In nations beset by hyperinflation, financial literacy is a crucial defense, empowering individuals to make informed decisions to safeguard their economic well-being. A profound understanding of financial instruments enables people to adopt sustainable practices that preserve their purchasing power amid fiscal instability. Cryptocurrencies, particularly stablecoins like USD Coin (USDC), may become vital tools in this endeavor.
Unlike traditional cryptocurrencies known for their volatility, stablecoins are pegged to stable assets such as the U.S. dollar, providing a consistent store of value. This stability allows individuals in inflation-stricken economies to protect their savings from currency devaluation, ensuring their financial resources retain value over time.
While the cryptocurrency realm is often perceived as high-risk, the strategic use of stablecoins offers a sustainable financial strategy. Nevertheless, while some institutions are incorporating stablecoins into their operations, many banks exercise caution due to regulatory uncertainties and concerns about the volatility and risks associated with digital assets. Consequently, widespread recommendation of stablecoins to retail customers is not yet common practice.
In this article we examine the impact of stablecoins on personal savings in hyperinflationary environments, providing concrete examples of how for instance the USDC can serve as a financial safeguard.
What is a Stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a stable value by pegging itself to a reserve asset, such as a fiat currency like the U.S. dollar, commodities like gold, or other financial instruments. This pegging mechanism aims to minimize the price volatility commonly associated with traditional cryptocurrencies, making stablecoins more suitable for everyday transactions and as a store of value.
Stablecoins achieve price stability through various methods:
- Fiat-Collateralized Stablecoins: These are backed by a reserve of fiat currency held by a central entity. For example, each unit of the stablecoin is backed by an equivalent amount of the fiat currency, ensuring its value remains stable.
- Commodity-Collateralized Stablecoins: These are backed by reserves of commodities like gold or silver, with the value of the stablecoin tied to the market value of the commodity.
- Crypto-Collateralized Stablecoins: These utilize other cryptocurrencies as collateral, often over-collateralizing to account for the higher volatility of the backing assets.
- Algorithmic Stablecoins: These are not backed by any collateral but use algorithms and smart contracts to control the supply of the stablecoin, aiming to maintain its peg by increasing or decreasing circulation as needed.
By providing a digital asset with reduced volatility, stablecoins facilitate more predictable transactions and are increasingly used in various financial applications, including remittances, decentralized finance (DeFi), and as a hedge against inflation in volatile economies.
Benefits of Stablecoin Adoption
Wealth Preservation: By converting local currency into stablecoins like USDC, individuals can maintain the value of their savings relative to more stable currencies, mitigating the effects of hyperinflation.
Financial Inclusion: Stablecoins provide access to digital financial services, especially in regions with limited banking infrastructure, enabling more people to participate in the global economy.
Efficient Transactions: Stablecoins facilitate faster and cheaper cross-border transactions compared to traditional banking systems, benefiting remittances and international trade.
Examples of Hyperinflationary Economies That Benefit from Stablecoins
Argentina
Argentina has faced severe inflation, with rates reaching 161% in 2023. This economic instability has led many Argentinians to turn to stablecoins as a hedge against the devaluation of the Argentine peso (ARS). By converting ARS into USDC, individuals could have preserved their savings’ value relative to the U.S. dollar, effectively shielding themselves from local currency depreciation. The adoption of stablecoins has been facilitated by crypto companies such as Lemon and Binance, which introduced crypto cards enabling transactions in digital assets.
In Argentina, where annual inflation soared to 211.4% in 2023, holding assets in Argentine pesos (ARS) led to substantial value erosion. Conversely, converting savings into USD Coin (USDC), a stablecoin pegged to the U.S. dollar, could have preserved wealth.
Scenario Analysis:
- Initial Investment (December 2022):
- 500 USDC = 500 USD.
- At the December 2022 exchange rate of approximately 1 USD = 170 ARS, 500 USD equaled 85,000 ARS.
- Value After One Year (December 2023):
- Inflation of 211.4% reduced the purchasing power of 85,000 ARS to approximately 27,300 ARS.
- The exchange rate depreciated to about 1 USD = 360.91 ARS, making 500 USD equivalent to 180,455 ARS.
Outcome:
Holding 85,000 ARS resulted in a real value of 27,300 ARS due to inflation. Maintaining 500 USDC preserved the value at 500 USD, now worth 180,455 ARS.
Turkey
Turkey has experienced significant inflation, with rates reaching 64.8% in 2023. This economic environment has driven Turkish citizens to seek alternatives to protect their wealth. Stablecoins have gained traction as an inflation hedge, with 52% of the population aged 18 to 60 investing in cryptocurrencies over the past 18 months. Among these investors, Bitcoin leads with 71%, followed by Ethereum at 45%, and stablecoins at 33%.
Turkey experienced an inflation rate of 49% in September 2023. In December 2022, the exchange rate was approximately 1 USD = 18.65 TRY. By December 2023, the lira had depreciated further, with the exchange rate at 1 USD = 27.5 TRY.
Scenario Analysis:
- Initial Investment (December 2022):
- 500 USDC = 500 USD.
- At 1 USD = 18.65 TRY, 500 USD equaled 9,325 TRY.
- Value After One Year (December 2023):
- Inflation of 49% reduced the purchasing power of 9,325 TRY to approximately 6,258 TRY.
- At 1 USD = 27.5 TRY, 500 USD equaled 13,750 TRY.
Outcome:
Holding 9,325 TRY resulted in a real value of 6,258 TRY due to inflation. Holding 500 USDC preserved the value at 500 USD, now worth 13,750 TRY.
Venezuela
Venezuela’s hyperinflation peaked at 283% in 2023, rendering the bolívar nearly worthless. In response, many Venezuelans turned to stablecoins like USDC to preserve their wealth and facilitate transactions. The Reserve app, for instance, allows users to exchange bolívares for U.S. dollars via the Reserve (RSV) stablecoin. After one year on the market in Venezuela, Colombia, Panama, and Argentina, there are over 100,000 weekly app visitors and more than 8,000 merchants accepting it as a means of payment.
Venezuela’s economy has been ravaged by hyperinflation, with rates reaching 189.8% in 2023. In December 2022, the exchange rate was approximately 1 USD = 17.489 VES. By December 2023, the bolívar had depreciated further, with the exchange rate at 1 USD = 47.729 VES.
Scenario Analysis:
- Initial Investment (December 2022):
- 500 USDC = 500 USD.
- At 1 USD = 17.489 VES, 500 USD equaled 8,744.5 VES.
- Value After One Year (December 2023):
- Inflation of 189.8% reduced the purchasing power of 8,744.5 VES to approximately 3,016.5 VES.
- At 1 USD = 47.729 VES, 500 USD equaled 23,864.5 VES.
Outcome:
Holding 500 USDC preserved the value at 500 USD, now worth 23,864.5 VES. Holding 8,744.5 VES resulted in a real value of 3,016.5 VES due to inflation.
Lebanon
Lebanon’s economic crisis led to an inflation rate of 212% in 2023. The collapse of the Lebanese economy in 2019, followed by the closure of financial institutions in 2020, prompted government restrictions on citizens’ access to their funds. In this context, stablecoins have emerged as a financial lifeline, allowing individuals to protect their savings and conduct transactions in a more stable currency.
Lebanon’s inflation rate was 211% in 2023. In December 2022, the exchange rate was approximately 1 USD = 40,000 LBP. By December 2023, the Lebanese pound had depreciated further, with the exchange rate at 1 USD = 80,000 LBP.
Scenario Analysis:
- Initial Investment (December 2022):
- 500 USDC = 500 USD.
- At 1 USD = 40,000 LBP, 500 USD equaled 20,000,000 LBP.
- Value After One Year (December 2023):
- Inflation of 211% reduced the purchasing power of 20,000,000 LBP to approximately 6,437,000 LBP.
- At 1 USD = 80,000 LBP, 500 USD equaled 40,000,000 LBP.
Outcome:
Holding 20,000,000 LBP resulted in a real value of 6,437,000 LBP due to inflation. Holding 500 USDC preserved the value at 500 USD, now worth 40,000,000 LBP.
Sudan
Sudan faced an inflation rate of 63.3% in 2023, severely impacting the Sudanese pound’s value. While specific data on stablecoin adoption in Sudan is limited, the general trend in high-inflation countries suggests that access to stablecoins like USDC could have provided a means for Sudanese individuals to preserve their wealth and maintain purchasing power.
Sudan’s inflation rate was 146.6% in December 2023. In December 2022, the exchange rate was approximately 1 USD = 570 SDG. By December 2023, the Sudanese pound had depreciated further, with the exchange rate at 1 USD = 1,200 SDG.
Scenario Analysis:
- Initial Investment (December 2022):
- 500 USDC = 500 USD.
- At 1 USD = 570 SDG, 500 USD equaled 285,000 SDG.
- Value After One Year (December 2023):
- Inflation of 146.6% reduced the purchasing power of 285,000 SDG to approximately 115,500 SDG.
- At 1 USD = 1,200 SDG, 500 USD equaled 600,000 SDG.
Outcome:
Holding 500 USDC preserved the value at 500 USD, now worth 600,000 SDG. Holding 285,000 SDG resulted in a real value of 115,500 SDG due to inflation.
Risks and Considerations of Stablecoin Adoption
Changes in regulations can affect the legality and use of stablecoins in certain jurisdictions, potentially leading to restrictions or bans. Additionally the value of stablecoins depends on the issuer’s ability to maintain the currency peg, and failures in this regard can lead to losses for holders.
Just like all digital assets, stablecoins are susceptible to cyberattacks and technical failures, which can compromise user funds. The use of hard wallets is advised in order to preserve your funds.
Stablecoins offer a promising tool for individuals in high-inflation countries to protect their wealth and engage in the global economy, but it is crucial to also understand the associated risks and regulatory landscapes.
Financial literacy and awareness are essential to maximize the benefits and minimize potential downsides of stablecoin adoption.