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Can Stablecoins Provide Africa With a Gateway to Economic Stability?

Stablecoins could help citizens preserve wealth in cases where the economy is unreliable.
Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.
Luis Aureliano is a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.

Facebook has announced plans to launch a stablecoin later this month, which once again validates the important role that asset-backed tokens will play in the future of blockchain technology. While it is often noted that stablecoins can benefit those looking to store wealth from the threats of financial instability, very little has been discussed about the impact this will have on the African continent.

This is somewhat surprising when you consider their long-standing history of fascist dictators that have all but destroyed many African economies.

The Rise and Fall of the Zimbabwe Dollar
From 2000-2008 the Zimbabwe economy experienced an average annual GDP rate of negative 8.29%. The then head of government, Robert Mugabe, sought to respond to the nation’s economic woes by implementing a significantly large quantitative easing policy.

Printing all that money not only didn’t help but actually resulted in the hyper-inflated state of the Zimbabwean dollar by more than 89 sextillion percent each and every day, which is 21 digits compared to a billion’s mere 9. The hyperinflation caused Zimbabwe’s citizens to lose all the value their money had, rendering it useless and leaving them destitute and impoverished. To put this in perspective, the paper the money was printed on was worth more than the money itself.

While inflation in Zimbabwe is no longer considered “hyper-inflation”, the Zimbabwean dollar is far from stable.

If the Zimbabwean people had had the opportunity to protect their assets from hyper-inflation by exchanging them for traditional stores of value such as gold, silver, diamonds or even the US Dollar, things would have been very different for them. However, access was not freely available to the average citizen, not least because the commodities market has been reserved for large-scale institutional investors only.

Today, citizens are still lacking access to a traditional medium of exchange with which to pay for basic goods and services. Zimbabwe’s Dollar is still extremely volatile, making everyday business transactions problematic and leaving the people of Zimbabwe in a constant state of poverty.

Stablecoins Provide Instant Protections Against Poor Economic Policies

The underlying technical framework that governs the issuing and distribution of stablecoins makes it a frictionless process to obtain stores of value. The African continent is home to some of the largest natural resource reserves in the world, not the least of which are diamonds.

While Africa has a complex history with the diamond industry, global pressure has resulted in great strides being made to keep conflict out of the trade. One such example of this is the Kimberley Process Certification Scheme (KPCS). Launched in 2003, the KPCS structure ensures that conflict-related diamonds are not able to make their way into the mainstream diamond trade.

As a result, with blockchain companies such as diamDEXX now offering a transparent way to hold value in KPCS diamonds in the form of a stablecoin, residents of African countries with less than stable economies now have a way out. A stablecoin is most commonly anchored to a major fiat currency, and in the case of DIAM, 1 stablecoin is pegged 1:1 against the USD and backed by physical diamonds as well.

The diamDEXX project is being spearheaded by some notable team members, including the 2010 Nobel Prize in Economics joint winner Sir Christopher Pissarides, as well as former Cyprus permanent secretary of ministries Michael Constantinides.

While diamonds are often associated exclusively with the jewel trade, it is important to note that the commodity has a number of other real-world use cases – especially in the industrial sectors. As such, Bain & Company has said that the demand for diamonds will surpass its supply by the end of 2020, further highlighting its characteristics as a store of value.

Another avenue to protect wealth is the classic staple, gold. Blockchain platforms such as Eidoo are looking to do just this with its gold-backed stablecoin. The project will see each stablecoin fully redeemable against 99.9% of fine gold. Much like in the case of diamDEXX, Eidoo reserves will be audited frequently to ensure the platform retains its integrity. This is also the case with USD-backed TrueUSD, which recently had their cash reserves verified by a third party auditor.

Nevertheless, with countries such as China, Russia and Turkey looking to obtain as much gold reserves as they can get their hands on, this once again illustrates the long-term safety net that the commodity can yield, protecting civilians from any future hyperinflation.

The Future is Bright for Value-Backed Stablecoins

Fortunately, the growth of value-backed stablecoins now makes it possible for everyday citizens to ensure they can protect their wealth from the threats of economic collapse. Hopefully blockchain is bringing us closer to a time where no one need fear the ruin that corrupt regimes and leaders can have to a nation’s economy.

Blockchain innovation is leading us to a time when, with the click of a button, all citizens of the world will have the opportunity to invest in real-world stores of value at the click of a button, all made possible by the innovation of stablecoins.

Equities Contributor: Luis Aureliano

Source: Equities News

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