Beyond the Hype: How Money Actually Moves in Africa

Transcript

[applause] >> Uh, good afternoon everybody. How are you all today? Busy day. Um, so we're going to talk about stable coins in emerging markets. Just a quick question here. Who's used stable coins to make cross-border payments? Like this year. How about last year? How about 2021? Or 2020? Okay. So, um, I want to talk about this because Africa's been very early in the stable coin adoption curve. Now, here we're sitting in New York. You might be thinking, Africa's so far away from here.

Uh, it is a very small market in dollar terms. Um, it's too risky. It's too complicated. We might as well just ignore it, right? It's kind of considered a flyover region when we think about stable coins. And I'll explain to you why it actually matters to you and a lot of the work you're all doing here and some of the nuances of how money moves on the continent. Um, So, um, Africa's, as I mentioned earlier, has been a very early signal to global adoption in in stable coins. We've been using it for a very long time. It's become now embedded into finance, how money moves, how money's created.

And just to give you a sense, uh, from 2024 to this year, um, the percentage of people who are actually using stable coin as a uh, as a proportion of the entire crypto market has increased. And a lot of these numbers are kind of abstract because, um, it's really hard to get the most accurate data because the beauty of crypto is that it's borderless, right? You cannot track self-custody amount of money moving around. So, a lot of data that we're using, they're actually the ones that are happening in centralized exchanges. And what's happening outside of that is a lot harder to track, but I'll I'll I'll I'll tell you that. So, we've been using it for cross-border payments.

We've been using it integrated into traditional finance. Um crypto cards were huge across the continent a very long time ago. Um so, when you think about African market, um a lot of these primitives, like it the continent is a signal for what's coming ahead in terms of the adoption curve when we think about new financial primitives. Um and the other reason why I think we should care a lot about this is that um here in the Western world, pretty much most people I talk to building with stable coins, they're trying to get the market share of traditional finance. And it's happening, but that's a really hard battle.

In Africa and many emerging markets, when we look at a lot of these financial primitives, we're actually building the products that are filling gaps our banks have left. So, we're not at the moment trying to take the market share, we're doing the things that they're not currently doing. That has a very fundamental difference in how you build, what pace you can go through, and what are the defendable modes that a lot of these startups are building. Let's look at a few examples that actually matter. Now, when we think about stable coins in emerging market, it's a it's a predominant narrative that we see, and I hear it in every podcast of people talking about stable coins.

But, we hear about people using it for remittance. So, you got somebody working in the US and sending money back home, or we hear about the software developer working online, and stable coins is the only way for them to receive money. But, I think one of the most fundamental uses and where the deepest volume is at is actually trade finance. These are people importing and and exporting goods and services, everything from these types of t-shirts to oil and gas to like internet like Starlink, and all types of businesses that are basically all these economies rely on.

And the first thing to note and understand is that our banks lend to governments and extremely large corporations. Now, those players only make up 10% of our economies. The remaining 90% they are SMEs and mid-market players, they don't get letters of credit from our banks. So, the fundamental value proposition of a bank is missing to 90% of the economy. And now, asking that 90% of the economy to use the same banks to move money across borders, what that leads to is actually trapped cash flow. You trapped your money and that's the best business model of banks, right? The longer you

keep float, the more you can lend it, the higher the profit through it. But, that is at odds with the needs of that 90% of the economy. So, what that means is as a business, you don't have liquidity velocity, it's trapped for weeks, and with highly volatile currencies, you're being exposed to FX risk. So, when stablecoins come in, it's actually you're increasing the speed of value flow, it's instant settlement, and it is happening at a very smaller fraction of the price that you'd pay for banks. So, the value proposition of a bank that does not lend to you, but wants to have you use the infrastructure to move money around the world, it is actually a loss-making

value proposition for a lot of businesses. That's one of the fundamental reasons why a lot of businesses are using stablecoin powered products because it saves them a huge cost, and they're actually saving money from not being exposed to a lot of that risk. Um So, that's that's one important case. The other one is that we don't hear much about is around running treasuries. So, if I operate a business across multiple jurisdictions, what I have to do with traditional banking is I have to keep money in multiple currencies as float across different banks.

My business then becomes FX risk management as opposed to actually business management. Um when we're using uh stable coins, what that allows me is actually unified treasury management in one single place. And a lot of FinTechs and stablecoin companies have become so sophisticated to offer the services that banks offer, which is the capacity to use those currencies, but the services that stablecoins offer, which is actually manage a treasury in a unified way. And a lot of on and off-ramps allow you to move money back and forth in a very easy way.

Lastly, and this is the hardest thing for a lot of us in New York to comprehend, is that stablecoins have become a very important part of market coordination for FX. And the reason why is that we have multiple prices for a single currency. That's a reason why there's a lot of dollar circulation outside of institutions. And the the price that the banks gives you is very different from the banks that you find in the parallel markets. What stablecoins have done is they've basically aggregated and coordinated all this liquidity on chain, right? So, that's that's the the the unique element of it. Um in order to actually drive a lot of payments and a lot of value circulation.

Someone with $1 or someone with a billion dollars can participate in the same market. And that has been very transformative, which banking doesn't offer. Um and price discovery, which is something that I'll I'll I'll jump into. Um as a result of this type of market coordination, even 3 years ago, companies like Shell, Chevron, and big oil and gas companies were more likely to be able to move money across the African continent and around the world using companies that are powered by stablecoins than knocking on a bank, waiting multiple days, getting exposed to significant FX risk in order to do their business.

So, this has been one of the core foundational elements of the stablecoin trajectory on the continent. Now, this is a beautiful graph I've used from one of our portfolio companies, Floatflow. It just shows you, like even with stablecoins, how money actually moves. On one side, you have a business. That business has a bank account. Now, that bank serves mobile money companies. Some of you might have heard M-Pesa, MTN, and these are business like telcos that basically use the phone number as your pseudo bank account with a trust account at the bank. Um we've got also banking as a service providers.

Um and then where money flows from there to a processor, that's a PSP, uh local LPs contribute local currency to that, uh brokers, OTCs contribute basically providing liquidity for moving fiat to dollar or fiat to stablecoin. There's a swap that happens somewhere in between, and this are the Binance of the world started this, and many other centralized exchanges now we've got sophisticated orchestrators on and off-ramps that are programmable or OTC desks that that are doing that. And then you do basically copy the exact same thing on the other side.

So, we still haven't fully um simplified the whole flow, uh but these are some of the steps that basically how money moves across fiat to stablecoin and then fiat on the receiving side. Now, the best-case scenario that we see in a lot of this for large amounts of money is within a few minutes. Some of the worst-case scenarios is within 24 hours. And this works on weekends as well um with different types of credit lines being offered. Now, let's go back to the pricing element, and this might be a controversial image uh because we're here in New York, we've been talking about regulation. When you come to emerging markets, crypto has been thriving not as a result of regulation,

but despite regulation. And I'll explain really the the thought process how. So, let's ask where in Nigeria, what's the dollar price today? Well, I see three prices. There is the wish price. That is I call it the wish price. That's the price that central bank tells you. So, they say, "Price of the naira today is 1,350." I call it the wish price because that's the the price the bank the central bank wishes the market will trade at. It quotes that price, but you and I cannot go go get that price.

Because the central bank does not have enough liquidity to meet all our demands and needs. And then there's the do you qualify price. That's the price that many regulated banks have. Do you qualify is basically a means of saying, "How How much can I sell it to you for without losing my license as a bank?" Right? And there's a bit of a premium to that. If you want to get that price, you might have to wait a day or two days, or you might have you might require a deeper level of banking relationship for you to access that. And then there's the third category, which is the now price.

And that's the price at which you can actually settle in this minute in this instance. And that is the stablecoin price. That's the open market price. And there's a huge margin between the two. To give you some reference points in Nigeria, that margin has ranged anywhere between 2% to 25%. And countries like Ethiopia where I'm from, that has ranged up to 120% margin. So, you're paying more than twice the price the bank quotes you to actually settle a price now. And many people see it, "Oh, the the the the the naira has been priced in different ways."

My interpretation of that is actually the speed of execution. So, you might have a very specific client relationship with the central bank, and you might be able to get the wish price, but he might have to wait a very long time until that liquidity is ready for you. But if you want to settle right now, you're doing it out in the open market. And this is one of the reasons why sometimes sort of regulators in the market, they're supposed to kind of work in each other's best interest, but they're sometimes they are at odds. And in markets across Africa, what you find is generally speaking, the market has higher leverage.

And what that means is from the smallest to the biggest institution, just ask, what price are you settling at? And if they're settling at that this price, then it shows that actually regulation is working, and regulation regulators have the highest leverage to drive business there. If it's happening on the other side, then regulators have to actually have to catch up to where the market is at. And my philosophy after doing this for a long time is that um good governance comes and follows good markets. So, uh price discovery is a core element of what we're solving for. We're talking about oracles in the earlier presentation. It's hard to pull a price feed for the naira uh because there are many different prices. So, a

lot of our startups, they're facilitating price discovery of the local currencies and enabling market participation in doing that. The other uh interesting element that we've been learning around stablecoin use is around um uh uh pricing uh risk. FX risk, I'll go to the next one cuz we don't have much time. Um and that's um we talked about the the spot price today, right? Like how much can I get the naira for today? But how about how much can I get for the naira in a year from now?

Let us say I'm a fintech company or I'm in construction, right? I'm investing, you know, $100 million in Ethiopia. Now, I'm going to expose to that country's currency risk, no matter what happens. So, how do I price that risk? Well, today a lot of the options that we have is I have to go to a broker, most likely in London or somewhere in Europe, to buy an option or a future for that currency, and that's how I hedge my risk. Now, with stablecoins, including local currency stablecoins, which is a very important part, it allows us to create all types of risk pricing instruments.

So, what people are building today is a means of pricing FX risk using options markets, um where the writers create a premium for how much I can sell you the dollar in a year from now, and that premium becomes an indication of what the market expects the price of the currency to be in a year from now. If it's on chain, it's transparent pricing, so there's a clear uh uh uh market uh discovery around that, and the the pricing is a lot more efficient. Um and this is actually one of the most important elements because there's a lot of folks who see huge amount of growth happening in a lot of these markets, but

they don't know how to participate cuz they don't know how to price risk. If you don't know how to price risk, then it's hard to put a ton of capital and energy around that. So, some of these elements in stablecoins allow us to build these types of financial primitives that actually build a lot of these economies. And lastly, um today in crypto, we see a lot of energy moving around sort of let's power TradFi as it is. And I see how that works, and you know, I spend half my time working on that. But we see also another parallel reality, which is creating fully on-chain markets.

Maybe here we have to choose one or the other. In emerging markets, we actually are building both in parallel. And they might converge at some point, and it's a tug-of-war. Which direction is the market going to move governance, regulation, and a lot of these laws towards. And what we're seeing is a lot is going to end up moving to fully on-chain open permissionless marketplaces where we build the fundamentals of our economic structures. Thank you. >> [applause]