Cryptocurrency Adoption in Africa
A Quiet Revolution
Introduction
The adoption of crypto currency is “on the rise” in Africa. Africa has been witnessing greater cryptocurrency ownership, trade volume and regulation.
There is no doubt that Bitcoin is the “otumfuo” (king) of the cryptocurrency world. We all came to know about altcoins through this king.
Many altcoins are trying to identify, and improve upon, the perceived limitations of Bitcoin. These alternative digital currencies must have a competitive advantage in order to draw interest. Some of the main types of altcoins include mining-based cryptocurrencies, stablecoins, security tokens, and utility tokens.
The Alpha
The beginning of the crypto renaissance in Africa was caused by various factors such as the willingness of Africans to adopt new technology, a young tech-savvy population that has quickly adapted to bitcoin, weaker local currencies that make it harder to get dollars and a difficult bureaucracy that complicates money transfer.
Movement of Funds
African authorities have exclusive deals with money transfer companies, which operate as national monopolies. The potential for cryptocurrencies to revolutionize the remittance industry is hard to overstate. It reduces fees and charges others see as exploitative, and it also cuts out middlemen.
Bitcoin helps establish trust through the blockchain, its public ledger. The digital currency’s blockchain, which was designed to be both decentralized and immutable, has reduced fraudulent transfers to almost zero.
The chart below was provided by blockchain analysis firm Chainalysis. The researchers emphasized that even though Africa has the smallest cryptocurrency economy, accounting for roughly 2% of the flow of global cryptocurrency ($8 billion worth sent out and $8.0 billion received) during the period studied, that relatively modest activity is creating life-changing value for users in a region suffering from economic instability by offering low-fee remittance and an alternative way to save. The high cost of cross-border remittances is one of the major factors plaguing many Africans. Using cryptocurrencies can enable remittance payments that are faster and less expensive.
Economic Instability
It is no news that many African countries are faced with severe currency devaluation and instability, which makes it difficult for the savings built up by residents to hold some value. The South African rand, for example, has declined more than 50% against the U.S. dollar in the last decade, according to figures provided by Trading Economics.
While Nigeria’s oil dependent economy has struggled with low crude prices during the COVID-19 pandemic, the central bank has devalued its currency twice this year. As a result, importers must bear the cost for a perpetually scarce dollar. Ghana, Egypt, Algeria and Ethiopia are also struggling with similar challenges.
Cryptocurrency can provide people and businesses on this continent with a more stable store of value. The charts below, which came from the aforementioned Chainalysis report, show the level of currency devaluation, expressed as the amount of native currency units needed to trade for $1. The faster the number grows, the more currency devaluation is happening.
The poor performance of the South African rand and the Kenyan shilling against the U.S. dollar this year led to increased activity on local P2P trading platforms LocalBitcoins and Paxful. Investors likely took advantage of the lockdown restrictions that went into effect to explore the crypto market, which might have contributed to the surge in activity within the said period.
However, both countries follow a clear pattern. When the native currency loses value, P2P trading volumes rise soon after, which reflects traders’ strategy of mitigating currency devaluation by shifting savings, and possibly remittances and other payments, to cryptocurrencies.
As more and more information is made available to new entrants and the education base widens on the continent, I believe Africa could be a better place for crypto activities than the West.
Still, risks abound.
Bitcoin and other cryptocurrencies are unregulated in many countries on the continent and their legal standing is not clear, meaning there is no safety and little recourse if you lose funds.
For many, converting local currencies to and from bitcoin requires informal brokers. Prices are volatile, and buying and selling is a complex process that demands technical knowledge.
In 2018, the Nigerian central bank warned industry participants, stating in a circular that “cryptocurrencies such as Bitcoin, Ripple, Monero, Litecoin, Dogecoin, Onecoin, etc are not licensed or regulated by the CBN.”
The announcement further specified that “For the avoidance of doubt, dealers and investors in any kind of crypto currency in Nigeria are not protected by law.”
The crypto revival is taking place in Africa, and we can only expect regulators to put measures in place to safeguard Africa’s FinTech ecosystem. They have the responsibility to roll out effective policies to protect consumers from financial fraud.
While Nigeria and Ghana remain the driving force of cryptocurrency adoption in West Africa, South Africa is also championing this cause in the southern part of the continent, and in the eastern part of Africa, we have Kenya and Tanzania making strides in their own domain. In the north, the Algerians and the Moroccans cannot be left out.
Africa is on fire! Across the continent, citizens of influential nations, which are geographically well-placed in their respective areas of Africa, are helping champion the cause of a cryptocurrency and blockchain revolution.
Conclusion
In summary, Africa is in a great position to play a key role in the world of digital currencies and adopt blockchain technology into many of its industries. Global entrepreneurs looking to establish cryptocurrency businesses should not underestimate this market, since it is full of people eager to harness the latest innovations to earn their livelihood. DeFi belongs to the developing world.
Africa is on fire!
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Disclaimer: 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. If you found this content engaging, and have an interest in commissioning content of your own, check out Quantum Economics’ Analysis on Demand service.
