Cross-border payment in Africa is a big frustration and a huge opportunity. Can stablecoins help?
For businessmen, crypto speculators, and the cousin who wants to send money home, crypto versions of the US dollar are a lifesaver.
Africans are using stablecoins to make cross-border payments, earn profits from crypto transactions, and hedge against inflation that is ravaging the continent’s economies and individual savings. Now, new crypto-adjacent startups in the continent’s hot fintech space are rushing to capitalize on the situation.
One of them, Uganda-born Eversend, is bundling fintech and stablecoin wallets to deepen its FX offering.
Founded by Stone Atwine and Ronald Kasendwa in 2017, but with a public launch in 2019, Eversend is a near-super app for cross-border payments and buying and selling crypto. The company, which co-founder Atwine has described as Africa’s leading “FX startup”, also offers USD, Euro and GBP wallets, as well as virtual cards. The startup builds APIs to power collections, payments, and currency exchanges through stablecoins for other fintechs.
In 2020, sub-Saharan Africa received the equivalent of 2.5% of its gross domestic product (GDP), or $42 billion, from remittances, according to World Bank data. But sending money to the region is expensive – the most expensive, in fact, compared to other parts of the world. For context, if you had tried to send $200 towards the end of 2020, you would have spent an additional $16.40 (or 8.2%) to send it through the old remittance channels. For African countries like Ghana, where remittances represent the equivalent of 6.3% of GDP, or even Lesotho where it represents a full quarter of GDP, sending or receiving money in the country using traditional money transfer channels can be exorbitant.
Unlike these channels (banks and money transfer companies like WorldRemit, Moneygram, or Wise), Eversend’s exchange platform leverages stablecoins to settle cross-border transfers.
Stablecoins: popular with crypto-brothers, importers, and just about anyone interested in inflation
Stablecoins are digital currencies linked to other assets such as the US dollar or the euro, the idea being that their attachment to fiat currencies makes them less volatile than cryptocurrencies like Bitcoin or Ethereum.
Tether was the first stablecoin, launched in 2014, and it remains the model for those who followed it. For every dollar deposited, users receive 1 token. The tokens can then, in theory, be exchanged into the original currency at any time, at a one-to-one conversion rate.
Tether and most other dollar-pegged (USDT) stablecoins claim to have dollar reserves that match the value of the tokens they issue, but proving this is difficult. On the one hand, stablecoins are, at their core, controlled by private companies that operate like banks but without the oversight of a government central bank. Regardless of scam allegations, predictions of a doomsday stablecoin day, and spectacular crashes of algorithmic stablecoins, another branch of stablecoins that does not claim to have real assets, stablecoins have continued to grow. Tether (USDT), the most popular of them all, reached a market cap of $83 billion, but dipped to $73 billion in early May as stablecoins came under pressure following the general crypto selloff.
Last year, Chainanalysis, a blockchain data platform, reported that Africa received $105.6 billion in cryptocurrency, a 1,200% increase from $8.8 billion from the previous year as crypto exploded across the continent. Stablecoins, a relatively new invention in the crypto world, account for a significant portion of these crypto transactions.
Africans use stablecoins for things as simple as savings or for things as complex as funding business travel in Southeast Asia.
“Whenever I get paid at work, I just withdraw the money that I will use for the month or 2 weeks. I just leave it in my account. So whatever [money I have set aside for] savings, I store them in a stablecoin,” Nigerian blockchain researcher Tochi Onyia told TechCabal.
“Nobody wants to buy dollars and then keep them in a bank account,” said Uzo Mbamalu, an entrepreneur whose dedicated stablecoin exchange, Palremit, is already in beta. He says that for young Nigerians, stablecoins offer the convenience of having a dollar account without going through the hassle of opening a home account, which requires two references who are currency account holders and regular KYC. .
According to Mbamalu, businessmen looking to import goods from China, for example, buy USDT, trade it on P2P or over-the-counter traders for Chinese yuan and use it to pay their bills. purchases. He explains that USDT and cryptocurrencies like bitcoin are trading at a high price in China due to tight regulatory constraints.
“Most Chinese do what they call arbitrage,” he said. “They buy bitcoin in Nigeria and resell it in China. In fact, most business people and importers have an incentive to use USDT because if they convert their naira into USDT and then sell that USDT in China, they will get more for their money. Sometimes they can get up to 10%”.
Mbamalu and Eversend CEO Stone Atwine confirmed that most Africans hold USDT as a hedge against inflation.
A SWIFT for African stablecoins
For Africans who find it difficult to send or receive money across national borders, hedging against inflation is a secondary concern.
The biggest challenge is navigating the complex and often frustrating process of obtaining the dollars or euros needed to buy manufacturing inputs, agricultural products or finished goods in a neighboring country.
Very often, due to the volatility of African currencies, cross-border trade within the continent is settled in dollars. But dollars are rare in Africa, usually centrally controlled, and tend to be more accessible to large corporations or politically connected people, less to small and medium-sized enterprises (SMEs). This state of affairs constrains these SMEs which need dollars, euros or yen to settle their transactions but which do not have easy access to them.
Although figures vary, intra-African trade reached an estimated $159 billion in 2018, according to the African Export-Import Bank (Afrexim). But the researchers point out that informal and often monetary cross-border trade in Africa is more dynamic, less understood and unreported by anywhere from 11 to 40 percent. Indeed, it is conceivable that informal trade could easily reach and perhaps even exceed the value of the transactions that the trade fair could catalyse.
Why are all these talks about trade important? Because intra-African trade is probably where most of the unexplored value of simplifying cross-border payments in Africa lies. At least that is the value proposition of the recently launched Pan African Payments and Settlement System (PAPSS).
The PAPSS aims to make cross-border payments between participating countries and financial institutions transparent and near instantaneous. In theory, the PAPSS is a workaround to the impossibility of a single African currency. So far, 6 central banks, 3 switching operators, 18 commercial banks (most of which are Nigerian) and 5 payment gateways have joined the network.
If PAPSS gets a large number of users, it could become the African SWIFT, the Belgian cooperative that handles most of the global settlements in international transactions. With the entry of PAPSS, people buying and selling across borders in Africa now have 2 options to make payments: source dollars or use a service provider in the PAPSS network.
But companies like Eversend want to offer a third option, similar to PAPSS or SWIFT but based on global stablecoins and, in the future, private blockchain versions of local currency for instant cross-border payments. “We are building this infrastructure that can help different companies easily transfer value across borders. In the back we are really powered by stablecoins,” explained Atwine.
Using global stablecoins like USDT is the low hanging fruit, but that doesn’t really remove the dollar’s dominance. On the other hand, building a SWIFT for local stablecoins is a lunar project. Atwine is right, however. At the very least, using local stablecoins will at least reduce the demand for dollars and euros to make cross-border payments.
Governments join the fray
Atwine also said CBDCs or government-backed stablecoins are a potential cross-border payment solution, and he’s on point. Although not expressly designed to facilitate cross-border payments, at least 9 African countries are studying or planning to launch CBDCs. Nigeria e-Naira is already online. It is the first CBDC on the continent and the ninth globally.
But CBDCs are problematic because they fear giving the government near-absolute control over private money, especially in Africa where they came in the wake of — largely unsuccessful — attempts to ban crypto activity.
In addition to serving as financial inclusion ramps, as government spokespersons claim, some have suggested that African CBDCs can serve as local stablecoins for crypto exchanges.
CBDCs pose a direct threat to private stablecoins (where regulators only need to ensure they have adequate reserves in the same way banks are regulated) and private banks (where actual stablecoin reserves can be filed). As a result, even bankers are unimpressed with CBDCs.
Atwine believes that while government-backed stablecoins, also known as CBDCs, are a potential cross-border payment solution; concerns about confidentiality and potential government overreach may impede its adoption.
The use of CBDCs or individually-issued African stablecoins for cross-border trade is still in the future. For now, solutions like Eversend that leverage global stablecoins have the advantage of generating these payouts. Their biggest challenge, however, will be convincing informal merchants to ditch physical dollars for smartphone wallets.