The debate on the future of money is not about inflation or deflation, fixed or flexible exchange rates,
gold or paper standards, but about the kind of society in which money is to operate. – Georg Simmel, German sociologist
What is a parallel Market?
A parallel market is an unofficial market in goods or currencies, especially in a country with a controlled economy. A parallel market is sometimes called a black market, an illegal market, etc. As the name sounds, it is not always bad or entirely illegal. In some countries, it is a better alternative to what is been offered by the government. In this article, however, we will talk about parallel currency exchange markets. It is also important to note that a lot of people that receive payments in foreign currencies are often dissatisfied with the official currency exchange rates. And the parallel market value of the currency is usually more beneficial. Most cryptocurrency dealers find it unfavorable to exchange at the official currency exchange rate. For this reason, some central bank digital currencies are likely to suffer poor adoption.
The need for economic growth and inclusive finance have nations pushing for financial innovation. And one area that is most affected is global finance. Cross-border payment and cross-border remittance are at the top of the list for governments. Traditional cash-money is expensive and cumbersome, confining the drive for cross-border payment innovation and economic growth. Today, nations are beginning to embrace digital currencies, albeit stablecoins. The advent of cryptocurrency has been a great leap in civilization; however, this has been riddled with unstable prices which are bad for trade. Stablecoin, a name for digital currencies pegged to fiat currency value which is more stable, is been adopted by the government for official digital currency. Even at that, the government still has a parallel market to deal with. Of course, global co-operation between governments across the globe can produce practices that foster sustainable development and policies. There are ways around this. But before we continue, let me tell you a story.
One cool breezy evening while I was discussing the science of the sun and sky with my relative I got a call from a colleague from my defunct startup, Orangeville Systems. “Sam, there is this man that just came into the country, he wants to build some apps. It seems like something we can do”, she said. I responded, “Okay, Commy.” The following day I was directed to 1004, Victoria Island to meet with the prospect. A few days earlier he had just had an interview with someone that came in a Range Rover. I do not know why he didn’t give the contract to that guy. This was about five months after I quit my job as a fullstack software engineer at a consulting company in 2016. We got the contract and I was employed as a project coordinator and engineering lead for this new project. It turned out that the project was for a consortium that frowned at the constraints facing payments between merchants in Nigeria and China. It’s apparent that China has a strong economic presence in Africa as well as other continents. Unstable exchange rate, high cost of remittance, unfavorable amount of time taken to clear payments, etc, were among the problems faced. The goal of the consortium was to build a new cross-border financial system with its main objective being instant, free, and simple cross-border payments without using Bitcoin, LiteCoin, etc, as they wanted a digital currency underwritten by assets in a Hong Kong bank.
The cross-border payment model applied was a hybrid of correspondent banking and peer-to-peer to facilitate this cross-border payment within seconds, and free. The impact I foresaw for the new global financial system (GFS), as we called it, was so intriguing that I halted my pet project, TestBox, a computer-based-test (CBT) app to dedicate myself to it. During the first two months of GFS, before employing other software engineers, I was the only software engineer on the team. As a fullstack software engineer, I had to build basic prototypes for the digital currency wallet, a stablecoin pegged to the value of Naira, and a commodity exchange platform (that would have a market maker system behind it). There were five integrated apps in the system to be built. This was financial engineering at the best I had ever seen. It was not too difficult to think that the consortium was intensely enthusiastic about finance. The consortium provided a serviced apartment for the team so we are able to focus on the project. Though I and my boss (the new client) often went out to have fun and discuss the future and impact of the project on society. I think he was inspiring me while also giving me a taste of the good life to come should we complete the project.
Though it was challenging, confidence also came from a past work experience between 2008 and 2010 when I worked as a fullstack software engineer and Information Technology Analyst at Reagan Renaissance Ltd, an importer, hospitality, trading, and haulage company. The company’s cross-border payments were tied to Form M, a mandatory statutory document to be completed by all importers for the importation of goods into Nigeria, and other financial instruments. At the time, the scope of my work was domestic payments and clearance between the company and its distributors. I created a web application that handled domestic (interstate) clearance and payment in tranches using ASP.NET. The system generated a set of cheque-like documents that acted like paper money. It also helped the company reduce payment time while also tracking distributors with Bank Guarantees, Bank Drafts, and other financial instruments used in handling large payments. Each document was the value of a truckload of cement. A bundle of these documents sometimes was valued at over NGN 200 million. It authorized distributors to claim ownership of their goods at remote warehouses across the country owned by the company. International payments, which were often over N500 million between the company and its foreign suppliers, were handled by the banks. This 2008 experience was my foray into FinTech. I went on to build other in-house applications around payments from payroll to freight. This experience helped my belief in the ability to design the system for GFS. It help me understand that cash was not the only form of money.
In 2016 when I was invited to architecture and build the GFS prototype I was thrilled. After months of coding at 1004, Victoria Island, we later moved to Ikoyi, where we were able to do a demo for lawyers. Youthful me was so thrilled that I was about to be part of something big. But this joy would turn to unhappiness when our legal counsel in Nigeria made it clear to us that there was no legislative framework for what we were building, and that it was like a parallel market solution. We didn’t want to have problems with the central bank of Nigeria (CBN). At the time, cryptocurrency was alien in Nigeria. It was hard getting anyone to listen to you. We remained positive and continued building, hoping that things will work out at least if not in Nigeria, then in another country in Africa. Some sponsors got weary and funding became a problem. By the time we built our digital currency wallet prototype not too long ago, it wasn’t as exciting as it was in 2016. However, this time, the currency had nothing to do with the dollar or naira. But the joy of this journey was the education I got from my boss, quite an eccentric wealth manager with vast experience in global finance and human psychology. For me, the experience was a golden reward. The experience is part of the foundation of TechAssembly. I’m pretty sure there are entrepreneurs that have stories similar to this. Financial regulators, to a large extent, determine the level of innovation a community can enjoy.
Apparently, the financial market shapes the architecture of civilization. Today, governments are creating a regulatory framework for finance, and entrepreneurs can build fintech platforms on a decentralized network with little concern about regulation.
Parralel Market and the government
Today, many Asians obtain USDT, a stablecoin pegged to the USD, from the parallel market for international trade. And USDT holders enjoy favorable rates in the parallel market. This doesn’t make central bank digital currency attractive. The demand for USDT is high, even in Asia. Africans who profit from cross-border remittance by selling USDT to Asians through the parallel market are most likely not going to embrace the official market rate of central bank digital currency. The friendly regulatory environment of the US has helped US-based cryptos gain global prominence. Even though central banks are now embracing home-based digital currencies at official rates, a major issue still remains that many citizens rely on USDT for cross-border remittance. The Chinese government is gradually pushing e-yuan to mainstream trade. Other central banks may adopt this method.
Just recently Stripe API announced a giant leap in global payment with instant, free cross-border payment using Twitter.
A big question remains how will central banks incentivize people to use the digital currency at the official rate for cross-border payments when parallel market rates are more profitable for many, and how will global collaboration play out? There are so many driving factors, but simplifying domestic payment through central bank digital currency is a good start.
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About TechAssembly
TechAssembly is a technology development company that works on digital transformation, tech skill acquisition, and tech talent acquisition. TechAssembly specializes in communication solutions, economic tech, FinTech, business solutions, Web and Mobile development (One Stop Shop for all technology development needs).
Our clientele includes funded start-ups and SMEs, some of which are within and outside Africa.