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Why African central banks should consider stablecoins

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Summary

  • Policymakers have constantly fretted about fraud and black-market forces infiltrating digital currency networks.
  • Besides, the idea of transferring control of monetary policy from sovereigns to opaque decentralised systems is simply unthinkable.
  • Moreover, for most of the world, use of cryptocurrencies to pay for goods and services is still very limited to certain niches.

A few days ago, the Nigerian Senate summoned the country’s top financial regulators for a briefing after the central bank ordered local financial institutions to stop providing services to crypto companies and users.

It was a weird move but not unexpected. Policymakers have constantly fretted about fraud and black-market forces infiltrating digital currency networks. Besides, the idea of transferring control of monetary policy from sovereigns to opaque decentralised systems is simply unthinkable.

Moreover, for most of the world, use of cryptocurrencies to pay for goods and services is still very limited to certain niches. Be that as it may, central bankers have been gravitating towards digital currencies as more research reveals their benefits.

This gap is set to get even narrower as Stablecoins slowly gain acceptance. Would these coins give the final push to get Central Banks to embrace digital currencies? In today’s article, we unpack their potential and the possibilities.

But first, what are they? As the name suggests, these digital currencies are distinguished from their more popular but highly volatile cryptocurrency brethren, such as Bitcoin and Ethereum, in their focus on price stability.

They are designed to remain stable in value against some pegged external asset class such as currencies (US Dollar) or commodities (gold).

In other words, the exchange rate is 1 to 1 (or very nearly) and not 2,000 to 1 one day and 48,000 to 1 the next, as for some crypto coins.

Of course, not all use an external asset class as collateral, some rely on algorithms to maintain price stability. In all, these coins have gained widespread adoption in a relatively short time.

Terra, South Korean stablecoin is one good example. It brings together a partnership of 15 large Asia-based e-commerce companies that serve over 30 million users.

That said, it’s possible that the rapid adoption of stablecoins is catalysing moves within central banks.

Not to be outdone, some countries are actively considering launching their own Central Bank Digital Currencies (CBDC) or what you may call “digital fiat currencies.”

China is one example, moving ahead on plans to issue a digital coin. In the US, banks can choose to use stablecoins for settlement, further reinforcing that idea that this new piece of financial infrastructure is here to stay.

Nonetheless, some analysts argue that perhaps central banks should avoid creating another digital currency and instead offer stablecoin providers access to their reserve accounts, under some criteria.

That through effective supervision, they could check that stablecoin issuance is fully backed.

They further point out that central banks can ensure interoperability between stablecoins issued by different providers by offering a common settlement platform between trust accounts.

In the end, there’s no doubt that the winds of change are blowing. The upside is undeniable.

From the promise of controlled volatility to the frictionless cross border payments in business transactions, the benefits are immense.

Indeed, if the Central Bank of Kenya were to give a stamp of approval to stablecoins, we might really see a lower reliance on fiat currency and actual paper money in our day-to-day lives.

Mr Mwanyasi is the managing director at Canaan Capital

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