/ 12 May 2022

Stablecoin is gaining currency in Africa

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African governments, already eyeing central bank-backed digital currencies to connect millions of unbanked and underbanked to their financial systems, are going a step further and signalling support for digital currencies that promise to leapfrog their economies into the digital era - and bring currency stability. (Photo by JUNIOR KANNAH/AFP via Getty Images)

As more and more African countries express their interest in launching digital currencies backed by central banks, three are considering the adoption of private-based virtual digital assets, which could bring greater currency stability.

Cameroon, the Democratic Republic of Congo (DRC) and Congo Brazzaville have all announced their intention to adopt cryptocurrency and blockchain-based solutions. The move is likely to push millions of unbanked and underbanked populations into their financial system.

The three economies are now set to begin the development of national stablecoins built on The Open Network (TON), a decentralized blockchain originally designed by Telegram.

Stablecoins are defined as digital currencies that are pegged to a “stable” reserve asset, like the U.S. dollar, or gold. They are designed not to change much in value, unlike some cryptocurrencies.

Already the DRC has confirmed its intent to establish a new national stablecoin, built on the TON blockchain, with the network anticipating confirmations for Cameroon and Republic of the Congo, according to The Open Network.

“TON has been engaging with all three countries independently for some time and has taken the lead to deliver cryptocurrency and blockchain solutions for each nation. These countries will each undertake a phased transition to adopting cryptocurrency as a central pillar of their economic structures,” TON said in a statement.

More African countries could soon join the fray as more foreign blockchain and cryptocurrency investors pitch camp on the continent, often using local partnerships to expand their global footprint.

Kenya, ranked fifth in last year’s Global Crypto Adoption Index by Chainalysis, and leading the world in peer-to-peer crypto trade, is experiencing increasing investor activity around this segment- with investors citing the country as a gateway to other African markets.

Crypto asset trading platform LBank last week partnered with Kenyan-based AI and blockchain-powered venture incubator, Adanian Labs, with the intention of growing the number of developers in the ecosystem and supporting the launch of blockchain and crypto products on the continent.

“The new partnership will accelerate Africa’s digital revolution by increasing blockchain developers who will drive the ecosystem. With this partnership, crypto and blockchain technology can play an increasingly significant role in helping African nations leapfrog in development,” said LBank Chief Executive Officer, Allen Wei.

The partnership has lined up a series of events over the year, including a workshop on the economy of crypto that will explore among others the option of stable coins for the local economy.

“We will continue to be in talks with different people and discussing with other parties to see how we can support projects that make sense,” Adanian Lab Chief Executive and Co-Founder, John Kamara told bird, indicating the possibilities for the introduction of stablecoins into the market.

This week, NEAR Foundation, a Swiss non-profit that oversees the governance and development of the NEAR protocol, also launched a regional hub in Kenya to lead blockchain innovation and talent development in Africa.

The Foundation is looking to market its own stablecoin – USN- the newest in the global market, which it says uses a sophisticated algorithm alongside a “fiat peg” to create a more stable price.

NEAR Foundation Chief Executive officer, Marieke Flament, said in an interview that stablecoins have become popular primarily because many investors treat them as an onramp from fiat to crypto and their ability to weather price volatility.

For African investors, who would historically have to pay fees to buy and hold US dollars, Flament said holding a US dollar-backed stablecoin becomes much more affordable.

“Investors big and small can use stablecoins as a hedge against inflation in their native currency, giving stablecoin holders better purchasing power over holding other assets, be they fiat or crypto,” said Flament.

A March 2022 report, dubbed, Currency Risk Management Practices in African Private Equity and Venture Capital, shows currency illiquidity and volatility remain significant barriers to the growth of private equity in Africa.

According to the African Private Equity and Venture Capital Association report, three-quarters of investors surveyed cited currency risk as important when investing in African private equity.

More than half of respondents said currency risk has slightly or significantly increased in the past two to four years. Earlier in the year, Economist Intelligence Unit (EIU) projected that 41 African countries would experience a nominal depreciation of their national currencies against the dollar by the end of 2022.

The EIU cited pandemic and weak economic recoveries, strained national finances and bullish commodity markets as among other factors that will increase currency volatility.

Pavel Matveev, Chief Executive of cryptocurrency payments firm, Wirex, said in a mail interview that stablecoins could be the solution to foreign exchange volatility in Africa, citing successes in countries like Brazil and Venezuela.

In Brazil, Matveev said, stablecoins had found multiple use cases to circumvent oscillating margins, while in Venezuela, they’ve been used as a solution to hyperinflation.

“As well as offering a solution to concerns about volatility, stablecoins offer the same benefits as other cryptocurrencies, such as cheaper transaction costs, faster speeds, and access to the unbanked,” said Matveev.

However, Flament warns that governments must also be aware of risks that come with new technologies as they consider the best stablecoin for their market.

Some stablecoin providers, he said, are cagey about their fiat reserves, while others do not give assurances on transactions – meaning that if investors or users cashed out en-masse, quickly, the stablecoin might ‘lose’ its value and start to fluctuate.

“This has happened several times already in the crypto space. Many stablecoins do have better protections, so it’s important for any government exploring private stablecoins to understand the potential risks from a macroeconomic level,” said Flament. – bird story agency