Emerging markets offer great opportunities for crypto
- According to Jocelyn Cheng, many of the most practical uses of crypto can be found in emerging markets.
- Cheng says crypto can reduce remittance costs and open access to loans in these markets.
- This article is part of “Master Your Crypto”, an Insider series helping investors improve their cryptocurrency skills and knowledge.
The crypto crash has significantly reduced the value of assets such as bitcoin and ethereum, but some investors say it also provides opportunities to support companies at the forefront of emerging trends in the web3 space.
Jocelyn Cheng, CEO of London-based Luno Expeditions, believes many of these opportunities lie beyond the United States. His company, the venture capital arm of Luno, a crypto investment firm, has invested in 30 web3 and fintech companies in 15 countries, including Nigeria, Kenya and Pakistan.
Several of Luno’s portfolio companies, including Kotani Pay, a crypto-payments startup, focus on customers in emerging markets such as Africa, South Asia and Latin America.
Insider spoke with Cheng about where she thinks crypto apps are poised to grow globally.
This interview has been condensed and lightly edited for length and clarity.
What areas of crypto are you most excited about right now?
We continue to see a lot of interest in stablecoins. There has been a very public explosion of stablecoins, but the basic utility for emerging markets is still there. They have become popular not only because they are good on-ramps from fiat currency to crypto, but also because, by definition, they are tied to a stable asset such as the US dollar.
They can help mitigate price volatility, especially for emerging market investors. Historically, to gain access to US dollars, they had to incur significant fees. With stablecoins, the advantage is that it really makes access to the US dollar much more affordable.
What is the use case for stablecoins for the average person in an emerging market?
I’ll give you a personal example, if that’s OK. Many years ago I was living in Tanzania and renting an apartment. I had a US dollar account in the US, and they demanded my US dollar rent in cash. But because I was in Tanzania, I had to go to the ATM and – from my US dollar account – withdraw Tanzanian shillings.
It was the only option. I had to pay ATM fees, foreign transaction fees, out of network fees, and I had to take these Tanzanian shillings and take them to a local currency dealer just to exchange them for dollars Americans to give to my landlord. My landlord then took that money in US dollars and had to do the same in reverse to deposit it into his local account.
We think the benefit of having stablecoins is being able to simplify this process. We have invested in companies like Caliza, which is a B2B company that provides fintech companies with the infrastructure to offer synthetic US dollar accounts using stablecoins. A customer can deposit local currency, where it is converted into a stablecoin like USDC, held by a custodian that provides direct access to US banking services.
Are there any other opportunities you see for crypto in emerging markets?
There is a huge opportunity for crypto to provide better international payment rails. Remittances are the source of income for 800 million people around the world. I think crypto has a very important ability to make remittances faster and cheaper.
In the traditional method, it can take up to five days and on average it can cost 7% for a $200 transfer. On the other hand, crypto allows the transfer of money within minutes from one wallet to another. User-to-user fees would solely depend on blockchain transaction fees.
In some of the pilots we’ve seen for using crypto as a form of payment, we’ve seen transaction fees really go down. There’s a company in our portfolio called Kotani Pay, which has been testing cross-border gig worker payments in Kenya. By using crypto, they reduced transaction fees by 93%.
We’ve also seen other companies that are a bit more advanced than our start-up target. Other companies like Coins.ph and Aza Finance work in emerging markets and use crypto rails for remittances. They offer a much lower cost: 1% to 4%, rather than the global average of 7%, and it also takes minutes to settle instead of five days.
What specific advantages does crypto offer over other technologies?
It streamlines the whole flow. If you are looking for instant settlement or very fast settlement, it saves the supplier from having huge cash reserves in destination countries.
Ultimately, there is a need for a last mile payment for the recipient. There is a need, for example, to integrate mobile money or, in some cases, 7-Eleven – whatever the last-mile pick-up point is for recipients. It is therefore essential to also integrate with non-cryptographic systems, but crypto provides a faster and cheaper rail for the cross-country part.
That’s one of the things we’re really passionate about, working with Kotani Pay, the company I mentioned earlier. They do not need internet access to connect to the blockchain. This is important because in Africa around 50% of people still use feature phones. Thus, a user does not actually need to see crypto to experience the benefits of crypto.
Kotani Pay connects blockchain protocols to local payment channels using USSD services, which are the dominant channels for mobile money payments. Thus, customers with access to these local payment channels can transfer money using feature phones.
Do you think most people will end up interacting directly with crypto, or will they just be in the background as more and more people start using these services?
I think, for sure, we will see more and more people interacting directly with crypto around the world. But I think we can also design a world where people get the benefits of crypto but don’t need to know what an NFT is or what their wallet’s private keys are.
One thing that we think is quite interesting, but still very nascent, is for crypto – specifically DeFi – to provide a more efficient source of capital for funding emerging markets.
We see a few early stories coming out: For example, Goldfinch, which is not a holding company but is of great interest to us. It has helped more than one million people borrow from businesses in India, Mexico, Southeast Asia, and Nigeria, and has more than $100 million in active loans.
Goldfinch works with existing lending firms that handle loan origination and services, so no real behavioral change is required on the part of the borrower. But then these lending companies can tap into global credit pools using DeFi, withdraw stablecoins from the pool, and deploy them on the ground in their local markets.
This article is intended to provide general information designed to educate a broad segment of the public; it does not provide personalized investment, legal or other business and professional advice. Before taking any action, you should always consult your own financial, legal, tax, investment or other professional for advice on matters affecting you and/or your business.