This article was contributed to TechCabal by Vladimir Fomene.

As African nations grapple with a persistent shortage of U.S. dollars, a paradoxical situation has emerged: significant amounts of dollars remain untapped and underutilised. One reason for underutilisation stems from regulatory restrictions preventing financial institutions from leveraging dollar stablecoins—cryptocurrency tokens pegged to the U.S. dollar. While these digital assets could ease liquidity pressures and facilitate smoother cross-border transactions, current policies leave them stranded on the sidelines.

This article aims to shed light on the extent of dollar underutilisation in major African economies such as Kenya and Nigeria, examining the regulatory barriers causing this phenomenon and quantifying the surprising volume of untapped dollar liquidity present in these markets despite the ongoing shortage.

The U.S. dollar reigns supreme in global commerce, serving as the primary medium of exchange for international trade. While currencies like the Euro and Yen play significant roles, they pale compared to the dollar’s dominance. This preeminence has elevated the U.S. dollar to the world’s de facto trade currency status.

Consequently, nations worldwide, including those in Africa, must maintain substantial dollar reserves. These reserves serve multiple critical functions: facilitating the purchase of goods and services on the international market, enabling cross-border money transfers, and meeting foreign debt obligations. This dollar-centric system underscores the currency’s pivotal role in shaping global economic interactions and highlights the challenges faced by countries with limited access to U.S. currency.

The scarcity of U.S. dollars in many African countries stems from a fundamental imbalance: dollar outflows exceed inflows. This is driven primarily by a trade deficit, where the value of imported goods and services surpasses that of exports. However, the picture is more complex. Remittances from Africans living abroad ($100 billion in 2022) and foreign direct investments ($45 billion in 2022) provide a crucial source of dollar income, while debt repayments ($112.3 billion in 2022) and repatriation of profits by foreign investors drain dollar reserves.

Africa’s growing population will further strain this situation, as increasing imports puts pressure on a system already tilted towards dollar outflows. The challenge lies in narrowing this gap and building a more sustainable dollar inflow. This problem also reduces the actual value of local currencies as people are ready to pay a premium to get dollars because of the shortage. This affects people saving their money in these local currencies and businesses carrying out international trade who now have to pay more in local currency to get the dollar. Benjamin Fernandes has a fantastic article about the dollar shortage crisis, titled “Is Africa’s dollar shortage ending anytime soon?”.

Here are some examples from some African countries demonstrating how the dollar shortage problem affected these economies.

Fly Emirates suspended flights to/from Nigeria because of failures from the Central Bank of Nigeria to repatriate profit in dollars made by Emirates in the country.

Nigeria wants to take a $2.25 billion IMF loan and issue diaspora bonds to attract foreign reserves.

In 2023, Kenyan fuel and oil importers couldn’t import these commodities because of a dollar shortage in the Kenyan market. This resulted in a scarcity of fuel, which increased fuel prices. Energy is the foundation of every economy. If the price of energy goes up, other commodities will follow.

The Bank of Tanzania (BoT) has pledged to redress the dollar shortage in 2024, saying it has implemented measures to control the situation. The measures include cautioning exporters to ensure export proceeds are remitted within 90 days after trading to guarantee a sufficient stock of dollars in circulation.

Like many African countries, Ethiopia relies heavily on imports to sustain its medical supply chain. After years of grappling with a chronic foreign currency deficit, the government secured a $3.4 billion loan from the IMF after floating its currency as part of the reforms to ease foreign currency shortages.

Dollar underutilisation

Beyond traditional dollar notes and digital dollars, African economies are witnessing the emergence of another form of dollar-denominated assets: stablecoins, more aptly termed “crypto dollars” in this context. Nic Carter and Matt Walsh of Castle Island Ventures define crypto dollars as cryptographic tokens circulating on public blockchains designed to mirror the value of sovereign currencies.

These digital assets come in various forms, each employing unique mechanisms to maintain their peg to the U.S. dollar. Our focus is on fully-backed crypto dollars, directly convertible to dollar notes or digital dollars.

The issuers of these tokens maintain their dollar peg through a robust reserve system. For every crypto dollar token in circulation, the issuer holds an equivalent amount of U.S. dollars or highly liquid dollar-denominated assets, such as U.S. Treasury bills. These reserves are typically held in regulated financial institutions, ensuring a 1:1 backing ratio. This structure bridges the traditional financial system and the burgeoning world of cryptocurrencies, offering new avenues for dollar liquidity in African markets.

Crypto dollars represent a revolutionary currency that operates on novel infrastructure: open blockchain networks. Unlike traditional payment systems, these networks function ceaselessly, without scheduled downtime or maintenance windows, ensuring 24/7 availability year-round. This constant operability and their open-source nature provide a fertile ground for innovation, allowing developers to build and deploy financial products and services easily.

Akin to physical cash, crypto dollars are bearer assets, with ownership determined solely by possessing digital tokens. However, they surpass cash in one crucial aspect: transparency. The blockchain’s inherent structure enables full auditability, allowing regulators and users to verify in real-time that issuers maintain adequate reserves to back their circulating tokens. This combination of continuous availability, programmability, bearer status, and transparency positions crypto dollars as a transformative tool which African innovators can use to address some of the payment and dollar shortage issues we face.

Crypto dollar liquidity in African markets

According to a report on Cryptocurrency adoption in sub-Saharan Africa published by Chain Analysis in 2023, stablecoins are estimated to account for approximately 50% of the activity on centralised cryptocurrency platforms like exchanges. This 50% is estimated to be equivalent to 30 billion U.S. dollars. It is important to highlight that these figures do not include activities outside centralised platforms like exchanges. The chart below shows that stablecoins played an important part in crypto activity in Sub-Saharan Africa from July 2022 to June 2023.

If crypto dollars are so valuable, why are they not being used by financial institutions like banks to solve the dollar shortage crisis?

Traditional financial institutions, particularly banks, remain hesitant to engage with stablecoins and await clear regulatory guidance from their central banks. This cautious stance stems from the lack of a cohesive policy framework recognising stablecoins as a legitimate currency. Across much of Africa, regulators have adopted a sceptical, if not outright hostile, approach to these technologies, primarily due to a limited understanding of their potential to address pressing economic challenges, such as the ongoing dollar shortage crisis.

However, the regulatory landscape is not uniformly restrictive across the continent. South Africa has emerged as a frontrunner in crypto regulation, with the Financial Sector Conduct Authority (FSCA) and the Financial Intelligence Centre (FIC) classifying crypto as a financial product and initiating the registration of crypto asset service providers. Moreover, South Africa’s Intergovernmental Fintech Working Group actively explores regulatory frameworks for stablecoins, signalling a progressive approach.

Nigeria, while lacking specific stablecoin regulations, has taken steps towards innovation by approving the launch of a Naira-pegged stablecoin, spearheaded by the African Stablecoin Consortium. Additionally, Nigeria has implemented guidelines for banks managing accounts for virtual asset providers, indicating a gradual opening to the crypto ecosystem.

Kenya, by contrast, has adopted a more cautious stance. Its Capital Market Authority offers a sandbox for blockchain projects but stops short of comprehensive legislation for virtual asset providers or stablecoins. This varied regulatory landscape across major African economies underscores the complex challenges in harnessing the potential of stablecoins to address dollar liquidity issues.

As of this writing, a landmark development has occurred in the global stablecoin landscape: Circle, one of the world’s leading stablecoin issuers, has secured an electronic money institution license in the European Union. This pivotal achievement comes under the purview of the Markets in Crypto-Assets (MiCA) regulation, the EU’s comprehensive framework governing stablecoins and other digital assets. The implications of this regulatory approval are far-reaching. It effectively paves the way for financial institutions across the EU to incorporate crypto dollars and crypto euros into their operational framework, treating these digital assets as legitimate forms of money.

Cryptodollar can reduce the severity of the dollar shortage problem

At Splice, we’ve developed an exceptionally cost-effective payment infrastructure that seamlessly integrates with existing financial systems by leveraging stablecoins and open blockchain networks. The true paradigm shift, however, lies in enabling financial institutions to use crypto dollars for intra-African transactions. This strategic use of stablecoins unlocks new financial flexibility, allowing these institutions to reallocate their physical dollar notes and conventional digital dollars to more critical purposes.

Our approach streamlines cross-border transactions and addresses the persistent challenge of dollar scarcity in African markets. By providing a parallel system of dollar-denominated transactions, Splice effectively increases the overall dollar liquidity in the ecosystem, offering a pragmatic solution to a long-standing economic constraint. This innovative use of blockchain technology demonstrates its potential to solve real-world financial challenges, particularly in regions grappling with currency shortages and cross-border transaction inefficiencies.

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Vladimir Fomene is a software engineer and entrepreneur. He is the co-founder and CEO of Splice, a fintech company focused on solving cross-border payments for financial institutions (banks, mobile money providers) and fintechs.