Latin America's Stablecoin Ecosystem Exposed to Concentration Risks

Latin America's stablecoin payment ecosystem may be vulnerable to disruptions due to its reliance on a small group of liquidity providers, according to Amit Chu, partner at Verda Ventures. A recent report from Varys Capital and Verda Ventures analyzed 494 companies in the region and found only 16 whose primary business is providing wholesale stablecoin-to-fiat liquidity.

The researchers warned that 'fragility in the system is concentrated in its thinnest layer,' with many sellers of liquidity passing on currency risk to a few underlying desks. Stablecoins accounted for 32.1% of cross-border crypto value, 22.1% of domestic P2P activity, and 17.6% of personal wallet balances in Latin America by June 2023, according to a Chainalysis report.

Chu stated that a disruption affecting a key provider could leave users holding stablecoins as they face higher costs or delays when converting them into a local currency. He suggested that clearer rules and licensing requirements would help reduce concentration and make it easier for banks to serve liquidity providers.