use stablecoins based on the dollar.

In the long term, the efforts already mentioned, consisting of listing the local stablecoin on major global exchanges, may make it possible to change the situation.

In the shorter term, it is possible to develop exchange applications and services, including decentralized ones, which would accept the main crypto-assets used locally to exchange them with local stablecoins.

Stimulating local technological innovation is therefore essential to develop these services.

Usage 6 - Protection against inflation and exchange rate differences

Dollar stablecoins are already widely used in emerging countries to build up reserves that are insensitive to local inflation, but also to benefit from better exchange rates, which are offered by exchange platforms.

And stablecoin based on the local currency which would be subject to significant inflation would therefore a priori have no chance of being adopted for these reasons, in any case as long as the dollar is perceived as more stable than the local currency.

But would it not be possible, under certain conditions, to confer on a stablecoin local some form of protection against inflation? For example, it could be interesting to encourage merchants and businesses to accept local stablecoins brought by the diaspora, to guarantee their price against the dollar for a certain period of time. What could be funded by stablecoin deposits as it is possible to generate yields on these deposits.

In the event that there is no parallel foreign exchange market, we can also consider offering local stablecoin buyers the most attractive effective exchange rate possible, namely the one closest to the official rate, when stablecoins are purchased in foreign currency, in any case more advantageous than going through the dollar intermediary.  Even if there may be an immediate benefit, excessive inflation would continue to scare off local users receiving these stablecoins, who would be tempted to get rid of this stablecoin in local currency as quickly as possible.

A stablecoin based on the country's natural resources could appear to be a solution to the problem, as the growth in the value of these resources would compensate for inflation. As mentioned above, the implementation of such a stablecoin is theoretically possible but delicate.

Usage 7 - Remunerated savings

Another way to encourage the use of a local stablecoin is to offer attractive remuneration for deposits, i.e. the retention of stablecoins in users' wallets.

Issuers of these stablecoins could offer interest, provided that the collateral reserves themselves generate interest, which is possible with sovereign debt securities. Conditions could be imposed for this remuneration, such as a minimum holding period or a minimum amount saved, and it could be accompanied by a tax reduction on the interest generated.

In a country with high inflation, this remuneration is essential to encourage the use and conservation of a local stablecoin. It must be at least equivalent to that of dollar-backed stablecoins.

Usage 8 - Loans and microfinance

Microfinance plays a crucial role in the development of entrepreneurship, commerce and crafts in emerging countries. In some countries, private debt held by citizens with microfinance institutions represents a significant share of total private debt.

Setting up local stablecoin lending services is technically simple, especially if the scoring is based on the movements of the borrower’s crypto portfolio. For example, if a borrower regularly receives local stablecoins from the diaspora, it is easy to determine the maximum loan amount to grant. Payment of installments can be automated via a smart contract.

Local stablecoins can be competitive with dollar stablecoins if interest rates on loans are attractive. Microfinance institutions could benefit from lower refinancing rates than through traditional channels by using stablecoins. In fact, these institutes are rarely rated well by rating agencies, and are often forced to charge very high rates. above 20% per year for their creditors.

In addition, local stablecoins could support community loans according to local mechanisms such as tontine, a community of artisans and small traders lending to one of them in turn.

Local stablecoins therefore have their card to play against dollar stablecoins, which will not necessarily be competitive nor very practical to use to provide loans to users in emerging countries.

Usage 9 - Access to a credit card

For the large part of the unbanked population in emerging countries, obtaining a bank card is difficult. Developers of stablecoin-based services may offer an international credit card that charges the stablecoin wallet upon use.  On condition of permissive exchange controls, which is far from being the case in emerging countries. This card can be virtual or physical. Setting up such a service on a local stablecoin is possible with a regulatory electronic money issuer license.

Dollar stablecoins do not necessarily have any advantages over a stablecoin local for the provision of a bank card, because they will be considered as an asset like any other in the user's wallet.

Usage 10 - National and international e-commerce

One easy way to increase adoption of stablecoins is to allow them to be used on e-commerce sites in emerging countries, or even to reserve advantages such as a lower VAT rate for orders paid for in stablecoins.

National E-commerce

E-commerce is growing strongly in emerging countries, despite problems with user confidence, often linked to the delivery of purchased goods. Let’s remember that Facebook is the first e-commerce platform 100% informal in many emerging countries. Orders are placed via instant messaging, with sellers who are far from all duly registered professionals.

In Africa,  cash payment on delivery is more than 90% of orders, and not upstream, by electronic payment when ordering. This is due to the low diffusion of online payment methods, their cost often too high for the merchant in relation to its low gross margins and the traceability of sales in the event of a tax audit. This poses problems of management of these species transported by delivery operators, and of quality of service with a high number of undelivered parcels.

A wallet with stablecoins allowing online payment would obviously help the development of e-commerce. The issuers of local stablecoins therefore have a great interest in establishing partnerships with the main local e-commerce sites so that they accept stablecoins as a means of payment. The use of stablecoins in e-commerce still remains limited, including in Western countries, so it is not too late for emerging countries to get started, provided that local regulations allow it.

Such a practice should also generate doubly positive tax benefits: firstly by facilitating the detection of parallel market sellers, who will receive financial penalties, and by better recovery of VAT from declared professional e-retailers who for their part will be able to work in better conditions.

International E-commerce

In most emerging countries, consumers do not have access to foreign merchant sites, precisely because they cannot pay online when ordering in foreign currencies. Such purchases are reserved for the happy few who hold an international payment card.

These restrictions in no way reduce the desire of local consumers. Entire parallel businesses have been set up to “manage” to buy on Amazon or elsewhere, while importers abuse the competitive advantage to sell imported products with excessive margins.

The opening of online shopping abroad is not without danger and should be done gradually. Reserved for orders paid in advance in stablecoins, this opening would be perfectly controllable because it is fully traced. There could therefore be facilitation in the customs processing of packages entering the country: refusal of prohibited products, payment of duties without small corruption.

The State could have a lot to gain in revenue, and citizens in purchasing power.

In summary

The table below compares the advantages of the two types of stablecoins for each use.

Conclusion

Local stablecoins have significant potential and can compete, or at least coexist, with dollar-backed stablecoins under certain conditions:

Favorable regulations

Establishing regulations that support their development is crucial. Although few emerging countries have currently regulated the use of crypto-assets, recent initiatives in 2024 in the United States, Europe, and within the BRICS show active support for crypto-assets, which is promising. For example, the November 2024 announcement by the Moroccan central bank regarding the imminent introduction of comprehensive regulations on crypto-assets goes in this direction, and should encourage many African countries to do the same.

A relaxed Exchange Control Policy

A favorable foreign exchange control policy, relying on the transparency offered by blockchain, is also necessary to compete with dollar stablecoins. Transparency is one of the essential benefits of blockchain for States, and will allow to relax foreign exchange policies thanks to the traceability and security offered by this technology.

Strong Support for Innovation

Encouraging innovation is essential to enable local startups to develop innovative services around stablecoins. This is particularly important because financial services must be adapted to the specifics of each country, which can only be best achieved by local entrepreneurs. The analysis in this article shows that the success of local stablecoins will mainly depend on innovations in user experience and business models.

Education in use

If a country understands the opportunity that presents itself, even with an optimal user experience of the services, it will have every interest in communicating in a positive and educational way to the population. The world of digital money can appear complex, especially for disadvantaged parts of the population, where the illiteracy rate can remain high. However, we must bet on the younger generations (those under 20) who were born after the advent of smartphones who will quickly educate their elders.

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