Mitigating Financial Frictions in Agriculture: A Framework for Stablecoin Adoption

Abstract: Persistent financial frictions - including price volatility, constrained credit access, and supply chain inefficiencies - have long hindered productivity and welfare in the global agricultural sector. This paper provides a theoretical and applied analysis of how fiat-collateralized stablecoins, a class of digital currency pegged to a stable asset like the U.S. dollar, can address these long-standing challenges. We develop a farm-level profit maximization model incorporating transaction costs and credit constraints to demonstrate how stablecoins can enhance economic outcomes by (1) reducing the costs and risks of cross-border trade, (2) improving the efficiency and transparency of supply chain finance through smart contracts, and (3) expanding access to credit for smallholder farmers. We analyze key use cases, including parametric insurance and trade finance, while also considering the significant hurdles to adoption, such as regulatory uncertainty and the digital divide. The paper concludes that while not a panacea, stablecoins represent a significant financial technology with the potential to catalyze a paradigm shift in agricultural economics, warranting further empirical investigation and policy support.