THE NECESSITY OF AN EARLY CRYPTO ADOPTION IN AFRICA
MOBILE MONEY’S REVOLUTIONARY IMPACT MAY HAVE RUN ITS COURSE
Just before the new millennium, Africa began to witness the beginning of a telecommunications revolution which has transformed the continent in different ways and propelled it to become a pioneer in the phone as a service space in general and mobile banking specifically. Today in Africa, people can pay their utility and cable TV bills, send and receive money, pay for fertilizers, and borrow money, all via a mobile phone. Investments in telecommunications technology and new products have pushed profits for telecom operators to unprecedented levels and befitted authorities with increased license fees and taxes. More importantly, though, telecommunication has helped improve the lives of millions of Africans through more inclusive growth and greater access to information. Nevertheless, mobile banking or mobile money has been unable to address all the financial services divide that persists in Africa. The industry is faced with a few challenges that include the proper scaling of the agent network, the internationalization of mobile money, and the complex cost structure. Cryptocurrencies (cryptos) and stablecoins promise to address many of those inherent issues and much more.
As interest in crypto shifted during the COVID-19 pandemic from a niche ecosystem to retail investors, Africa should seize the opportunity to leverage the technology and enable the sort of generational changes needed to improve the lives of Africans in an impactful way. And the
appropriation of this technology in Africa would be more positively impactful on the continent than anywhere else.
There Are Numerous Use Cases Of Crypto That Are Revelant For Africa
Although crypto adoption is nascent in Africa compared to other regions, the continent is seeing an exponential adoption rate. According to The 2021 Geography of Cryptocurrency Report, Chainalysis estimates that between July 2020 to June 2021, crypto asset volume grew by $105.6 billion in Africa, an increase of a whopping 1,200%1. This represented the highest growth in the world. Although the total value remains quite small, it appears that many young Africans are interested in the digital currency space overall, and cryptos specifically.
Much of the interest in cryptos is speculative due to the outstanding wealth some people have made in a short period in other parts of the world, particularly in North America. This fascinating and popular narrative unfortunately clouds the significant value that cryptos could bring to Africa in solving some of the problems that even Internet 2.0 and telecom companies have not been able to entirely resolve. The practical use-cases that cryptocurrency presents, and its nascent nature are what make it exciting as far as Africa is concerned. There is a long list of use cases of cryptocurrencies that are relevant to the African context and there should be increased open
debates to firm up strategies to materialize them. Two prominent areas that cryptocurrencies would play a positive role in are remittances and banking services.
Remittance
Remittance inflows within and into Africa constitute a lifeline for many families. According to figures, remittance to Sub-Saharan African countries was $42 billion in 2020, representing a year-over-year decrease of 12.5 percent due to the ravaging pandemic2. However, we note a resiliency in remittances inflows following a quick rebound, indicating its importance for vulnerable families and investments. Nonetheless, the actual value of remittances is much higher due to the complex channels of remittance flows, particularly informally.
Given this context, it is woeful that remittance fees are the highest in Africa. Notwithstanding improvements to payment system infrastructure, at 8.17 percent of remittance value, the cost of remittances is still higher in Africa compared to the global average of 6.5%3. This hurts the bottom life of receiving individuals and families who depend on remittance to conduct necessary
activities such as buying foodstuffs, paying school fees and housing, and investing in business activities.
The objective of Sustainable Development Goals Target 10.c, is “by 2030, reduce to less than 3 percent the transaction costs of migrant remittances and eliminate corridors with costs higher than 5 percent.4” Without the wide adoption of decentralized financial instruments such as crypto, this target will not be achieved because the current system is mired with banks, agent networks, credit card issuers, and complex regulations. Even a 3 percent remittance fee is far too high given the technology that is available in the world today.
Crypto could help solve this mainly due to the blockchain technology that it uses. It is permissionless, decentralized, scalable, and robust. The peer-to-peer nature of the technology promises to eliminate the intermediaries, thus significantly lowering the fees associated with remittance. It is even possible to use crypto as an intermediary currency. For example, a Nigerian migrant in the United States could convert U.S dollars to crypto, which she could then convert into Naira. As the adoption of cryptos increases and developers continue to make improvements, gas fees will be greatly reduced, rendering crypto transactions even more affordable.
Banking services
Most Africans do not have a formal bank account. Despite the progress that has been made in increasing the bancarization rates on the continent, 57% of Africans still do not have any form of bank account5. Bank account holders also complain about the numerous and hefty fees that banks impose while demanding excessive lending interest rates with often unattainable conditions. This has further reinforced the distrust of people in the formal banking system.
Furthermore, it is still too cumbersome to open a bank account in most countries in Africa. The volume of papers required poses a significant challenge, particularly to people living in rural areas. Although projects such as digital ID for all are being assessed in Africa, the reality is that we are still at least a decade away from achieving this. And while we wait, there is a significant strain on how people earn and save money. So far, crypto banking does not have sophisticated financial products like traditional banks do. However, there are already basic savings and lending products available. Crypto loans do not generally involve credit checks and digital assets constitute collaterals. These trustless transactions occur peer-to-peer via crypto platforms. In Africa, a tontine group could leverage its digital assets to borrow from another tontine group for working capital or to purchase farming inputs—no need for a bank. Cryptocurrencies would also help to further formalize African’s economy that is still too dependent on cash. It would reduce the burden of carrying a significant amount of cash. Although there are evident risks associated with these services, the technology is young, and the entire ecosystem is rapidly fine-tuning. Some of the world’s largest banks are already discerning that the future of banking is right alongside cryptocurrencies. Visa, Mastercard, and JP Morgan are just a few of the largest financial services firms that are already offering crypto services to their users or are in the process of developing financial products directly linked to at least a few cryptocurrencies.
WHAT SHOULD AFRICAN STAKEHOLDERS DO TO POSITION THE CONTINENT EARLY ?
Governments and the private sector are responsible for developing the crypto space in Africa
African governments and the private sector have a role to play in ensuring that the continent is a participant in the development of cryptocurrencies and allied technologies. Together, they can create the infrastructure, develop talents, and implement the technology in ways that are relevant, efficient, and scalable for Africa.
Governments
- Invest so that authorities understand the technology of cryptocurrencies instead of fighting it. because like the internet, all countries will eventually adopt some forms of it.
- Make digital currencies and cryptocurrencies mandatory courses in the education curricula at an early stage. No African should graduate from high school without having a robust notion of cryptocurrencies. This step is imperative to have generations of Africans wellversed in a world of digital currencies. A foreign language is compulsory in middle school in most countries in Africa. Crypto, then, could also be mandatory.
- Invest further in internet infrastructure considering that the vast untapped opportunities that crypto and digital currencies promise require internet 3.0 and blockchain technology.
- Develop a robust regulatory and investment framework for internet 3.0 which will also encompass blockchain technology. In the same light that traditional financial services regulations gradually evolved, authorities must do similar with cryptocurrency.
The private sector
- Banks and other institutional investors must view cryptocurrencies as an asset class. They should therefore provide avenues for their clients to invest in crypto as part of a balanced portfolio. This could provide them access to new demographic groups and novel sources of income. Hesitancy will likely result in disruptions in the industry, much like we have observed telecoms increasingly taking market share from traditional banks.
- Develop strategies to gradually enable crypto acceptance and lobby government to promote regulations that are conducive to a crypto-friendly business environment
- Establish a strong collaboration with the vibrant crypto ecosystem within and outside Africa and finance and coach crypto startup entrepreneurs
- Accelerators and incubators should begin to make a bigger space for crypto in their programs across Africa.
CRYPTO DOES NOT HAVE A TULIP BULB FATE
Despite the potential of crypto to foster a more inclusive financial system in Africa, it cannot achieve this alone. Most importantly, the technology remains imperfect. Nonetheless, it is useful to accept that, somehow, cryptos and digital currencies will become part of our daily lives sooner than most people realize it. In 2017, Jamie Dimon, the CEO of the global banking giant, JP Morgan, vehemently downplayed the utility of Bitcoin in a forum and stated that cryptocurrencies are “worse than tulip bulbs.” Fast forward today, the company was the first bank to create a digital coin in 2019, and most importantly, it has quietly enabled its financial advisors to place clients’ wealth into crypto funds earlier this year. His company’s crypto strategy is a stark divergence from his “invest at your risk” comments. This is in line with the increase in crypto-dedicated funds and the liquidity pools they represent.
OPPORTUNITY TO BE AT THE FOREFRONT OF A REVOLUTIONARY TECHNOLOGY
Africa appears to already be late at the crypto race. Moreover, compared to many developed regions, the continent currently lacks the required infrastructure and the appropriate ecosystem for a booming crypto market. Yet, crypto technology is still in its early phases. So, while Africa may not have an edge in the short term in areas such as usage of crypto in the metaverse, the continent could develop niche markets in sectors such as agriculture, remittances, and banking services for the poor. This will require visionary leadership, a committed private sector, and a strong willingness from all to be a participant of change, not a spectator.