Stablecoins: Accelerators For Dollarisation in the Global South

If you think about your country’s currency, what thought comes to mind? Anxiety? Stress? Perhaps you’re concerned that rising inflation is reducing your buying power significantly, or that you need to initiate or receive costly or time-consuming cross-border payments. There is, however, a potential solution to these problems in the form of a digital, easily accessible form of the US Dollar, namely stablecoins.

Dollar-denominated stablecoins accelerate dollarisation, which is the use of the US Dollar alongside or instead of the domestic currency. Despite some declines during the crypto winter, the total market capitalisation of the stablecoin sector was $124 billion in July 2023, according to a report from CCData. In fact, the market cap of stablecoins in circulation has seen a steep increase of around 450%, since 2021, when it was around $29 billion. 

Stablecoins are a revolutionary financial instrument that is reshaping the financial landscape, particularly in emerging markets and developing economies. Let’s look at this exciting phenomenon in more detail.  

What are stablecoins?

‍Stablecoins, as the name suggests, exhibit significantly lower price volatility compared to conventional cryptocurrencies like Bitcoin and Ethereum. They achieve this stability by pegging their value to fiat currency, often the US Dollar. Xapo Bank, one of the first retail crypto-enabled banks in the world regulated by the Gibraltar Financial Services Commission, launched access to two flagship stablecoins, USDC (US Dollar Coin) and USDT (Tether), in 2022 and 2023 respectively. 

How do stablecoins work? A central pillar of this new technology is the blockchain, an aspect of Web3 technology – but what is the blockchain? Simply put, it’s a transparent and tamper-resistant ledger for a variety of applications, including cryptocurrencies, like stablecoins and Bitcoin, smart contracts and decentralised applications (DApps). The blockchain records all transactions and keeps a secure history of them. Some blockchains are also decentralised, meaning they’re controlled by a network of computers and not a single, centralised entity. 

At Xapo Bank, you have access to Stablecoins from your US Dollar account. When USDC or USDT are received via blockchain-based payment rails, they undergo an instant conversion into US Dollars. Firstly, it shields assets from potential de-pegging risks. Secondly, it eliminates the necessity of navigating through various apps and exchanges to acquire US dollars. Not only do you have access to US Dollars, but you can earn up to 4.5% annual interest*, paid out daily with the convenience of anytime access to funds, and no lockups. 

The benefits of stabelcoins

‍The Global South is witnessing an acceleration in dollarisation, thanks to the multitude of   benefits offered by stablecoins, including:

Cross-border transactions

‍Wiring money between two places can take longer and cost more than driving it across the relevant borders. Why? Traditional wire transfers follow a complex and exhausting route through various capitals; they are also costly at around 3-7%. Incoming transfers are frequently automatically exchanged for local currency at high rates of conversion.

With stablecoins, however, transactions are secure, speedy, occurring within a matter of minutes, and almost costless, thanks to blockchain technology. The upside is that you can live anywhere in the world without being reliant on the local banking system. Salaries, remittances and general payments can happen 24/7 via dollar-denominated stablecoins. This important benefit promotes financial inclusion, making accessible and available financial services for all individuals and businesses. By contrast, financial exclusion limits entrepreneurship and economic growth.

Protection against inflation

‍A key reason stablecoins are accelerating dollarisation is that they offer a stable, reliable store of value. Those in the Global South can convert volatile local currencies into dollar-pegged stablecoins. To see the devastating effects of inflation, take a look at this graph showing USDT to Argentine peso conversion over the past year. 

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Many employees prefer their salaries to be paid in stablecoins rather than local currencies in order to avoid long waiting periods, payment delays and bank withdrawal fees, states an article in Cointelegraph. Latin America has, in fact, seen the largest withdrawal of salaries in crypto. 

So, which stablecoins are emerging as most dominant? The Q3 2023 Cash & Crypto Payment Trends Report, issued by Xapo Bank’s Chief Operating Officer Dary McGovern, offers some interesting insights among their users. This graph illustrates how USDC got off to a strong start, but month on month, has been losing transaction share to USDT on the Xapo Bank’s platform. 

Clearly, stablecoins are playing a pivotal role in accelerating dollarisation in the Global South. Smooth and efficient blockchain rails are driving this development, leading to a more stable and efficient financial landscape for many individuals and businesses.

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Disclaimer‍

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