Nic Carter - Cryptodollarization: The Emerging Markets Story - TOKEN2049 Singapore 2024

I'm uh here to tell you about how to use technology to extend your life and Achieve immortality sorry that's Brian Johnson um I'm here to tell you about stable coins um I sat on this roughly the same stage a year ago and uh talked about how I felt like stable coins were achieving an inflection point and that's happened uh we have the data to prove it we didn't before we do now uh and specifically what I'm here to tell you about is how stable coins are penetrating in emerging markets and potentially causing significant geopolitical outcomes influencing the monetary policy of these nations and causing significant benefits to end users to Savers to consumers in these places so since I was here a year ago this is going to be data heavy presentation I'll publish a slides later since I was here a year ago the supply of stable coins has grown from 127 billion to 171 billion as of today uh so we've had significant growth not as explosive as in 2021 but still very material um and there have been some new entrance there uh Athena has launched an interest bearing stable coin they've taken market share but really it's a tether story tether continues to dominate they're about 70% of the market and maybe more interestingly I love this chart because it's just up and to the right constantly it's linear this is uh active monthly sending addresses on blockchains uh you can see it's just always growing so it's over 20 million now so over 20 million addresses on chain every month will send a stable coin transaction this chart includes every major blockchain where stable coin transactions happen every major L2 and uh Tron is the number one I think a lot of people know that uh ethereum uh is up there ethereum l2s are gaining market share uh B BSC is actually pretty uh prominent now keep in mind this doesn't mean that there's 20 million individuals that are making stable coin transactions uh we don't know exactly what the ratio of real humans to blockchain addresses is but this is a very demonstrative chart of the continued growth we see in the stable coin sector and importantly we see that it grows regardless of the crypto Market cycle right so everything every metric in crypto trended down from between 22 and 23 but this kept growing so this is a very important data point which shows us stable coins have achieved some kind of real adoption outside in the real world not just in crypto right so this is the critique I always hear from Central Bankers from haters from no coiners right oh crypto people are just using stable coins to transact on exchanges it's just Traders that's not true right there are ordinary people using stable coins to make their lives better and the growth of stable coins throughout the market cycle is indicative of that so uh this is a very important metric as well this is dollar settlement value so this is all of the dollars settled on blockchains in stable coin format this data is enormously difficult to determine because you have to do a huge amount of d noising uh you have to net out me net out inter exchange transactions and it's an estimate right and in the past I actually had a more aggressive estimate for this I thought it was around $10 trillion dollar a year my new estimate is around5 trillion do a year uh so I'm I'm a little bit more conservative but the point is stable coins are settling huge amounts of value by any measure uh Tron is actually the number one uh followed by ethereum and if you take that same data I just showed you and you compare it to all of the value settled with Native crypto assets Bitcoin ethereum Bitcoins in Orange here ethereum's in purple other uh l1s are in uh light purple stable coins are in blue you see that blockchains are mostly about sending dollars uh mainly dollars stable coins but mainly dollars and it in the past it's been as high as 70% and right now it's around 50% so over time dollars have just kind of invaded blockchains and come to really dominate the flows uh and so if you compare this to the percentage of stable coins that are backed by dollars it's about 99% uh there's some gold there's some euros but really not a lot of other Sovereign currencies this is a sign that crypto is good for the dollar right uh you often hear Bitcoin people say oh you know we're going to destroy the dollar uh blockchain are bad for the dollar we're going to destroy all the Fiat currencies it's the opposite public blockchains extend the reach of the dollar worldwide maybe in the future it'll be other effects right it doesn't have to be the dollar but clearly people prefer to use Sovereign currencies on blockchains and this is very visible in the data we just have to acknowledge it as a reality crypto is good not bad for the dollar don't forget that and if you compare how dollarized stable coins are to other major Financial Networks globally savings devices globally it's very Stark right so foreign exchange reserves dollars about 55% International Trade flows all these metrics are in the kind of 50 to 60% the dollar is the global Reserve but it's not overwhelmingly so right uh for the foreign exchange transactions that adds up to 200 so keep that in mind for stable coins again it's 99% so it's very Stark I think and of course stable coins are new they've only really been around for five years or so it could change as of right now this is what I when I talk to policy amers in Washington I say look at how dollarized stable coins are uh I think it's very very clear so as I said before stable coins have decoupled from the crypto Market cycle in green on the right Axis that's transaction that's the aggregate amount of trans transaction value settled on stable coins and then on the left hand side that's crypto exchange spot volumes you see it came down dramatically in 22 23 but stable coin usage went up so something is happening with stable coins that has nothing to do with crypto trading what is that who are these people using stable coins I set out to find out so I commissioned a study this year I just published it last week we hired OV one of the best pollsters to go to five key Emerging Market countries Brazil India Indonesia Nigeria and turkey these are all places with high crypto adoption and we ask crypto users in these countries what are they doing with stable coins and no one's ever done anything like that before nobody knew we s we had all the onchain data but we didn't know what are these people actually doing with stable coins are they just trading are they buying nfts or are they doing uh ordinary Financial transactions and uh as it turns out that's what they're doing right the number one thing they do 50% and I'll get into this in a minute is getting access to the crypto economy but just behind that is saving money in dollars and in most of these countries getting dollar banking is very hard these are countries for the most part with high inflation uh with relatively weak property rights and what we saw was a majority of all of the individuals surveyed have converted their local currency into a stable coin but interestingly they have very different reasons for why they like stable coins right so in Nigeria um it's to save in dollars that's their primary stable coin goal in Turkey the primary goal was to earn a yield right in Indonesia it was efficient currency conversion so so it's not the same exact reason in all these countries why they like to use stable coins so this is sort of the most important finding from the survey what are your primary goals the number one goal was access to the crypto economy that makes sense these are crypto in users that we surveyed the number one number two goal was saving money in dollars so there is a kind of crypto dollarization happening in these places and then there's a whole other penopoly of things that they're doing they're earning a yield you some stable coins are natively interest bearing others you put them in def5 pool and you owner yield that way um they are taking their finances into their own hands in some cases they're buying goods and services with st with stable coins some cases they're sending money internationally so they're doing all sorts of things and we have now the data to prove it the important thing is that stable coins are part of these users everyday Financial lives we ask them which of these things have you done at least once 70% have converted their currency to a stable coin 30 39% have paid for something with a stable coin 38% have sent or received money to a relative in a different country with stable coins uh some of them are using it for their business some of them are doing payroll so I think this is very critical data you know we need to understand stable coins have crossed the chasm into being a mainstream Financial technology an important part of these people's lives they're not just trading crypto and the usage is growing overwhelmingly in every country we talk to in particular Nigeria and we're going to focus on Nigeria in a minute here the usage is growing so on the left side you have uh this year's usage whether it increase or decrease on the more pale colors you have next year's expected increase and you just see in every single country they increased their usage in the past year and they plan to further increase their usage in the next year and of the five countries Nigeria was number one followed by India so the drivers of adoption though depend on the specific context in these countries right so on the left here we have the real yield so that's short data government security yield minus inflation rate and in Turkey it's very negative because they have high inflation Nigeria it's very negative and this kind of makes sense 55% of the Turkish users we surveyed said they're chasing yield that's why they use stable coins and it makes sense uh government uh short Daya government debt instruments are not yielding uh anything useful for them so the dollar having a positive real yield is is useful and then on the right here we have the average inflation rate over the last 10 years in these countries and in Turkey they're going through an advanced inflation episode right now same in Nigeria and in Brazil there have been hyperinflation episodes in living memory so people remember that and uh you know you can see how that also influences people's propensity to use stable coins so another thing we wanted to understand was why is tether so dominant as the stable coin of choice in emerging markets and make no mistake tether is number one and you know you might be a little surprised by that if you read the mainstream media in the US you know you read The Wall Street Journal they're always saying how tether is garbage how it's under reserved the accounting is Shady uh you know it's used for all sorts of bad things the truth is we went and we asked these people you know Ordinary People in these five Emerging Market countries why do you like tether what scares you about tether would you consider using something else and as it turns out they don't care about what the Wall Street Journal has to say believe it or not um they care about liquidity they care about Network effects they care about reliability track record Lindy so the number one reason is because it's the most popular stable coin in their Network it has this Advantage it's been around for the longest time it's been fairly stable throughout that period and it's just very entrenched at this point so I think this really demonstrates the difference between perception and reality people care about the pragmatic qualities that allow them to save uh and you know protect their own Financial interests they don't necessarily care about what the Western media has to say so we have some more data feeds these are not from my study this is other data that I found that also shows continual growth of stable coins in the real economy actually this chart on the left is Singapore data uh from CH analysis showing stable coin payments just growing quarter over quarter over quarter and on the right here we have Brazilian tax data as it turns out Brazil asks taxpayers to share information regarding their stable coin usage this is uh reported tether usage for payments in Brazil and you can see it's just up and to the right it's growing constantly so we are in this kind of inflection period of very steady and strong growth particularly in Emerging Markets now I want to focus on one country in particular which is Nigeria every single question we asked in the survey Nigeria was the number one Nigerians have the highest favorability for stable coins that's this data here they have the highest portfolio penetration of stable coins they use stable coins the most frequently Nigerians are obsessed with stable coins and it kind of makes sense uh Nigeria has high inflation you can get a dollar-based bank account in Nigeria presumably if you're a bit more affluent but there are capital controls associated with those dollar accounts and ultimately that dollar is a liability of a local bank which you may not trust by contrast a stable coin liability is a very credible liability if you're facing off against Circle or py USD paos you can be pretty sure that the assets are there that are backing those stable coins issued uh and so that's a more credible claim on a dollar asset so even though you may have access to Dollar banking you probably still prefer stable coins so it's my conclusion looking all this data and I encourage you to look into the stud as well um it's on my website Castle island. VC um Nigeria is going through a crypto dollarization episode so you may wonder what that term means it's pretty self-explanatory it's a dollarization event with crypto right uh so because crypto liquidity is so widespread because you can hold coins in a non-custodial way because peer-to-peer exchanges exist crypto infrastructure is just available on your smartphone it's very hard to stop governments are not necessarily able to stop Savers when they are wanting to dollarize when they want to convert their savings from the local currency into a stable coin that's not something that governments can easily inhibit and in the past there have been dollarization episodes there is Ecuador there is El Salvador uh you have poor you know fractional dollarization episodes in places like Argentina but those were with in many cases physical dollars physical Bank notes right that that's much harder to spread throughout the population stable coins can very easily be distributed throughout the population so my thesis is there's something different about stable coins that means the dollarization episodes are more aggressive and they're harder to stop and of course the Nigerian government's not so happy about this stable coin crypto adoption in their country they put a binance executive in jail still in jail they cut off Banks from uh allowing exchange crypto exchanges to access them it's causing serious frictions but it is happening anyway so I wanted to go a little bit further based on this data and try and make a guess of what other countries might be likely to experience a crypto dollarization episode so this chart takes a little bit of explaining so please bear with me I went ahead and picked six variables that I think correlate with a propensity to adopt stable coins a crypto propensity index these variables are property rights inflation smartphone penetration the cost of remittances and then General crypto adoption and so if you have weak property rights High inflation High smartphone penetration expensive remittances and high crypto adoption I would say you have a high propensity to adopt crypto so I took all those variables I put them into quintiles uh which we don't have to dig into that and I created a index score of the country's likelihood to experience dollariz ation crypto dollarization and of the ones on my list the ones that are most likely were Nigeria which is validating that kind of validates my model Argentina Venezuela Zimbabwe Angola Egypt Pakistan and Brazil so I dug into these countries and they have some common themes so they tend to have very high inflation or hyperinflation they tend to be excluded from the Global Financial system so remittances are expensive the cost of moving money in and out of the country is high institutional trust in these countries is weak property rights in these countries is weak the penetration of financial accounts according to World Bank data is weak crypto adoption is generally high with the exception of Zimbabwe and Angola and importantly these are places that have Capital controls uh almost all of them do with the exception of Brazil so uh if I had to make a guess as to what the next Nigeria would be the next Emerging Market country to experience some kind of crypto dollarization event I would say probably one of these countries so uh stay tuned maybe next year I'll come back and give another talk and I'll say it happened I think it's likely to happen in the next decade it's not going to be overnight so I you know one last question is well Nick are you being neoc Colonial in your talk here you know should we be excited about dollars penetrating some of these markets is that a good thing and I would say yes I actually do think it's good right so uh in in previous episodes of dollarization uh in Ecuador in uh 2000 or in Salvador in early 2000 dollarization which is the government changing the official currency from an inflationary local currency to the dollar has significantly brought down inflation rates right significantly they achieve macroeconomic uh stability in in these instances and it allow you know we see spontaneous dollarization happening at the population level in many cases these are individual Savers taking their financial lives into their own hands opting out of an inflationary local currency opting into a different stronger currency and I would say there's other ancillary benefits to stable qu adoption in some of these countries which is better financial integration being able to engage in trade Import and Export crossb payments without the frictions that are associated with the banking system and the further away you get from the Nexus of global Finance whether that's Hong Kong London or New York the further away you get the more expensive Finance is and that is a drag on the econom iies of these places so I think when you introduce something like stable coins which is a flat Fair Equitable Global Payments mechanism you reduce that drag you increase Commerce you increase the ability of these people to earn in an asset that is stable and sound and generally I believe that would correlate with GDP growth so even though the government may not like the loss of monetary discretion in many cases you see them capitulate when their citizens lead they eventually follow so it may be a bit controversial to be touting dollarization but the fact is we have crypto infrastructure we have blockchains we have wallets it's going to happen we've seen these episodes happening now we have evidence of that and I think it's going to keep happening I'm going to wrap it up there thanks so much for your time