Samuel, a 26-year-old working in the marketing department of a Nigerian manufacturing company, has been thinking about migrating to Canada for the last few years. He is one of the thousands of Nigerians who have spent the past 12 months preparing their documents in the hopes of a positive response to their applications for permanent residence.
But Samuel — who asked to be identified by his first name only to keep his relocation plans private — noticed the same problem kept cropping up in the dozens of Telegram and WhatsApp groups that share information about the immigration process. Many of the would-be migrants struggled to access U.S. dollars to pay for their immigration documents.
“The number one challenge, every single day,” he said, is that they are unable to pay for the mandatory academic credential assessment for relocation to Canada. It costs around $170.
“It’s not a lot of money in the grand scheme of things,” Samuel told Rest of World. But he worried that a series of forex restrictions imposed by the Central Bank of Nigeria in recent years restrict ordinary Nigerians like himself to spending limited amount of US dollars via their debit cards each month.
Over the last six years, as the Nigerian economy declined following the drop in oil prices, the Central Bank has scrambled to protect the value of the local currency, the naira. It introduced several restrictions that have made it challenging for individuals and businesses to freely access dollars for international payments.
To get around this problem, Samuel and others in his chat groups of hopeful migrants have switched to using dollar-backed cryptocurrencies — known as stablecoins — to make their payments.
Stablecoins, such as the Tether (USDT), USD Coin (USDC), and the Binance USD (BUSD), are a form of a cryptocurrency typically backed by traditional assets like the U.S. dollar or gold. These currencies are designed to be pegged 1-to-1 against the dollar. This supposedly protects stablecoins against the volatility that characterizes major cryptocurrencies like Ethereum and Bitcoin — a sector that had a market capitalization of about $2.5 trillion in May before losing 60% of its value in a week
Samuel says he buys USDT using naira and then finds a trusted middleman in Canada or the U.S. to exchange the stablecoins for Canadian dollars. Putting himself at great risk of being scammed, he arranges for a person in Canada, whom he finds through the chat groups or websites like PayTrie.com, to pay for the credential assessment.
Globally, stablecoins are touted as a convenient way to enter the cryptocurrency ecosystem without worrying about losing money and as a cheaper way to move funds around. In Sub-Saharan Africa, stablecoins remittances can be up to 20 times cheaper, than via traditional money transfers. USDT and USDC transfer fees are often as low as 0% to 1%. Marius Reitz, general manager for Africa at Luno, a cryptocurrency trade platform said “stablecoins provide a way to bypass the high costs associated with legacy institutions, to send and receive money faster, and to retain most of the monetary value.”
Adoption has followed. USDT and other stablecoins, such as Celo Dollar (cUSD) and USDC, reached a combined market capitalization of over $100 billion within the first five months of 2021, signaling that more people are now holding these assets.
After Nigeria’s central bank imposed more restrictions on incoming and outgoing dollar transfers this year, a growing number of Nigerians switched to stablecoins, said Emeka Madu, Africa regional director for Paxful, a leading cryptocurrency trading platform. Paxful claims it has around 1.5 million Nigerian users, with USDT now representing around 5% of the platform’s total trading volume. In June alone, the platform’s USDT trade volume jumped 71% from the previous month.
Other platforms such as Buycoins and Quidax have also reported significant growth over the last year, spurred by remittance transactions. Quidax, which introduced USDT in mid-2020 following requests from customers, said the adoption of stablecoins has grown, and it is now the second-biggest currency on the platform, which operates in five African countries.
While Bitcoin remains the most popular cryptocurrency, in Africa, stablecoins are gaining traction, as users look to get a hold of foreign currency, make digital payments, and safeguard the value of devaluing local money. Industry sources disclosed to Rest of World that some businesses hold their funds in USDT but convert it to Bitcoin when they need to make large-volume transactions.
The fear of inflation has long been an issue in markets like Nigeria and Zimbabwe, where the prices of basic commodities have surged by 17.4% and 56.4% respectively, according to statistics from the countries’ governments.
“Inflation is eating away the value of the naira, meaning my savings and investments in naira are worthless,” said Temi, a Lagos-based worker who asked to be identified by only his first name because he works for a top Nigerian bank.
In response, over the last two years, some cryptocurrency platforms have offered stablecoins savings to attract African clients trying to avoid government restrictions and loss of value. Cryptocurrency trading platforms, including Binance, Buycoins, and Luno, also pay out interest on savings deposited as either Bitcoin, BUSD, USDC, or USDT.
In Zimbabwe, private savings clubs and amateur investors are looking to crypto and opting for stablecoins as the safer option, said Mercy Musodzi, vice chair of a Harare-based club that runs a six-month savings program for informal traders in U.S. dollars and other currencies. Members contribute seed capital to a fund that they can borrow from at a fixed interest rate. After an agreed period, they share proceeds from the interest accrued as well as the initial capital contributed. By converting club funds pooled in local currency, it hedges against value loss, especially with volatile currencies such as the Zimbabwe dollar. In Mozambique, Hiveonline, a Swedish startup, has been using stablecoins as a unit of account in a three-token structure that can also be used for savings groups. The company’s CEO, Sofie Blakstad, said the platform now has about 70 Mozambican cooperatives on its platform.
But commercial trade is the most obvious use case for stablecoins in African markets, especially as a fast-rising option for cross-border payments, given the significant amount of import business from outside the continent. Damilola Odufuwa, the Africa spokesperson for Binance, said that by using peer-to-peer transfer options, small merchants in Nigeria are increasingly taking on USDT and USDC for business-to-business payments with exporters in Asian countries like China and Taiwan, as the currency crunch continues to wreak havoc on international transactions.
“In the past, importers literally traveled with bags of money to China to buy different goods, but now, we have seen business owners who use stablecoins to pay their Chinese suppliers,” said Ugochukwu Aronu, CEO of Xend Finance, a Nigerian crypto platform.
But executives at humanitarian NGOs also shared with Rest of World that stablecoins usage is helping them get around regulatory holdups and wastage of donor funds on exorbitant banking fees. ImpactMarket, a Portugal-based decentralized poverty-alleviation organization with activities in 19 countries, said it has used stablecoins to “distribute more than $1 million to 18,300 beneficiaries within 102 communities.”
“We are distributing an unconditional basic income to communities in Africa using Celo Dollars only,” Jessica Gaubert, growth manager at ImpactMarket told Rest of World. Like many stablecoins, Celo Dollars are pegged 1-to-1 with U.S. dollars.
Initially, according to Gaubert, ImpactMarket’s beneficiaries were often compelled to cash out their stablecoins through local dealers. But after multiple withdrawals, “we are starting to see merchants accept” Celo U.S. Dollars for payments, she said. In the last few months, Celo Dollars have gained significant support from 140 organizations across the world and were recently integrated into the Opera browser, Africa’s second most-used browser, according to Hootsuite, for peer-to-peer transfers. In Kenya, ImpactMarket works with Kotani Pay, a fintech company, to support M-Pesa payments for people without access to the internet or a smartphone.
However, while stablecoins are described as safe, stable, and reliable, they carry some risks. Some financial regulators and other industry experts think that these are the same risks faced by conventional banks. For one, this group of digital currencies is supposed to be redeemable upon demand. Hence, theoretically, stablecoins companies should keep a majority of their holdings in cash reserves or highly liquid assets, similar to banks.
In practice, stablecoins are unregulated digital assets. There are no legal provisions to restrict the companies behind these cryptocurrencies from investing in risky assets. And unlike banks, fiat money converted to USDT, BUSD, and USDC is not insured by central banks anywhere. These issues raise the stakes of stablecoins as their adoption soars.
Elizabeth Rossiello, CEO and founder of AZA Finance, told Rest of World that the risk profile for individual users and traders of stablecoins in Africa is much more pronounced in that “African traders do not have the same variety, nor the ease of onboarding, which restricts their options and ability to capitalize on trading opportunities,” as compared to western traders.
Yet, it is unclear how many African cryptocurrency users are aware of these risks.