It has less to do with crypto speculation than hedging against weakening local currencies. From Moneyweb.
The rand may have notched up modest gains against the US dollar since the formation of the government of national unity, but the trend elsewhere in Africa is in the opposite direction.
That’s why US dollar stablecoins such as Tether (USDT) and USDC are surging in popularity in emerging markets faced with relentless depreciation in their local currencies.
A recent report on stablecoin trends in emerging markets by Castle Island Ventures and Brevan Howard Digital (sponsored by Visa) suggests that the newfound love for stablecoins – which were traditionally used as a way for crypto enthusiasts to switch into a less volatile store of value – is because they’re now being used as a way to hedge against local currency weakness.
The reasons are not hard to find.
The Nigerian naira has lost about 70% of its value over the last year, Zimbabwe’s new gold-backed ZiG currency has lost half its value since being introduced in April, and the Malawian kwacha has lost nearly 40% of its value against the US dollar over the last 12 months.
It’s no surprise that Nigeria has the highest stablecoin affinity among all the emerging markets surveyed by the Visa report’s authors. Nigerians transact in stablecoins more frequently than others.
Read:
Devaluing Zim’s ZiG won’t fix the currency
Rand to gain in 2025 while Naira faces more pain, according to Ebury
The Zambian kwacha has fallen more than 21% over the last 12 months. The Kenyan shilling lost 29% of its value against the US dollar in 2023 but recovered some of that loss in 2024 following interest rate cuts in response to lowering inflation.
A decade ago, the rand was trading at just above R11 to the US dollar. That puts the recent 6% gain in rand value in a more sobering context.
Regulatory concerns
Stablecoins are tokenised representations of fiat currencies circulating on the blockchain and are currently valued at more than $160 billion, up from $1 billion in 2017.
Residents in emerging markets such as Indonesia and Nigeria use stablecoins as a form of currency substitution that allows them to hedge against weak local currencies.
It allows them to dollarise their wealth and transact outside central bank control – which may soon attract focused attention from regulators.
Regulators in countries like Nigeria have expressed concerns over the risks posed by high stablecoin penetration, as holders are indirectly purchasing US debt instruments such as short-term treasuries.
Listen: African currencies are being smashed as stablecoins come to the rescue
New forms of stablecoin have emerged in recent months as various regulatory domiciles have passed clarifying stablecoin legislation, hoping to attract issuers. Some of the most proactive jurisdictions in creating regulatory frameworks for stablecoins include the EU, Singapore, Dubai, Hong Kong, and Bermuda, says the Visa report.
Numerous uses
Stablecoins are used in numerous ways, including cross-border payments, payroll, trade settlement, and remittances. They also offer yield, often earning rates as high as 6% a year.
They are also used for treasury management: companies convert local cash into USD stablecoins without violating exchange control regulations and convert back to local currency when they need to spend.
The Visa stablecoin report estimates that $2.6 trillion worth of value was settled in the first half of 2024.
“Stablecoins offer considerable advantages relative to existing payment systems, including native programmability, strong auditability properties, fast settlement, the ability to self-custody, and native interoperability,” says the report.
Tether remains by far the largest issuer of US dollar stablecoins despite its controversial past over claims that its issuance was not fully collateralised. It currently accounts for about 70% of the global stablecoin supply.
Listen: Why stablecoin Tether is more profitable than Goldman Sachs
The Visa survey shows access to crypto remains the most popular use case for stablecoins, but non-crypto uses, such as access to US dollars, are not far behind at 47%, while 39% are doing it for yield generation.
Stablecoins are preferred to US dollar banking due to yield, efficiency, and the lower likelihood of government interference.
Tether is owned by iFinex, a Hong Kong-registered company that also owns the crypto exchange BitFiniex, while USDC is issued by Circle Internet Financial.
Read: Tether talking to commodity traders about lending them its billions
The control these companies exert over stablecoin issuance is now substantially larger than many central banks and will no doubt increase substantially in the coming years.
It may not be long before those earning rands start asking employers to switch to US dollar stablecoins instead. This practice is already fairly common in the crypto sector and is only likely to grow in the years ahead.
Stokvels ripe for stablecoin adoption
Shiven Moodley, macro strategist at crypto company 80Eight, says stablecoin and crypto adoption will generally start to pick up momentum as the number of use cases is better understood. It may take a rewards-based approach to get wider adoption or creative staking (yield-earning) mechanisms.
One market ripe for stablecoin adoption is stokvels, where huge amounts of cash are held, earning little or no yield.
The ability to offer an attractive yield and lower the costs of transacting on the blockchain is deserving of more attention from the stokvel sector and others, adds Moodley.