Key Takeaways
- Stablecoins only work if the peg is credible, as tying them to volatile local currencies risks undermining their purpose.
- With the Naira losing over 50% of its value in 2023, a Naira-backed stablecoin inherits this volatility.
- Large-scale use of locally pegged stablecoins could drain liquidity from fragile banking systems, weaken lending, and complicate monetary policy.
Stablecoins are often viewed as the bridge between traditional finance and the digital economy.
By pegging tokens to a reference asset—commonly the U.S. dollar—they promise users stability in an otherwise volatile crypto market.
This stability is critical for use cases ranging from remittances to savings, e-commerce, and cross-border trade.
But what happens when a stablecoin is pegged to a highly volatile currency instead of a globally stable one?
Experiments with locally pegged stablecoins are emerging worldwide, raising questions about sustainability, credibility, and macroeconomic impact.
The Appeal of Local Currency Pegs
Pegging a stablecoin to the local currency seems logical for many emerging markets. It ensures that users can transact in familiar denominations, potentially reducing conversion costs and making digital assets more accessible.
Stablecoins tied to domestic currencies also align with national sovereignty concerns, as governments may prefer a home-grown alternative to widely used dollar-pegged tokens like USDT or USDC.
According to researcher Olayimika Oyebanji, Nigeria’s cNGN is one such case. Launched in 2024, it was designed as a Naira-backed alternative to foreign stablecoins in remittance flows and local payments.
Other African economies, and even some in Latin America and Asia, are considering similar models. The rationale is clear: if people can transact digitally in their own currency, it could enhance adoption and financial inclusion.
Yet the risks of this approach are just as clear.
The Volatility Challenge
The purpose of a stablecoin is to provide price stability, but if the underlying asset is unstable, the peg can quickly become a liability.
For example, the Nigerian Naira lost more than 50% of its value against the U.S. dollar in 2023 due to inflation, oil price shocks, and foreign exchange controls.
In such conditions, a Naira-pegged stablecoin like the cNGN inevitably mirrors that volatility in real terms.
This dynamic is not unique to Nigeria. Many local currencies across Africa, Latin America, and parts of Asia face similar pressures from inflation, dependence on commodity exports, or limited foreign exchange reserves.
Pegging a stablecoin to such currencies risks creating digital assets that are “stable” domestically but rapidly depreciate against stronger benchmarks like the dollar or euro.
This can discourage cross-border adoption, limit user trust, and undermine the very rationale for stablecoins as reliable stores of value.
Transparency and Trust
Beyond volatility, reserve transparency is another critical factor. The success of dollar-backed stablecoins such as USDC stems in part from regular third-party audits verifying one-to-one backing with fiat reserves.
Even USDT, historically criticized for opacity, has increased its reserve disclosures.
By contrast, some locally pegged stablecoins have launched without publishing independent audits or clear information on reserve composition, location, or liquidity.
Without transparency, users cannot verify whether tokens are fully collateralized, opening the door to under collateralization or sudden loss of confidence.
Trust in a stablecoin is ultimately trust in its reserves—and if that trust is absent, stability can unravel overnight.
Macroeconomic Considerations
Stablecoins pegged to volatile currencies and raised broader macroeconomic concerns.
If citizens increasingly hold value in a digital token rather than bank deposits, it could drain liquidity from the formal banking system.
In fragile financial systems, this disintermediation may weaken banks’ ability to lend and complicate central banks’ control over monetary policy.
In advanced economies, regulators have flagged similar issues. The American Bankers Association, for instance, raised alarms about yield-bearing stablecoins in the U.S., arguing they could distort deposit bases.
In emerging markets with weaker financial buffers, such risks could be even more pronounced.
Growth and Adoption Risks
Scaling a stablecoin in a volatile economy requires more than technical infrastructure. It demands robust reserves, credible redemption processes, and clear governance. Without these, rapid adoption can magnify risks instead of mitigating them.
For example, if demand for a locally pegged stablecoin grows faster than reserve capacity, undercollateralization becomes a possibility.
In the event of a currency devaluation, liquidity crunch, or loss of confidence, users may rush to redeem their tokens, overwhelming reserves and breaking the peg.
This dynamic has played out before in the collapse of algorithmic stablecoins, albeit with different design flaws.
Broader Lessons for Africa and Beyond
The cNGN experiment highlights risks that apply across many developing economies. Most African nations, for instance, face currency volatility, high inflation, and thin reserves.
Replicating locally pegged stablecoins across multiple countries could create a patchwork of unstable digital assets, undermining financial inclusion efforts rather than strengthening them.
A more sustainable path may involve regional or basket-backed stablecoins.
For example, a pan-African digital token backed by the U.S. dollar, gold, or a mix of stable global currencies could smooth volatility while enhancing cross-border interoperability.
Regional cooperation through institutions like the African Union or ECOWAS could also lend credibility and oversight.
Globally, similar ideas are being explored. Some economists advocate dual models where one digital instrument functions as a state-issued currency under central bank control, while another serves as a market-facing tool for liquidity and efficiency.
Such frameworks balance sovereignty with global usability, and may prove more sustainable than country-specific pegs to volatile fiat.
Giuseppe Ciccomascolo began his career as an investigative journalist in Italy, where he contributed to both local and national newspapers, focusing on various financial sectors.
Upon relocating to London, he worked as an analyst for Fitch's CapitalStructure and later as a Senior Reporter for Alliance News. In 2017, Giuseppe transitioned to covering cryptocurrency-related news, producing documentaries and articles on Bitcoin and other emerging digital currencies. He also played a pivotal role in establishing the academy for a cryptocurrency exchange website. Crypto remained his primary area of interest throughout his tenure as a writer for ThirdFloor.
