Stablecoins present developing nations with a solution to currency devaluation and inflation, but challenges like government regulation, education, and access to cryptocurrencies.
There are numerous use cases for stablecoins in emerging markets, and we will explore them. Stablecoins serve as an ideal bridge between traditional finance (TradFi) and decentralized finance (DeFi) thanks to their price stability and efficiency. They facilitate fast, low-cost payments and remittances, and can provide liquidity across blockchains.
Although this may delight American travelers, depreciating currencies negatively affect local economies, and the strength of the U.S. Dollar is unlikely to diminish in the near future.
In this article, we’ll examine several key trends and future expectations:
- Currency devaluation trends in emerging markets.
- The impact of high inflation, declining currencies, and a potential global recession on stablecoin adoption.
- Stablecoins as a solution for citizens of developing nations.
- The importance and opportunity for parties capable of facilitating reliable and cost-efficient purchasing and selling of stablecoins for fiat.
- Government regulatory considerations.
We will conclude that stablecoins play a critical role in developing markets and that governments need to take them seriously. Proper implementation and legal treatment can provide a significant advantage to nations willing to invest in this emerging technology, with future use cases likely beyond our current imaginations.
uring the 1970s, U.S. inflation averaged 6.8%, peaking at 13.5% in 1980. Generous monetary policy (especially social warfare and war funding) and subsequent supply-side disturbances contributed to these high inflation levels, strikingly resembling the current situation in late 2022. However, the USD was not as strong then, and there was more certainty regarding global macroeconomic events.
The world faces high inflation, declining currency valuations, war, a European energy crisis, and a potential global recession. Amid great uncertainty, investors have sought safety in the U.S. Dollar, further strengthening it against developing nations.
Here is a snapshot of how several countries’ currencies have performed over the past year:
||Oct 26, 2021
||Oct 26, 2022
(Local Currency to USD)
Many more examples exist, such as the British Pound or the Venezuelan Bolivar, but this provides a solid overview of global currency devaluation against the USD. It’s worth noting that many such price impacts occurred within the past few months alone.
This can lead to severe consequences for local economies, including:
- Higher Debt: Countries often borrow in USD-denominated debt, making repayment much more costly.
- Slower Growth: Higher U.S. interest rates, aimed at curbing inflation, result in local interest rates rising to remain competitive, leading to less spending in local economies
- Lower Trade: an appreciating USD leads to more expensive import costs. This reduces import volumes while the excess costs are passed on to consumers. Exporters make less per export, though the volume of exports increases to their benefit.
Inflation also wreaks havoc on local economies, often exceeding the U.S. inflation rate of 8.1%. For instance, Turkey, Argentina, Venezuela, and Lebanon currently face inflation rates of 83%, 83%, 114%, and 162%, respectively.
Currency devaluation and inflation aren’t new phenomena in many global jurisdictions. These issues are just two of the many reasons that an increasing number of citizens are turning to cryptocurrencies as a viable solution. However, the cryptocurrency industry is still in its early stages, with volatile options like Bitcoin being too risky for some to handle.
Stablecoins, a subset of cryptocurrencies, provide practical use cases for developing economies in the present and are poised for continued growth. In the following sections, we’ll explore why this is the case.
Stablecoins as a Solution
Stablecoins are a type of cryptocurrency designed to maintain a relatively stable price, typically by being pegged to an underlying currency or commodity. The most common approach is a 1-to-1 peg with the U.S. dollar, but other stablecoins, like the recently announced Euro stablecoin., are emerging.
The U.S. dollar’s recent rise has partly resulted from its function as a safe haven currency. However, individuals in developing countries often cannot purchase U.S. dollars themselves or face strict limitations. For instance, Argentinians can only buy $200 USD per month and must otherwise resort to the informal market, where the rate is 50% lower than the official rate. Unfortunately, many choose this option, as losing 50% of value upfront might be more appealing than dealing with their country’s nearly 85% inflation rate.
Stablecoins essentially serve as digital cash, enabling anyone worldwide with cryptocurrency funds to buy them. This significantly broadens opportunities for global users to store their funds in U.S. dollars (or other currencies) and preserve their hard-earned money. However, several obstacles are currently hindering more widespread adoption.
Challenges for Stablecoin Adoption
Unlike Bitcoin, USD-backed stablecoins are legally established and managed by centralized legal entities rather than being decentralized. This means that governments can impose bans or seizures at their discretion, as demonstrated in February 2022 when the Nigerian government ordered banks to close accounts of all crypto users.
Decentralized stablecoins, which are not subject to government control, do exist but are not backed 1-to-1 by actual USD. This can result in increased volatility or even a total collapse, as seen with the fully decentralized stablecoin Terra Luna. Crypto-collateralized stablecoins show great potential but are still in their infancy and lack clear legal compliance, unlike USD-backed stablecoins. They may also face liquidation if the value of the underlying collateral falls below the stablecoin loan’s value.
Gemini’s 2022 State of Crypto report identified education as the most significant barrier to blockchain adoption, a sentiment we concur with. While abundant information is available online, much of it can be overwhelmingly complex, misleading, or downright false. Finding reliable information is difficult, and even when discovered, additional barriers, such as global literacy issues, remain.
Access to Stablecoins
For individuals interested in using cryptocurrencies to address currency devaluation, inflation, or other concerns, the next step is actually acquiring them. Most users must complete KYC procedures and buy through a centralized exchange like Binance.
Some may be unable to undergo KYC due to a lack of identification. Those who can pass compliance checks might find the costs of purchasing cryptocurrencies too steep to justify. In the future, the gap between traditional and decentralized finance must be bridged to allow more users to benefit.
Providing Access to Stablecoins
Education is a critical factor in crypto adoption. Although abundant information is available online, it can be confusing or even misleading. In the future, we hope educational institutions will bolster their efforts to promote crypto adoption and invest in essential resources. Regulatory clarity will also incentivize entrepreneurs and offer guidance for institutions seeking to provide further education.
There is considerable friction in buying and selling cryptocurrencies using fiat currencies. While purchasing a credit card might be simple and quick for those with access to banking services, fees often exceed 5%, making it unsustainable. Local payment methods may offer solutions at fees below 3%, but they often suffer from delays and occasional bank failures.
Numerous companies, known as ramp providers, are actively working to address these issues. Specifically, they are focusing on the following:
- Reach: as many citizens in as many countries as possible should be able to use ramps.
- Fees: fees should be affordable. A $2 fee may be fine for someone in a developed country but significant for someone in a developing nation.
- Payment Success: often times bank issues prohibit payments from going through. Banks must also support efforts to lower the barriers to blockchain adoption.
There is a tremendous opportunity for robust ramp providers to perform social good; even minimal fees can result in significant financial rewards for their efforts.
Consider this: if only 1% of global citizens (excluding those from the United States) put just 1% of their savings into stablecoins to store value and potentially engage with the decentralized finance ecosystem, it would amount to a vast sum of money. This needs to consider the institutional use of stablecoins, which could offer an efficient and low-cost method of transferring value worldwide.
However, the current ambiguity surrounding government regulation could present a substantial barrier to adoption. Governments are expected to enforce stricter regulations, particularly in the wake of recent events involving FTX.
The Role of Governments
Governments are well-aware of stablecoins and are responding with various approaches. Many are considering creating Convertible Bank Digital Currencies (CBDCs), such as China, which is expected to launch one in 2023. Additionally, 19 of the G20 alliance members are exploring CBDCs. CBDCs are digital tokens issued by a central bank, pegged to their national currency, and similar to cryptocurrencies. It remains unclear whether central banks will rely on blockchain technologies; however, they will likely issue them on private ledgers to maintain control.
Tokenized versions of CBDCs are expected to emerge as well. This tokenization resembles how USD-backed stablecoins are tokenized versions of real USDs, aiming to create public versions of CBDCs.
Tokenizing respective currencies is no simple task, and governments will likely need the support of stablecoin infrastructure companies to aid their transitions. Therefore, it’s crucial for governments to develop robust regulatory frameworks that are compatible with their CBDCs and tokenized stablecoins.
When someone in Vietnam purchases a stablecoin like USDC, the seller effectively buys Vietnamese Dong. This means there’s no selling pressure on the currency unless it’s sold in turn. Meanwhile, it enables people to remit funds out of their country, which may or may not have capital controls, without violating capital control laws or physically removing capital from the country.
Determining the appropriate governmental response is not straightforward. Banning citizens from purchasing foreign currencies via blockchain might be difficult to enforce, if not impossible, given decentralized stablecoins. Establishing a robust regulatory framework will be challenging, and many countries may wait for others to take the first step.
In the face of macroeconomic challenges, including currency devaluation and inflation, stablecoins emerge as a promising tool to bridge traditional finance and decentralized finance, offering citizens of developing nations a safeguard for their hard-earned savings. Despite the potential benefits, hurdles such as government regulation, education, and cryptocurrency access impede widespread adoption.
Ramp providers, tasked with reducing friction in buying and selling cryptocurrencies, are pivotal in fostering stablecoin adoption. These companies focus on improving reach, lowering fees, and ensuring payment success. Governments, in turn, must carefully consider their role in the stablecoin ecosystem, particularly as Central Bank Digital Currencies (CBDCs) complicate matters. Robust regulatory frameworks accommodating both CBDCs and tokenized stablecoins must be established.
Ultimately, the convergence of macroeconomics and stablecoin solutions presents a unique opportunity for developing nations. Embracing this technology and creating a conducive environment for its growth may yield substantial rewards. As the world navigates a tumultuous landscape, stablecoins hold the potential for significant social good and financial benefits. The challenge lies in successfully implementing and regulating this groundbreaking technology to serve as a beacon of hope for millions of global citizens.
Stably is committed to supporting the onboarding of global citizens into cryptocurrencies.
If you are interested in learning more about how integrating Stably Ramp can help, please visit our Stably Ramp webpage.