Mobile mindset: How Africa can reap the benefits of leapfrogging in crypto

While cryptocurrency has been hailed for its potential in the financial sector of the developed world, one of its greatest applications has been virtually overlooked. In nations that lack dependable economic systems or governance, cryptocurrency may offer the much-needed spark of hope that has so far been denied to millions of financially excluded people. Access to finance, security of transactions, privacy of funds, and faith in a common medium of exchange, can transform many livelihoods across the African continent. 

Indeed, for a continent that has always surprised industry onlookers and economic analysts, Africa might just be about to turn around and deliver another miracle – steal a march in cryptocurrency usage and practical applications in a way that no other region has been able to dream of. 

Africans increasingly using crypto for commerce

Significantly, a report by Reuters notes that while cryptocurrency is more commonly used for investment and speculation purposes in other parts of the world, Africa is bucking this trend and mainly using it for commerce. Individuals and small businesses in Africa’s FinTech hubs of Nigeria, South Africa and Kenya account for most of this activity. 

With most cryptocurrency advocates across the world confessing that the currency’s real future lies as a facilitator of transactions, not as a store of value, it is clear that Africa is the only region that is getting it right, so far. Even amid a potential scenario of mainstreaming of crypto assets in other parts of the world, with the Bank of New York Mellon, Morgan Stanley, JP Morgan and Goldman Sachs recently opening up to trading in cryptocurrency while Tesla, PayPal and Visa are allowing customers to transact in it, the role of crypto as a passive investment rather than an active medium of exchange is what has unfortunately come to the fore in advanced economies. 

No wonder then that global cryptocurrency advocates such as Twitter’s Jack Dorsey, Cardano’s Charles Hoskinson, besides well-established crypto companies such as Binance and Huobi, firmly believe that Africa is set to become one of the most exciting regions in the digital asset space. As the crypto-sphere grows and finds new solutions to an array of inefficiencies in global markets, Africa is uniquely positioned to capitalise on all that the world of cryptocurrencies has to offer. 

What is a cryptocurrency?

In the old currency system, traditional bankers were the miners of the old generation, getting paid in the currency of the central bank run by un-elected officials. Now, the new central bankers are the cryptographers and the new owners of the financial infrastructure are the holders of the cryptocurrency coins, which is or could be everybody. 

In a nutshell, a cryptocurrency is virtual money that people can use just like real money to buy things or send to other people. Crucially, cryptocurrencies aren't controlled by any central authority, like a reserve bank, which theoretically protects them from any interference by governments. From a speed and cost standpoint, cryptocurrencies cut out the middlemen, such as banks or credit card companies, making it faster and cheaper to transfer money from one virtual wallet to another. 

No wonder then that cryptocurrencies are catching on. The most famous cryptocurrency, Bitcoin was created in 2008 by an unknown person going under the name of Satoshi Nakamoto. Since then, more than 6,000 other types of cryptocurrency have been created, including popular options like Ethereum and Litecoin. Recently, Bitcoin has risen to a value of almost $60,000, giving it a cumulative market capitalisation of over $1 trillion, while the total market for cryptocurrencies has surged past the $2 trillion cap.

Factors spurring the rise of crypto in Africa

Caption: Mobile money has gained traction across Africa, paving the way for cryptocurrency adoption (Credit: insights.invyo.io)

With an increasing number of Africans already embracing mobile money services such as M-Pesa, industry insiders say it is no surprise that cryptocurrency is rapidly catching on in Africa. Given that cryptocurrency basically works like mobile money, it is easier for Africans to understand and embrace as a concept, as opposed to the West where people already enjoy greater financial inclusion and easier access to banking systems.

Indeed, cryptocurrency is fast gaining traction on the continent. For one, Africa has much to gain and a lot less to lose than consumers in advanced nations where traditional banking is entrenched and formal employment avenues predominate. Soberingly enough, a GSMA report from 2019 notes that of the 1.7bn people financially excluded globally, 66% are in Africa.

For years, African nations have lagged in traditional banking, but the phenomenal success of Kenya’s Safaricom M-Pesa has unequivocally shown that this is, and can be, an advantage in the coming blockchain economy. Indeed, Safaricom’s success has shown that Bill Gates’ adage – “Banking as a function is necessary, Banks are not” – holds only too true for the Hopeful Continent. What Safaricom’s M-Pesa did for Kenya, cryptocurrency can do for all of Africa. 

Moreover, with one of the youngest populations globally,  Africa has a growing generation of adaptable young professionals and would-be entrepreneurs. This, accompanied by high unemployment in many African countries in the wake of the COVID-19 pandemic, means that young people are increasingly turning away from traditional sectors and exploring new ways to make money. 

Finally, unreliable local currencies and hyperinflation have also played a part in the cryptocurrency boom. When the Zimbabwean dollar skyrocketed in 2015, some people turned to trading in Bitcoin instead. For the same reasons, Africa's growing diaspora is also leveraging the cryptocurrency movement to send remittances across borders more cheaply. 

According to the World Bank, approximately US$48.7 billion was remitted to Sub-Saharan African bank accounts or 2.76% of the region’s GDP. With average remittance fees sitting at 6.51% per transaction globally and reaching as high as 15% between select African nations, traditional structures make it difficult for individuals to provide the desired support to their families. One popular service that offers a viable alternative to traditional and expensive remittances is the crypto-based remittance company BitPesa. Headquartered in Kenya, BitPesa uses Bitcoin as a medium for international money transfers as a means to avoid bank fees and also cut out the cost of converting money into different currencies that may be subject to inflation at best, and capital controls at worst.

Tread with caution on the crypto bandwagon

At the same time, it cannot be denied that cryptocurrencies come with their own share of risks. Indeed, bitcoin and other cryptocurrencies are unregulated in many countries and their legal status is unclear, meaning there is no safety net and little recourse if you lose funds.

For many, converting local currencies to and from bitcoin relies on informal brokers. Prices are volatile, and buying and selling is a complex process that demands technical knowledge. Thus, both exchanges and over-the-counter (OTC) brokers carry risks, from hacks to scams.

Also, while bitcoin is handy for remittances, it isn’t much use on the ground – for buying goods from shops or paying rent to landlords, for instance. This means friends or family who are sent funds by workers living overseas must convert it back to traditional currency, often via a broker at their end, introducing additional risk.

Against this sobering backdrop, the Nigerian central bank warned the public in 2018 that cryptocurrencies were not legal tender, and investors were unprotected. Earlier in 2021, the Central Bank of Nigeria (CBN) went so far as to issue a circular warning banks and financial institutions that “facilitating payments for cryptocurrency exchanges is prohibited” and that they needed to identify and close accounts associated with them.

The crypto revolution continues to take hold

Looking at pure numbers, monthly cryptocurrency transfers to and from Africa under US$10,000 shot up by 55% over 2020, reaching a peak of US$316 million in June when most countries were reeling under lockdowns and pandemic-spurred unemployment woes. These numbers, which are based on data from US Blockchain research firm Chainalysis, are likely to keep rising. 

No wonder then that, even as Nigeria cracks down on cryptocurrencies, other African countries are scrambling to create new laws to prepare for a possible future where cryptocurrency is the norm. South Africa's top financial regulators, including the South African Reserve Bank, released a policy paper in April 2020 with recommendations for the regulation of cryptocurrency. Meanwhile, Kenya has implemented a digital tax from January 2021, possibly opening the door to more crypto regulation.

At the recently held Blockchain Africa Conference 2021, Cardano’s Charles Hoskinson flagged off his clear interest in expanding his operations in the Hopeful Continent by noting that “our staff on the ground in Africa will likely scale from the dozens to the hundreds, if not the thousands, and instead of just having one headquarters, it’s likely we’ll have at least four or five headquarters throughout the continent. For example, we’ve already started a campaign to build up resources and access and personnel in the country of Ghana.“

Africa’s future finance to be powered by crypto 

Several African countries have exchanges and start-ups in the crypto space, and their businesses are recognising the significance of cryptocurrencies in fostering cross- border trade and payment. 

Moreover, the infrastructure for the take-off of digital tokens is solid. Telecommunication liberalisation across the continent has enabled Internet accessibility remarkably. Figures from GSMA indicate that, from 477 million people in 2019 who subscribed to mobile services in Sub-Saharan Africa, accounting for 45% of the population, over half of Africa’s population will be subscribed to a mobile service by 2025. Also, the statistics indicate that smartphone usage in the continent, already at 50% of the population in 2020, will almost double to reach 678 million by the end of 2025 – an adoption rate of 65%. 

Looking ahead, it is clear that the reshaped and rebooted financial services sector will settle where it sees the maximum potential for innovation. The cryptocurrency regime is Silicon Valley’s replacement for the old infrastructure of finance and Africa’s chance to leapfrog the old system, thus positioning the economies of Africa for the future of finance.