Good day everyone. How are you doing today? Busy day. So, we'll talk about stablecoins in emerging markets. Just a quick question.
Who has used stablecoins to make cross-chain make cross-chain payments like this year? What about last year? What about 2021 or 2020? Okay, I want to talk about this because Africa was very early on the stablecoin adoption curve. We are currently sitting in New York.
You might think that Africa is so far away from here. Uh, it's a very small market in dollar terms. Uh, it's too risky, it's too complicated, we could just ignore it, right? This is kind of considered a transitional region when we think about stablecoins. And I'll explain to you why this is actually important to you, and explain a lot of the work that you all do here, and some of the nuances of how money moves on the continent.
Er, er, Africa, as I mentioned earlier, was a very early signal for the global adoption of stablecoins. We have been using this for a very long time. Now, an integral part of finance is how money moves, how money is created. And just to give you an idea, from 2024 to this year, um, the percentage of people actually using stablecoins as a share of the entire crypto market has increased, and a lot of these numbers are abstract because abstract because , um, it's really hard to get the most accurate data, because the beauty of cryptocurrency is that it's borderless, right? You can't track the amount of money moving on its own.
So a lot of the data that we use actually happens on centralized exchanges. And what happens outside of that is much harder to track, but I'll tell you what. So we use this for cross-border payments. We use this integrated into traditional finance. Crypto cards have been huge across the continent for a very long time.
So if you think about the African market, um, a lot of these primitives, like content, are a signal of what's coming next in terms of the adoption curve. when we think about new financial primitives. Um, and the other reason why I think we should be very concerned about this is because, um, here in the Western world, almost most of the people I've talked to are building with stablecoins, they're trying to get market share from traditional finance traditional finance , and it's happening, but it's a really uphill battle in Africa and in a lot of emerging markets. When we look at many of these financial primitives, we are actually creating products that fill the gaps fill the gaps left in our banks. So we are not trying to capture their market share at the moment.
We are doing what they are not doing now. It makes a very fundamental difference in how you build, what pace you can go at, and what are the secure ways that many of these startups build. Let's look at some examples that really matter. Now matter. Now , when we think about stablecoins in emerging markets, this is the dominant narrative that we see, and I hear it in every podcast where people talk about stablecoins, but we hear about people using them for remittances.
So, you have someone working in the US and sending money home, or we hear about a software developer working online and stablecoins are the only way for them to get paid. But in fact, one of the most fundamental applications, where the largest volume is, is trade finance trade finance . These are people who import and export goods and services. Everything from these types of t-shirts to oil and gas, internet like Starlink, and all the types of businesses that these economies essentially depend on . And the first thing to note and understand is that our banks lend to governments and extremely large corporations.
Currently, these players account for only 10% of our economy. The remaining 90% economy. The remaining 90% are memes and mid-market players. They do not receive loans from our banks. So the fundamental value proposition of a bank is missing for 90% bank is missing for 90% of the economy.
And now we're asking that 90% of we're asking that 90% of the economy use the same banks to move money across borders. This effectively results in cash flow capture. You have taken your money. And that's the best business And that's the best business model for banks, isn't it? The longer you hold the bonds in free float, the more you can lend them, the higher the return on that.
But this contradicts the needs of 90% of the economy. So that means that as a business you don't have liquidity velocity. You are limited to weeks, and with highly volatile currencies, you are exposed to currency risk. So when stablecoins come out, you actually increase the velocity of the flow of funds. These are instant payments, and they happen at a very small fraction of the price you would pay to banks.
So the value proposition of a bank that doesn't lend to you but wants you to use the infrastructure to move money around the world is actually a loss-making value proposition for many businesses many businesses . This is one of the fundamental reasons why many businesses use stablecoin-based products because it saves them huge amounts of money, and they actually save money without being exposed to much risk. Um, this is one important case. Another issue we don't hear much about is, ahem, treasury management. So, if I do business in multiple jurisdictions, in traditional banking I have to keep money in multiple currencies circulating in different banks.
My business then becomes currency risk management, as opposed to actually running the business. When we use, um, stablecoins, it allows me to actually have unified treasury management in one place. And many fintech many fintech and stablecoin companies have become so sophisticated that they offer services that banks offer, namely the ability to use these currencies. But the services that stablecoins offer are actually unified management of your treasury. And the many transitions allow you to move money back and forth very easily.
Finally, and this is the hardest thing for many of us here in New York to understand, is that stablecoins have become a very important part of market coordination for currency. And the reason is that we have multiple prices for one currency. That is why there is a large circulation of dollars outside institutions. And the price that banks offer is very different from the price of banks that you will find in parallel markets. Stablecoins have essentially aggregated and coordinated all of this liquidity on the blockchain, right?
That is what makes them unique. Um them unique. Um , to actually drive a lot of payments and a lot of value turnover, someone with $1 or someone with a billion dollars can participate in the same market, and that was very transformative, which banking doesn't offer. Um, and pricing, which I'll talk about now. Um, as a result of this type of market coordination, even three years ago, companies like Shell, Chevron, and the big oil and gas companies oil and gas companies had a better chance of moving money.
Across the African continent and around the world, using companies that run on stablecoins rather than knocking on the bank, waiting for days, exposing themselves to significant currency risk to conduct their business. So this was one of the main fundamental elements of the trajectory of stablecoins on the continent. Here's a nice chart I used from a stream from one of our portfolio companies portfolio companies . It just shows how, even with stablecoins, money moves. On the one hand, you have a business.
This business has a bank account. This bank serves mobile money companies. Some of you may have heard of Empessa, MTN, and these are companies like Telos that basically use a phone number as a pseudo bank account with a trust account at the bank. We also have banking services as service providers. And then the money flows from there to the processor, which is the PSP.
Local LPs contribute in local currency. Brokers, OTC, mainly providing liquidity for converting fiat currencies into dollars or fiat currencies into stablecoins. Somewhere in the middle is swap, and it's the Binance of the world that started it, and many other centralized exchanges centralized exchanges . Now we have sophisticated orchestrators on programmable over-the-counter platforms or OTC platforms or OTC desks that do this, and then you actually copy the same thing on the other side. So we still have n't completely simplified the entire flow.
Uh, but these are some of the steps by which money moves from fiat currency to stablecoin and then to fiat currency on the receiving side. The best case scenario we see in all of this for large sums of money large sums of money is within a few minutes. Worst case scenario – within 24 hours, and this also works on weekends, with different types of credit lines offered. Now let's get back to the pricing element, and this may be a controversial image because we're here in New York. We talked about regulation.
When you get to emerging markets, cryptocurrency thrives not because of regulation, but in spite of regulation, and I'll explain the thought process of how that happens. So let's ask if we are in Nigeria. What is the price of the dollar today? Well, I see three prices. There is a price of desire, which I call the price of desire.
This is the price that the central bank tells you. So they say the NRA price today is 1350. I call it the desire price because it is the price at which the bank and the central bank want the market to trade. This price is listed there, but you and I cannot get it cannot get it because the central market does not have enough liquidity to meet all our demands and needs. And there is also the price of "do needs.
And there is also the price of "do you meet the requirements?" This is the price set by many regulated banks. “Do you qualify? ” is essentially a way of saying how much I can sell this to you for without losing my banking license, right? And here is a small bonus.
If you want to get this price, you may have to wait a day or two, or you may need a deeper level of banking relationship banking relationship to access it . And there is a third category–price N, and this is the price you can actually pay at this moment, in this case; this is the stablecoin price, this is the open market price, and there is a huge margin between them. To give you some guidelines in Nigeria, this margin ranges from 2% to 25%. In countries like Ethiopia, where I come from, this margin ranges up to 120%. So you pay more than double what the bank is offering to actually settle the price now.
And many people see this in the fact that the NRA is evaluated is evaluated differently. My interpretation of this is speed of execution. So you might have a very specific client relationship with a central bank and you might get the price you want, but you might have to wait a very long time for that liquidity to be ready for you. But if you want to settle the deal now, you do it on the open market. And that's one of the reasons why sometimes regulators and the market should work in each other's interests, but sometimes they contradict each other.
And in markets across Africa, it turns out that overall the market has a higher level of influence. And that means from the smallest to the largest institution, just ask, at what price do you set the deal? And if they set a deal at that price, then it shows that regulation actually works, and regulators have the most influence to stimulate business there. If it happens the other way around, then regulators need to catch up with the market. And my philosophy, after working on this for a long time, is that , um, good governance comes and goes with good markets.
So, um, pricing is a key element of what we decide. We talked about oracles in the previous, um, presentation. It's hard to get pricing information for NARA, hmm, because there are so many different prices. That's why many of our startups contribute to determining the prices of local currencies and ensuring market participation in this. Another, um, interesting element that we've been studying about the use of stablecoins is about, um, pricing, um, currency risk.
I'll move on to the next one because we don't have much time. Hmm, and this, um, we were talking about the spot price today, right? For example, how much can I get for a naira today, and how much can I get for a naira in a year? Let's say in a year? Let's say I'm a fintech company or I work in construction, right?
I'm investing, you know, $100 million in Ethiopia. Now I am exposed to the currency risk of this country, no matter what happens. So, how do I assess this risk? Well, today a lot of the options that we have are that I need to go to a broker, most likely in London or somewhere in Europe, to buy an option or a futures contract on that currency, and that's how I hedge my risk. Now with stablecoins, including local currency stablecoins, which is a very important part.
This allows us to create all sorts of risk pricing tools risk pricing tools . So what people are creating today are creating today is a way of pricing currency risk through options markets, where option writers create a premium for how much I can sell you a dollar for in a year, and that premium becomes an indicator of what the indicator of what the market thinks the price of the currency will be in a year the price of the currency will be in a year . If it's in the chain, it's transparent pricing. So there's a clear, uh, market, uh, opening around this, and pricing is much more efficient much more efficient . Um, and that's actually one of the most important elements, because a lot of people are seeing huge growth in a lot of these markets, but they don't know how to participate because they don't know how to assess the risk.
If you don't know how to assess risk, it's hard to invest a lot of capital and energy into it. So some of these elements in stablecoins allow us to create these types of financial primitives that actually build a lot of these economies. And finally, um, today in cryptocurrency we see a lot of energy moving around, let's strengthen the thread as it is. And I see how it works, and you know, I spent half my time working on it. But we also see another parallel reality, which is the creation of completely on-chain completely on-chain markets.
Perhaps we will have to choose one or the other here choose one or the other here . In emerging markets , we're actually building both in parallel, and they may converge at some point, and it will be a tag war. In which direction will the market move? Management, regulation and a lot of these laws. And we see that a lot of things will eventually move to fully on-chain, open, permissionless marketplaces, where we build the foundations of our economic structures economic structures .
Thank you.
Automatic transcript — names and jargon may be misspelled.
