Local stablecoins are great, but who really needs them?

This report, titled "Local stablecoins are great, but who really needs them?", explores the growing popularity of local stablecoins pegged to African currencies. The series, "Follow the Money," examines the business and scaling strategies of various African fintechs, financial institutions, and companies.

Several African countries have launched their own stablecoins, including South Africa's ZARP and ZARsc, Nigeria's cNGN, and Tanzania's nTZS. These stablecoins aim to put African currencies on the blockchain, promising faster, cheaper, and more interoperable payments.

While these stablecoins emphasize their potential benefits, the article questions whether there is a strong enough demand for them among the general public. Dollar-backed stablecoins already have a global market, network effect, deep liquidity, and a clear reason for people to hold or use them. In contrast, local stablecoins lack a built-in demand source.

Existing payment systems in Africa, such as bank transfers and mobile money, already provide ways for users to move local currencies within their borders. This creates a chicken-and-egg problem for local stablecoin issuers, as users need a reason to hold a local token before merchants are willing to accept it. Additionally, liquidity providers require sufficient trading activity to make money, which in turn depends on the number of users, creating a vicious cycle.

The article also discusses the potential benefits of local stablecoins in the wholesale market, particularly for business-to-business (B2B) transactions. For example, a Tanzanian importer could use a local stablecoin to represent the shilling, connect local liquidity to a global digital asset market, and facilitate cross-border payments to suppliers in China. Market makers can also benefit by setting spreads and earning from the difference between buy and sell prices.