It is interesting how topics that one has been aware of for some years suddenly become top of mind, such as  stablecoins where I could not see the practical use. Surely if you want a fiat currency you just use a fiat currency?

Thanks to examining some business cases and attending the Blockchain Africa conference in Johannesburg recently, the implications in low cost banking and innovation in finance finally dawned on me. (I’ve never claimed to be a fast thinker!) Stable coins are cryptocurrencies whose value is pegged to a fiat currency at a 1:1 ratio, such as the US dollar.

One of the strongest use cases for stablecoins is in cross border remittances, which cost remains punitive for the masses and highly profitable for those companies that have managed to secure the corridors in terms of regulation, technology and distribution, such as Mukuru, Hellopaisa, Western Union and others. The main reasons for this are regulation around country foreign exchange and licensed incumbent banks.

We now have emerging neo crypto banks across the world that use stablecoins as the proxy for the fiat currency, created and tracked on a blockchain platform, which at once enables an almost zero cost transfer between currencies. Thus, stable coins can facilitate both faster and cheaper transactions compared to traditional payment methods like bank transfers, leading to much more efficient payments systems globally. It was pointed out at the conference that many users do not even realise that their fiat money transfer is being converted to digital tokens and exchanged on a block-chain based payment rail before being converted to fiat on the other side.

There are risks to the stability of stablecoins, however. The most popular USD stablecoin, USDC (issued by Circle Internet Financial), is considered the “gold standard” of USD stablecoins because it has the backing assets clearly visible to its users. Both Visa and Mastercard have announced USDC as the first crypto asset to offer their clients, and it is clear that they are betting on USDC for settlements. There are others which for various reasons are not transparent in their fiat holdings, and without some kind of certainty of the “depositors’” ability to recover their money, one assumes that there will be a “discount” to the face value of the pegged currency.

As an example of this kind of tension, seemingly due to the transparency described above, the USDC peg went to 0.88 to the USD on the day of uncertainty around the Silicon Valley Bank failure (many of the deposits held were at SVB) but recovered back to par at the beginning of trading the Monday following intervention by the US Federal Reserve. But interestingly the Hong Kong Dollar (pegged against the US Dollar for 40 years) is 110% collateralised with cash.

How do stablecoins help with low cost banking? In practice what they do is enable transactions (including cross-border transactions) without the need for intermediaries, such as banks, which can significantly reduce transaction costs. This can help to expand the reach of banking services to underserved populations, particularly in developing countries where traditional banking services may be expensive or inaccessible. Thus, stablecoins can provide a more stable and predictable asset, providing access to financial assets that are not subject to fluctuations or inflation. This could help to promote financial inclusion and reduce economic disparities.

For example, a saver can deposit their local currency savings into a USD or Euro linked coin, thus creating a store of value outside of the local currency. Taking this further the issuer could offer any kind of contract attached to this store of value, for instance offering an inflation-linked product or another savings product, outside of the base stablecoin offering.

The potential challenge here is with the authorities who may take steps (as have a number of African countries) to limit foreign exchange transactions for residents (such as South Africa) or even outright banning any form of crypto, such as Uganda. These same authorities are also looking at issuing their own Central Bank Digital Currency, anticipating that digitisation of currency is inevitable, and any other route would leave the country behind.

We believe that new fintech offerings around this technology, which are well validated, matured and indeed secured with strongly tested technology, will become the norm. Fiat-backed stablecoins (unlike algorithmic stablecoins) will continue to influence developed and developing markets, and therefore the remittance market.

We also believe traditional banks will play a big role in the stablecoin market, once the regulatory certainty is paved by the US and EU. Because of the regulatory moat, banks’ stablecoin efforts would have lower funding and customer acquisition costs compared to newer players such as USDC-issuer Circle. And they have every incentive to drive more revenue to themselves with payments conducted on blockchain, rather than through brokers and established payment networks like Visa and Mastercard.

Meanwhile, our Technopreneurs will be driving the innovation, and are already taking the world by storm building decentralised platforms, railing and applications with a potential to improve efficiency, accessibility and security of financial transaction – Ovex and Luna in crypto exchanges and wallets, Uniswap as largest decentralised exchange, to Celo building a crypto ecosystem.