Africa’s stablecoin promise breaks at the off-ramp

Three major African payment service providers recently experimented with stablecoins, expecting to slash the cost of cross-border money transfers by ten times. However, they found the on-ramp to be functional, but the off-ramp was not. Converting back to local currency proved costlier than 8%, and in thin markets, the savings were non-existent. Their findings reveal that stablecoins cannot resolve African cross-border finance until the industry addresses local liquidity.

Africa's cost of sending money remains the highest globally, with transfers averaging 8.5% compared to 6% elsewhere. Chainalysis estimates that transferring $200 through stablecoins reduces costs by 60%. Yet, this calculation fails to account for the conversion process at a large scale.

Conversions involve three steps: messaging, compliance, and settlement into locally spendable money. Stablecoins excel in the first two steps, but they do not guarantee local spendability. For instance, a trader in Lagos cannot use USDT to pay rent, and a freelancer in Nairobi cannot use USDC for school fees. Someone must convert local currency into stablecoins, and someone must convert stablecoins back into local currency.

The main cost lies in two areas: foreign exchange (FX) and the last mile. FX involves converting stablecoins into local currencies, which requires a counterparty willing to trade in the required amount and currency. In most parts of the region, this pair is thin, leading to slippage and higher costs. Additionally, some liquidity pools are anonymous, and participants may be laundering money, further limiting market depth.

The second cost is the last mile, where local payment rails have fixed costs and regulatory requirements that only become cost-effective at scale. Above that scale, cross-border rails are more expensive, but stablecoins do not eliminate this cost. Instead, they shift it to the end of the journey, where local liquidity should ideally be deep, licensed, and uncomplicated.