Navigating the Evolving Landscape of Cryptocurrency Regulations in Africa

By Sheku Jusu-Sheriff

Sales and Marketing Manager, Africa Risk Management and Compliance Partners

Cryptocurrency is a digital asset that operates on a decentralised network distributed across numerous computers. This decentralised nature allows it to function outside the control of governments and central authorities.

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There are four primary types of cryptocurrencies: Utility Tokens (such as Ethereum and XRP), which serve specific functions on their blockchain;

Transactional Cryptocurrencies (Bitcoin), which are used as payment methods;

Governance Tokens (such as Uniswap), which represent voting rights in decentralised platforms; and Platform Tokens (like Solana), which support applications built on a blockchain. Security Tokens also represent asset ownership, with examples like Polymath and Securitize.

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This short article will explore current trends in cryptocurrency regulations in Africa and examine the advantages and disadvantages of these regulations.

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One significant factor capable of driving the trend in cryptocurrency regulation across all African countries is their membership of the Financial Action Task Force (FATF), requiring them to implement regulations aimed at combating Anti-Money Laundering (AML) and the Financing of Terrorism (CFT). This will ensure that cryptocurrencies are not used for illegal activities such as money laundering or terrorist financing, both of which could have serious repercussions not only for individual nations but also for the entire continent.

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This regulatory focus has influenced banks' risk appetite and financial services for facilitating cryptocurrency transactions.

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Unfortunately, cryptocurrencies can be strongly linked to the activities of financial criminals. Banks and other financial institutions believe that not engaging the cryptocurrency ecosystem in Africa reduces the likelihood of unlawful actors using cryptocurrencies for illicit purposes across their platforms, thereby minimising their risk of being penalised.

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Taking the macro view, in 2022 alone, cryptocurrency-related AML violations resulted in over $5.8 billion in fines (Comply Advantage).

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Another key trend is the restriction on financial institutions providing services to cryptocurrency exchanges in several African countries. Concerns about the volatility of cryptocurrencies and their potential to destabilise national economies have led to such measures. For example, the crash in Bitcoin's value by 77% in 2022 (Caleb & Brown) highlighted these risks. By preventing financial institutions from engaging with cryptocurrency exchanges, regulators aim to protect the stability of the financial markets.

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One advantage of cryptocurrency regulations in Africa is investor protection because regulations create a more secure environment for cryptocurrency investors by reducing the risk of scams and fraud in unregulated markets. This regulatory oversight benefits banks and financial institutions by fostering trust and transparency in cryptocurrency transactions.

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A further advantage of cryptocurrency regulations in Africa is increased government revenues, as with a regulated market, governments can levy taxes on cryptocurrency transactions. For instance, Nigeria imposes a 10% tax on digital assets (Lexology), boosting government revenue and creating a more formalised market.

Lastly, cryptocurrency regulations will bring market stability as regulations contribute to a more stable market by curbing illegal activities and reducing sudden fluctuations in cryptocurrency prices. This helps banks and financial services operate in a more predictable environment, with fewer disruptions from volatile cryptocurrency markets.

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The advantages of the Cryptocurrency regulations in Africa will impact banks and other financial services positively.

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However, there are some disadvantages to regulations, as am sure you would expect across a continent so large and diverse.

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One disadvantage of the cryptocurrency regulations in Africa could be inconsistent policies across countries because different African nations may adopt varying approaches to cryptocurrency regulation. For example, Egypt takes a stricter stance, while Ivory Coast opts for a more lenient approach. This can create challenges for cross-border trade and collaboration within the continent’s financial services sector. The European Union’s approach to the regulation of cryptocurrencies illustrates this point very well, with the Markets in Crypto-Assets (MICA) Regulation, which harmonises cryptocurrency regulations across 27 countries.

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Also, another disadvantage of cryptocurrency regulations in Africa is stifling innovation, as overregulation may hinder innovation in the cryptocurrency and blockchain space. Entrepreneurs and businesses looking to leverage cryptocurrency for growth could find themselves restricted by rigid regulatory frameworks.

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A final disadvantage of the cryptocurrency regulations is government overreach, as while regulations aim to prevent illegal activities, they also risk infringing on individual privacy. Governments may monitor cryptocurrency transactions closely, leading to concerns about excessive control over how individuals use their digital assets. This centralisation can erode the decentralised ethos of cryptocurrencies.

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To date, the picture of the implementation of cryptocurrency or digital assets regulations across Africa is mixed. Some countries that have either issued regulations or a clear position include South Africa; Nigeria; Egypt; Kenya; Uganda; Cote D’Ivoire; and Mauritius. Most countries have issued statements either restricting or banning the use of cryptocurrencies. In contrast, Mauritius has embraced the cryptocurrency space, positioning itself as a crypto-friendly jurisdiction by implementing a regulatory framework for digital asset custody and licensing for service providers under the Financial Services Commission (FSC).

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Many Central banks across the continent are working on developing their own e-digital currency, such as the e-naira issued and regulated by the Central Bank of Nigeria. It was the first of its type in Africa.

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In summary, African countries are increasingly aligning with FATF regulations to combat AML and CFT activities involving cryptocurrency. These efforts, along with bans on financial institutions servicing cryptocurrency exchanges, form key trends in the region’s regulatory landscape. The advantages of these regulations include enhanced investor protection, increased government revenue, and improved market stability. However, challenges remain, including inconsistent policies, potential stifling of innovation, and concerns about government overreach. As Africa’s cryptocurrency market continues to evolve, balancing regulatory oversight with innovation will be crucial for sustainable growth in the sector.

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