Why is there a need for local stablecoins?
Despite advancements in Web3 infrastructure, a more friendly view of regulators around the world on stablecoins with MiCAR coming in Europe, and countries such as Singapore putting regulatory frameworks in place, stablecoins and digital currencies are still not the mainstream tool for payments and remittances for end-users around the world.
Historically, alternative forms of money have always emerged when the use of or the access to money has been restricted. The Eurodollar and Petrodollar are examples of alternative forms of money that emerged because of restricted access, however, real innovation on money so far has been limited. There is a global need to settle financial transactions without relying on the traditional banking system, as in many countries of the world people still don’t have access to it. Also in countries suffering from very high inflation, users have a need to access more stable currencies, like the USD, and potentially, with a digital USD, also get access to US Treasury rates.
Stablecoins can improve access to currency, and the respective infrastructure around stablecoins should make it easier to store, send and receive currency. However, this infrastructure is just now developing.
Decentralized Finance, or DeFi, is an umbrella term for decentralized peer-to-peer financial services, where no centralized third-party, e.g. no centralized managed bank, needs to be involved. In many countries in the global north, with mature financial systems and elected institutions working on price stability to maintain economic growth, there is no pressing need for DeFi. However, millions of people in the world today are excluded from these traditional banking systems. While many projects in the Web3 space boast “financial inclusion” on their flags, recent developments in the ecosystem show that the industry failed to deliver on that promise. Even folks in Web3 do not use stablecoins for payments, or DeFi platforms for short term-credit, as they have access to credit cards, cash, and even their phone as a means of payment, so they don’t need to rely on stablecoins.
In Ghana, only one third of the population has a bank account. However, close to 95% of the population has access to a mobile phone. This by itself makes a case for a mobile-first DeFi for Africa. Users across the continent would benefit from advancements in stablecoin usability. Furthermore, especially in countries in Africa, prices for remittances are still very high. For example, according to the WorldBank database, the fees for remittances from Germany to Ghana in October 2023 are between 17.5% and 22.3%. In addition to these high fees, there is a long lead time to transfer funds as a wire transfer can take up to 6 days.
For a more widespread end-user adoption of stablecoins, we need scalable blockchains with cheap gas fees and the opportunity to pay for these gas fees in stablecoins. We also need to identify solutions that abstract from the hexadecimal key, and allow for easy to use crypto wallets. Furthermore we need cheap native on- and off- ramps in every country, and a stablecoin platform that enables local, transparent and permissionless digital currencies.
We have seen a lot of advancements in blockchain scalability. Celo, soon to be an Ethereum L2, offers scalable transactions with Ethereum security for ultra low gas fees. Gas fees can be paid in stablecoins, and with Social Connect, an open source identity protocol, a hash of your phone number (to keep your privacy on-chain) or any other identifier (e.g. the email address) can be linked to a public key. With this users can find each other easily via the identifier.
To get to a space where there are native on- and off- ramps in every country in the world, in the past, every wallet had to negotiate with as many on-/off-ramps as possible for an integration. This many-to-many problem has a simpler solution. A hub-and-spoke model, where on-/off-ramps and wallets can agree on a standard to enable cheap liquidity. FiatConnect.org provides that standard, and it is fully open-source, so it is accessible to every wallet and to every on-/off-ramp.
And also wallets are becoming more accessible and easier to use for end-users. Two wallets that actually use SocialConnect for end-users to easily connect with their phone number are Valora and MiniPay.
With these wallets, end-users can now swiftly onboard to an ultra-lightweight wallet within seconds, enabling seamless sending and receiving of digital assets rapidly, with ultra-low fees.
So given that infrastructure creating a better user experience is now finally emerging, let’s get back to the core question: why would users in markets across Africa actually need local digital currencies?
Many users in the world still want to have access to the USD. In countries such as Ghana, Nigeria, or Uganda, where currencies have historically experienced devaluation against other currencies and the countries have been subject to high price inflation, users have a preference for holding money in stable fiat currencies, like the USD, and therefore for USD-based stablecoins when considering saving.
But at the same time, users need access to local (digital) currencies when they want to borrow, or when they want to pay local merchants. If users have to borrow money in USD, devaluating local currency would make the loan more expensive when they have to pay back the loan.
If a user in Nigeria wants to build a business and needs a loan to get started, the user will have costs in local currency, will have to pay taxes in local currency, and potentially will also have the first cash inflows in local currency. At the time the user would pay back the loan, a loan in foreign currency would be more expensive if the local currency devalued. Therefore, the user has a preference for a loan in local currency.
To address this, the Mento platform hosts local currencies like cUSD, cEUR, cREAL and eXOF, and allows users to launch a local stable asset in every country in the world, also offering tooling that supports liquidity and usability of these stable currencies. The Nigerian Naira or Kenyan Shilling are great candidates for additional digital assets. At Mento Labs, we are looking for partners that would be interested in launching additional stable local currencies around the world.
About the Author
Authored by Markus Franke, Co-Founder & CEO, Mento Labs