Cross-border payments between Africa, Latin America, and China

In an increasingly interconnected world, the flow of trade and capital between Africa, Latin America, and China has grown substantially. These regions are not only key players in the global economy but are also redefining how trade is conducted. However, one persistent challenge remains: cross-border payments. High transaction costs, currency conversion complexities, and lengthy settlement times have traditionally hindered seamless trade between these regions. Stablecoins, a new and transformative financial tool, are emerging as a solution to these challenges, enabling faster, cheaper, and more transparent transactions.

A Snapshot of Trade Between Africa, Latin America, and China

Trade between Africa, Latin America, and China has been flourishing over the past decade. China has established itself as a primary trade partner for both Africa and Latin America, importing raw materials such as oil, copper, and agricultural goods while exporting machinery, electronics, and manufactured products. Recent data shows that China-Latin America trade in goods reached $427.4 billion in the first three quarters of 2024, representing a 7.7% year-on-year increase. Additionally, trade between China and Africa reached a historic high of $282 billion in 2023, marking a 1.5% year-on-year growth.

Latin America and Africa are also strengthening trade ties, particularly in agriculture and natural resources. However, despite this promising growth, businesses in these regions face financial friction due to inefficient payment systems, reliance on USD-based banking corridors, and vulnerabilities to exchange rate fluctuations.

The Pain Points in Cross-Border Payments

1. High Costs: Traditional cross-border payments often involve multiple intermediaries, including correspondent banks, leading to high fees. For SMEs in Africa and Latin America, these costs can eat into already slim profit margins.
2. Long Settlement Times: Payments can take several days to clear, creating cash flow challenges for businesses reliant on timely transactions.
3. Currency Exchange Risks: Trade between countries with weaker or volatile currencies, such as the Argentine peso, Nigerian naira, or Kenyan shilling, amplifies the risk of unfavorable exchange rate movements.
4. Limited Financial Inclusion: Many businesses in Africa and parts of Latin America operate in cash-heavy environments, further complicating access to efficient digital payment systems.

How Stablecoins Are Changing the Game

Stablecoins are cryptocurrencies pegged to a stable asset, often a fiat currency like the US dollar or euro. Their inherent stability, transparency, and efficiency make them particularly attractive for cross-border trade. Here’s how they address key pain points:

1. Lower Costs: By bypassing traditional banking intermediaries, stablecoins significantly reduce transaction fees. Transfers between wallets occur on blockchain networks, where fees are a fraction of those imposed by banks.
2. Faster Settlement: Stablecoin transactions settle within minutes, compared to the days it takes for SWIFT payments. This immediacy is critical for businesses managing tight supply chains.
3. Hedging Against Currency Volatility: Traders can use USD-pegged stablecoins like USDC or USDT to avoid the risks associated with local currency fluctuations. For instance, a Latin American exporter dealing with a Chinese buyer can invoice in a stablecoin to lock in a predictable value.
4. Greater Accessibility: Stablecoins are accessible to anyone with a smartphone and an internet connection, bridging financial gaps in underbanked regions.

Case Study

Consider a Kenyan agricultural exporter shipping coffee to China. Traditionally, this transaction would involve converting Kenyan shillings to USD and then to Chinese yuan, incurring multiple fees along the way. On average, these fees can reach up to 6% of the transaction value. Using a stablecoin like USDT, the exporter can receive payment directly in a wallet, reducing fees to less than 1%, translating into significant savings on transaction costs.

Additionally, stablecoin transactions settle within minutes, unlike the traditional system, where payments can take 3–5 business days to process. The exporter’s ability to access funds almost instantly ensures better cash flow management and operational efficiency. These funds can then be seamlessly converted into the local currency or used to purchase supplies from Latin American suppliers who also accept stablecoins.

Challenges and Limitations

While stablecoins offer numerous advantages, they are not without challenges:

1. Regulatory Uncertainty: Many governments in Africa and Latin America have yet to establish clear regulatory frameworks for stablecoin usage.
2. Technical Barriers: Stablecoins rely on blockchain technology, which may be inaccessible to users in regions with limited internet infrastructure.
3. Liquidity Risks: In some cases, converting stablecoins back to local currencies can be challenging due to low liquidity in regional markets.
4. Security Concerns: Users must be vigilant about wallet security to avoid hacks and scams.

The Future of Stablecoins in Cross-Border Trade

Despite these challenges, stablecoins are poised to play a transformative role in facilitating trade between Africa, Latin America, and China. Initiatives such as Circle’s partnerships with local payment platforms and the growing adoption of blockchain technology in trade finance signal a bright future. Governments and private sectors must collaborate to address regulatory concerns and invest in digital infrastructure to fully unlock the potential of stablecoins.

As trade volumes between these regions continue to grow, stablecoins can bridge the gaps in existing financial systems, fostering greater economic collaboration. By leveraging this innovative technology, businesses can overcome long-standing barriers and unlock new opportunities for growth.

‍