According to the Financial Stability Board (“FSB”) and the Bank for International Settlement (“BIS”), stablecoins can be defined as crypto assets that aim to maintain a stable value relative to a specified asset, or a pool or basket of assets. They serve as a crucial bridge between traditional (“Trad-Fi”) and decentralised (“De-Fi”) finance, offering businesses new avenues for transactional flexibility. The benefits are numerous: mobility, accessibility, convenience, and low-cost transfers.
As reported by CoinMarketCap, the total market capitalization of stablecoins reached $166 billion as of May 23, 2024 – with USDT (Tether), USDC (Circle), and DAI, together accounting for circa 93 percent of the market. Tether, the leading stablecoin issuer, now boasts over $111 billion in assets, all reported to be backed by reserves. Among these, an impressive $74 billion is held as U.S. Treasury Bills, as verified by BDO’s March 2024 attestation. To put this into perspective, Tether’s Treasury holdings rival those of entire nations. They are nearly on par with the reserves of Mexico and Germany, ranked 19th and 20th among major foreign holders of U.S. Treasury securities, and surpass those of the UAE.
MENA’s stablecoin market
These virtual assets (“VAs”) are set to grow at a sustained pace, and the Middle East and North Africa (“MENA”) region is no exception. The region’s stablecoin market is experiencing significant growth and development, driven by multiple initiatives from both the public and private sector, and from high-inflation jurisdictions such as Turkey and Lebanon. Available 24/7, carrying near-zero costs, and being fully programmable, stablecoins support the national agendas of Middle Eastern governments, such as increasing financial inclusion and expanding the banked population.
A PwC analysis estimates that a potential dirham-backed stablecoin’s market sizing could generate about $533 million in revenue to the issuer within five years, with a compounded annual growth rate (“CAGR”) of 32 percent. This growth is also driven by ancillary services – such as VA brokerage and custody – provided by financial institutions that are increasingly exploring ways to implement a stablecoin proposition as part of their market offering.
Global players driving stablecoin adoption in MENA
Another growth driver for stablecoins in the MENA region is the establishment of market players from other regions. Circle, for instance, is looking to develop partnerships to grow its USDC market share in the MENA region. According to Circle’s CEO Jeremy Allaire 70 percent of USDC adoption occurs outside the USA, with Asia, Latin America, and Africa leading. Allaire predicted significant stablecoin growth for 2024-2025 as regulations emerge in Japan, UK, EU, Hong Kong, the UAE, Singapore, and the USA.
As part of the broader Circle’s Alliance Programme, Circle has partnered with Fuze, a UAE-based Virtual Asset Service Provider (“VASP”), to expand the adoption of USDC stablecoin in the MENA region. This partnership exemplifies the broader potential for stablecoin use cases in virtual asset trading, payments, remittances, company expenses, and DeFi applications.
Use cases and benefits
Stablecoin use cases include virtual asset trading, payments (such as, cross-border transactions, trade finance, merchant payments), replacing client money accounts for VASPs, including VA exchanges, brokers and FinTech companies. Other use cases include remittances, company expenses, cash and treasury management, and De-Fi applications. As the market evolves, many more use cases are expected to emerge. Some of these include:
- VA Trading: Stablecoins, as a common medium of exchange for virtual assets, are poised to revolutionise virtual asset trading. They will enable seamless transactions against assets priced in the same unit of account, maintaining operations within the Web3 ecosystem. This offers continuous availability, ensuring trading can occur 24/7 without the constraints of traditional banking hours.
- Payments: The adoption of stablecoins as a means of payment will transform various sectors. They promise to unlock multiple use cases, including retail payments, point of sales, e-commerce, and wholesale payments. By providing cheaper, near-real-time, and always-available settlement options, stablecoins will benefit merchants through reduced transaction costs and enhanced ability to track spending.
- Remittances: Stablecoins will also have a profound impact on cross-border exchanges between individuals and entities. They offer a low-cost transaction method with immediate settlement capabilities. For instance, while the global average cost of remittances was 6.5 percent in 2022, the UAE optimised this to 3.5 percent, showcasing the potential for cost reduction. This efficiency will be particularly beneficial in the MENA region, where remittances are a critical financial lifeline for many households.
Rise of yield-bearing stablecoins
A new use case that is emerging, globally as well as in the Middle East, is the one of Yield-Bearing Stablecoins:
- Yield-stable pay interest on their earnings, unlike staking, where the reward is earnt for helping to run the network;
- The interest comes from various sources, like DeFi lenders, protocol earnings or real-world assets.
Right now, there is one clear leader in this space, Ethena’s (sUSDe). The beauty, for both institutional and retail investors, is that the initial investment is kept safe while generating additional yield.
Moreover, in the UAE, a new partnership has recently been announced between Medad Holding and Franklin Templeton to issue a new “yieldcoin”, that would offer investors superior use cases for cash and collateral payments and mark an innovative step forward in bringing together the traditional and new blockchain-based financial rails. Infrastructure and servicing will be provided by Franklin Templeton via their BENJI tokenization suite – the same infrastructure that is currently used to administer Franklin Templeton’s U.S. Government OnChain Money Fund (FOBXX) – the only tokenized fund in the world where the official set of transaction records are maintained on public blockchains.
Read more: Is this the beginning of the end for stablecoins?
Practical benefits of stablecoins
Stablecoin adoption and growth in the MENA region will depend on defining successful use cases that appeal to both institutional and retail users. These use cases will showcase the practical benefits of stablecoins, encouraging widespread adoption. Additionally, strengthening collaboration between public and private market players is essential. Enhanced cooperation will create a supportive ecosystem that fosters innovation and adoption.
Furthermore, the MENA region stands on the brink of a financial transformation driven by stablecoins. With continued support and strategic initiatives from both the public and private sectors, the region can harness the full potential of stablecoins, driving financial inclusion, reducing transaction costs, and integrating traditional and decentralised financial systems.
Serena Sebastiani is the virtual assets consulting lead at PwC Middle East.
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