Bitcoin in Africa: Why It Is Gaining Traction Despite the Odds
More countries in Africa are warming up to the idea of supporting cryptocurrencies after the Central African Republic legalized bitcoin.
A relatively small African country recently became the world’s second jurisdiction to adopt bitcoin (BTC) as its official currency, following El Salvador’s similar decision in 2021.
According to a presidential announcement, the Central African Republic’s (CAR) parliament voted unanimously to legalize bitcoin and other digital assets. It makes bitcoin legal tender in the CAR alongside the Central African CFA franc.
Notably, monthly crypto transfers under $10,000 to and from Africa increased by 55% in 2021 hitting $316 million in June last year.
According to American blockchain research firm Chainalysis, these numbers will likely keep going up. Unlike the CAR, other African countries are mainly using bitcoin for commerce, with Nigeria, South Africa, and Kenya being largely responsible for this activity.
Helping the unbanked
The continent’s economic volatility is one of the reasons why many Africans are turning to digital assets. Because bitcoin does not have a single domain, the value of money traded is unaffected by national inflation rates. This allows citizens of African countries to preserve their purchasing power in a failing economy.
Crypto can also be used to make cross-border payments. Because of fraudulent and money laundering operations, PayPal’s direct use in many African nations is limited, but crypto companies employ blockchain technology to keep public data in a decentralized manner.
Moreover, today’s young generation in many African countries is ditching traditional jobs, due to high unemployment rates, and exploring new opportunities to earn money.
With digital currencies like bitcoin, people can start a business, work for big brands outside their own countries, and earn a living.
Many African entrepreneurs want to expand their businesses internationally. Such businesses often use bitcoin to attract the attention of international markets and protect themselves against currency devaluation.
In most African countries, there are no formal bank accounts. Although the banking sector has somewhat improved across the continent, 57% of Africans do not have any form of bank account, despite significant progress.
Account holders also complain about bank fees, which are both unreasonably high and often unaffordable, while banks demand excessive lending rates. As a result, people are increasingly distrustful of traditional banking.
Opening a bank account is still quite difficult in most African countries. A significant amount of paperwork is required, especially in rural areas.
While initiatives such as a digital ID for all are being discussed in Africa, it is not likely that we will reach that goal within the next decade or so. Meanwhile, people are experiencing significant strains in earning and saving money.
With bitcoin, basic savings and lending are available. Generally, bitcoin-backed loans do not require a credit check and digital assets serve as collateral.
Remittances
Africa relies heavily on remittances as a source of financing. Despite early indications of a reduction in remittances during the epidemic, non-commercial transfers were a critical source of economic stimulus at a time when other forms of capital were departing.
A report by The Brookings Institution titled 2022 Foresight Africa reveals that cryptocurrencies can improve remittance systems.
Fees for international wire transfers are approximately 7% of the entire amount transferred, and funds can take several days to settle. Some cryptocurrencies, on the other hand, can process payments instantly and offer foreign exchange and money transfers for pennies.
Digital asset transfers related to remittance payments have expanded substantially in volume and value during the pandemic outbreak.
Crypto platforms offer decentralized peer-to-peer lending platforms and are well-positioned to address a number of economic difficulties in the region.
According to a report by Chainalysis, Africans received $105.6 billion worth of cryptocurrency between July 2020 and June 2021, showing that the usage of cryptocurrency in the region increased by 1,200%, at the time.
The report estimated that in 2019, $562 million worth of remittances were facilitated by cryptocurrencies out of the $48 billion worth of estimated remittances to Sub-Saharan Africa.
Avoiding currency instability
Bitcoin booms have also been caused by unreliable local currencies and hyperinflation. Unlike fiat currencies, bitcoin is inflation-proof since the number of bitcoin in circulation is capped at 21 million. For some, it makes it a reliable store of value during times of economic hardship.
Despite the fact bitcoin is usually associated with anonymity, its public blockchain, which records all transactions, makes payments transparent.
Transparency is an important factor when it comes to granting loans and providing aid. The misuse of foreign aid in Africa has often been caused by corruption and mismanagement.
The result has been little improvement for ordinary people. That said, the usage of cryptocurrency can solve this issue as money can be traced, thanks to blockchain technology.
Bitcoin’s entry into Africa comes with risks
Although bitcoin and crypto in general, have taken off in Africa, not everything has been smooth sailing. The trend has a dark side, with trades and speculation having caused some people harm.
Africans, like the rest of the world, have explored cryptocurrency as a means of making a better living, but some have lost money or been scammed. Because most African governments do not regulate bitcoin, there is no safety net in place to compensate for fund losses.
Citizens are frequently enticed into making risky investments due to a lack of education. Getting educated is thus a vital first step, especially as crypto appears to many people to be excessively hard to understand.
Exploring crypto regulation in Africa
Laws are being drafted in key African countries to prepare for the prospect of bitcoin becoming the norm.
Nigeria, Africa’s largest economy, is leading the way here by establishing regulatory standards for cryptocurrency businesses and startups.
A policy paper providing proposals for regulating cryptocurrencies in South Africa was produced by the South African Reserve Bank and other senior financial regulators.
Despite its growing popularity, it is still too early to predict how Africa will adopt bitcoin. Still, it is something young Africans should think about.
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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