Stablecoins - boring yet revolutionary
TLDR
Stablecoins are here to say - whether to you like it or not.
Current benefits include lower transaction costs, opening up global market place and faster transactions
Infrastructure being built that will increase broad adoption
Risk of regulatory gaps especially with taxation
Resistance is futile!
In the last couple of week where crypto bros are testing whether they have strong or weak hands, many anti-crypto proponents are struggling to refrain from the (bi-annual) “I told you so, this crypto thing na Ponzi scheme”. I certainly do not belong to the “To the Moon” tribe but believe that in many ways, the world has changed and there is no going back - wherever back is. Stablecoins, the boring sibling of BTC, ETH and all the shitcoins you can think of, is quietly going to cause trouble!
Many on the African continent buy into the merits of crypto because they have benefited immensely from being early adopters be from free airdrops or profits from buying coins very early. If you bought crypto when it was in the low hundred $s, even after the crash of last week, it is hard to stop worshipping at the altar. Similarly many have enjoyed airdrops that have resulted in significant wealth for simply just believing. For buying domain names in the Ethereum naming Service and spending say a $100, people were rewarded with shares/tokens worth 10x-20x ther investment. These lucky events will continue and fuel yet more talk of ponzi-like economics or speculation.
Yet their are many examples of utility gained by investing in crypto and a lot of this revolves around stablecoin which is a type of crypto-currency that is backed (approx 100%) by fiat (‘real’ currency.). So in the case of USDC which is one of the most popular stablecoins, 1 USDC is instantly changeable for $1 via crypto-exchanges.
The use cases I have seen include:
Protection against FX devaluation; turn my naira into USDC on an exchange and automatically i am neutralized from naira devaluation
Earning real returns on your cash (>6%). With inflation at high double digits most savings account are giving rates below inflation
Receiving higher value for inward remittances. You send $1 via western union into Nigeria you get N410 or thereabouts. Most crypto platforms will give you the parallel rate so approx 25% more value in naira
Increased cross-border payments. You want to pay your foreign supplier who wants fx or $. Imagine its a Chinese supplier. Your naira will first be converted into USD then yuan. So you suffer transaction costs twice. Then the bank will put a nice fee on this. Conversely you can send your Chinese supplier USDC which they may like because they too are trying to gain access to $
The pace of innovation is too fast for regulation and this has its pros and cons. On the pro side, we will see a lot of value driven innovation that will benefit consumers or SMEs that have historically had to put up with a lack of access or high cost to transact.
If regulation does not keep up with innovation or the gap stays too far, I predict that many will start having parallel financial lives especially for those that are in the services industry.
Take Uju who is a graphic designer that has clients in the US. The clients are happy because they pay Uju 30% of the going rate. Uju is ecstatic because that 30% is 5 times what she has in Nigeria. She simply asks that the clients pays into her crypto wallet, a service that Coinbase already provides today to merchants worldwide. As far as the Nigerian Taxation authorities are concerned, Uju might be unemployed or not even registered. When Uju wants to get Naira she can use any of the multiple peer to peers platforms. She send crypto/stablecoin and someone deposits Naira in her bank account. Uju could be working with Nigerian clients and this scenario would still be applicable. More cash for Uju and tax-authorities completely blind to this transaction assuming the client also has stablecoins that are out of the visibility of the current finance system.
This is a big assumption to make but I have no doubt that this will inevitably happen through increased proliferation of acceptance by merchants of stablecoins. We are not there yet but things will speed up. I hear you protest “ Ok maybe for small amounts and retail flows, there are no issues, but once the funds transferred reach a critical amount, it may trigger further investigation as mandated by the KYC and anti-money laundering rules.”
Fair point, let’s see how we can start getting larger cash pools in stablecoins.
Let’s say Uju has saved over $50k in stablecoins and wants to bring it into the Nigerian ecosystem. This is almost N30mm and even transferring that via P2P in three lump sums will not avoid detection. Furthermore the current P2P systems are better for retail flows; I might be happy trusting a counterparty to transfer N275k for my $500. But to trust Charles1D who has a 4 star rating with $50k - Na, not ready yet.
But where there is a will there is a way. Maybe Uju wants to rent an apartmement of N7mm - she says to the property manager:
Mama, i will pay you N3mm in naira and N4mm in stablecoins.
Landlady is happy - she only books N3mm in revenue and automatically has a much lower tax bill. She also has stablecoins that she can send easily to her daughter in Yankee or to pay for that import from her Chinese supplier. You can see how a shadow system immediately builds up over time.
Will there be a time when stablecoins are used for day to day purchases. There are already a couple of precedents. El Salvador has already made bitcoin legal tender though that is increasingly problematic. Closer to home, the Central Bank of Nigeria has already launched the e-Naira which in theory can be used just like the Naira. It was introduced to address some of the friction in the current financial system including transaction costs and ease of cost border payments but the important thing is the precedence that has been set. The e-Naira is only available to people with bank accounts but surely its not far-fetched to think of another stablecoin used by the underbanked. There are already a couple of Nigerian denominated stablecoins so the infrastructure has already been built. Jury is out as to when when you will be able to buy groceries or bread with stablecoins -but I don’t rule it out at all!!
Reasons for hope
My general optimism sounds far fetched now but this is only because there is still widespread wariness around crypto and there are still significant gaps in ease of use.
We will soon start seeing payment infrastructure built that is powered by crypto (whatever that means) but with the complexity hidden from the user. It has already begun.
Compare sending money to 0x32463940CFdC046f6e5aE59FB7bf4685D8008d46 ( A blockchain address -not mine!)- even if you copy and paste fear will catch you especially when there is no bank at the other end to complain to if you make a mistake.
But now you can send Ethereum to ngozi.eth (mine) and it will come to me. Please feel free to try it 🤣
But the biggest opportunity that stablecoins bring is to allow everyone to operate in a global economy. With USDCs or other stablecoins readily accessible, the ability to transact with supplier or customers globally is ensured. Already states like Wyoming are providing regulatory windows to decentralized autonomos organization- filing costs as little as $100, lower than the cost or registering at the Corporate Affairs Commission and with a faster turn-around (approx 3 days)
A few years ago, Carbon borrowed $5mm from Lendable a deal remarkable in that no Nigerian bank would give us the same terms i.e. unsecured by any collateral. The deal was difficult because it was $ based and required hedging. The same commercial realities are at play but the introduction of stablecoins and a large pool of retail investors looking for high yield make it much easy 3 years later for local borrowers to access such funds.
Platforms like Goldfinch (disclosure; I am an advisor) are now able to finance emerging market lenders with increased acceptance of stablecoins. Now whilst this may be good for local lenders, the counterpoint is that its now easy for a foreign lender to access Nigeria and other African markets. It truly is a global market place now.
Individuals will gravitate towards options that give them move flexibility or value. So a currency that is accepted universally and preserves purchasing power will always be chosen over one that is limited to a region and prone to devaluation. Every day, SMEs and individuals are making this choice not because they have strong hands or are HODLers, but because using stablecoins makes their life easier, and opens up opportunities that didn’t exist before. And with increased adoption of cashless globally, there will be greater the adoption of stablecoins.
Many thanks to Obinna Okwodu who helped in the brainstorming for this article