Fodé Diop’s story is not unique. In many African countries, currency devaluation has had a drastic effect on people’s livelihoods, thanks to interventions by Central Banks, governments, and international monetary institutions. This has led to a loss of trust in these institutions by the citizens.
The Governor of the Central Bank of Kenya, at a recent World Bank event, said that:
Some people promoting DeFi (decentralized finance) saw an opportunity when people started losing trust in governments and financial institutions in countries with developed economies. So they started promoting cryptocurrencies, with bitcoin as the most well-known, as a way to pay for things instead.
What is cryptocurrency? To have a deep understanding of cryptocurrency in Africa, we need to know what it is. Cryptocurrency is a digital or virtual asset that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. What is the difference between cryptocurrency and other digital assets? Cryptocurrencies are decentralized, meaning they are not subject to government interference or manipulation. Other digital assets, like traditional fiat currencies, are centrally controlled and subject to the whims of governments. What are the benefits of cryptocurrency in Africa? Cryptocurrencies offer African countries a number of potential benefits. For one, they could help reduce corruption by ensuring that transactions are transparent and cannot be easily hidden or tampered with. They could also help African countries develop more stable economies, as they would not be subject to the same inflationary pressures as fiat currencies. Finally, cryptocurrencies could help Africa reduce its dependence on the US dollar, which is the dominant currency in global trade.
- The state of crypto in Africa
- Sector deep dives
- Blockchain-native innovations from Africa
- Bull case for crypto adoption in Africa
- Bear case for crypto adoption in Africa
- Conclusion
The State of Crypto in Africa
In 2019, Jack Dorsey said that he was very optimistic about the potential of cryptocurrency in Africa.
The Chainalysis 2021 Geography of Cryptocurrency report showed that Africa has seen a huge increase in cryptocurrency activity over the past year, with $105.6B worth of crypto being sent to the continent between July 2020 and June 2021. This is up from just $8B in the same period last year, and represents a growth of over 1200%. Kenya, Nigeria, South Africa and Tanzania have seen the highest levels of adoption, with Kenya and Nigeria being ranked 5th and 6th in the world on the 2021 Global Crypto Adoption Index.
The average cost of sending $200 to Africa is 8.2 percent, according to a World Bank report. This is a major source of income for most Africans. According to numbers from Chainalysis, about $562M worth of cryptocurrency was sent back to the continent in retail-sized payments.
rougly 0.2% of all Bitcoin and Ethereum nodes are located in Africa, most of them in South Africa. According to the node tracker on Etherscan, there are no Ethereum nodes in Africa at all. Additionally, Africa only has 19 nodes for the Bitcoin Lightning network, which is about 0.12% of the global node count of over 3000.
According to an article from Bitcoin Magazine, there is little to no mining activity taking place on the continent. This is due to the high cost of purchasing mining rigs, as well as the expensive electricity prices. Additionally, the continuous government intervention in the form of strict regulations has made it very difficult for miners to operate.
One notable difference between the cryptocurrency adoption rates on the African continent and in Europe is that relatively fewer businesses in Africa accept cryptocurrency as payment. In Africa, the countries with the highest number of businesses that accept cryptocurrency as payment are Kenya, South Africa, Zimbabwe, Nigeria, Madagascar, and Egypt. It is worth mentioning that there is also some merchant activity related to crypto payments in Algeria, DRC, Ethiopia, and Sudan.
With more than 29 African countries using crypto for cross-border transactions, the growth of crypto adoption in the continent has been catalyzed by:
- Increase in internet penetration
From 2005 to 2017, the percentage of Africa’s population with internet connectivity increased from 5% to 22%. However, this is still lower than other continents. The IFC predicts that the number of internet users in Sub-Saharan Africa will grow significantly in the next few years. According to the GSM Association, in 2019 only 26% of the population in Sub-Saharan Africa had access to mobile phones. This is projected to rise to 475 million people by 2025.
- Population demographics
A comparison of World and Africa’s population statistics shows that Africa’s population is much younger and growing at a much faster rate. Africa’s young, growing population has had interactions with the internet economy, making them more likely to embrace crypto. Africa’s internet economy is projected to reach $180B by 2025.
- Economic instability
Hyperinflation in countries like Zimbabwe has prompted a lack of faith in long-standing financial institutions. When comparing the global average it is evident that Africa experiences a higher inflation rate, ranging from 5-15%. Even African economic giants, such as Nigeria, Egypt and South Africa, are not exempt from this.
Most African countries have high inflation rates, which makes them vulnerable to national currency devaluations. For example, the Nigerian Naira has lost a lot of value to the US Dollar in recent days. The black market exchange rate hit N580/$1, which is much higher than the rate on google, which is N412/$1. The Governor of the Central Bank of Nigeria even accused Aboki FX, an online foreign exchange update platform, of manipulating the forex exchange markets, after the consistent loss in value that the Naira experienced against the US Dollar.
Many people want to find ways to protect their money from inflation and currency devaluation, which are common problems in Africa. Cryptoassets offer a way to do this, which has helped more Africans get interested in crypto.
- Weak financial infrastructure
A large portion of the continent is without access to commercial banks, which is 61% lower than the global average. In addition to the high costs of sending remittances, fees for cross-border payments are still incredibly high.
While the transaction fees for cryptocurrencies are lower than those for traditional methods, the global nature of cryptocurrencies means that those who aren’t served by fintech startups in their country are still able to send and receive payments.
- Adoption of mobile money payments services
Mobile money payment services like M-Pesa and MTN Mobile Money have helped grow peer-to-peer trading activities, which are prosperous. Crypto exchange platforms like Paxful and Localbitcoins have given their users the ability to sell and buy crypto using mobile money payments services. Most Central Banks, like the Nigerian one, have a stance of discouraging the use of banking infrastructure for crypto activities, so most banks are unable to support peer-to-peer trading. This is why there is a need for the exchanges to provide mobile money as an option.
Sector Deep Dives
Art
Africa has always been home to a rich history that is diverse and unique. AfroFuture DAO was formed to help unlock the value of historical assets in order to support the next generation of creators. The organization aims to be the launchpad to web3 for African artists who are still in web2. One of the founders of AfroFuture, Osinach, recently had a $75,000 sale from three NFTs. He becomes the second African, after Lethabo Huma, to offer their work to Christie’s.
So far, AfroFuture DAO has been able to make 7.45 ETH in African history sales and 24 ETH in African art sales. Their Afrofuturism theme has guided the two $AFTR creator cohorts of 5 African creators in each cohort to produce NFTs through their governance token, the $AFTR. The $AFTR token supply is limited to 100,000,000, and certain percentages are allocated for different things such as creator commissioning, seed club, private sales, community, and the $AFTR core team. After submission by owners of historical African assets, the DAO votes on a quarterly basis which applications are accepted into the vault. From the vault, the assets are put up for auction.
According to the AfroDroids site, the artist Owo launched the project in August with the intention of minting a total of 12.1K items. So far, 418 ETH has been traded for these items, with 3.4K owners. The project has a strong Discord community of 23,000 members. Every quarter, the project has different goals, such as purchasing land in the metaverse in Q3 2021, supporting up-and-coming artists from Africa, and doing a movie production for a feature film in Q3 2022.
Finance
Several cryptocurrency startups are serving the African market with decentralized exchanges offering peer-to-peer trading, sending gift cards, custodial wallets, remittances, cross-border payments and uncollateralized loans.
In South Africa, Luno is the most popular cryptocurrency exchange, followed closely by VALR. In Nigeria, Buycoins is a popular cryptocurrency exchange that also allows users to send gift cards. According to Buycoins, they processed $141 million worth of cryptocurrency transactions in 2020. In Ghana, Bitsika reports that they moved $39 million worth of cryptocurrency in 2020 and had 95,000 users. The most popular cryptocurrency exchanges for remittances are Binance, Luno, VALR, LocalBitcoins, Bitfinex and Paxful.
Why is cryptocurrency becoming popular in Africa?
Cryptocurrencies are becoming increasingly popular among low-income earners who have previously been excluded from the financial system. Most banks in Africa are not accessible to this segment of the population, and even when they are, low-income account holders are discouraged by high transaction costs.
The economic situation in many African countries has not been good in recent years, with problems such as debt and political instability. This has caused things such as inflation to become worse, and has made the currency in countries like Kenya and Nigeria very weak.
While cryptocurrencies have the potential to address financial exclusion and weak domestic currencies, they have not been able to do so effectively thus far.
Cryptocurrency provides individuals with access to a mobile device and internet connectivity the ability to engage in similar activities to those conducted through financial institutions and intermediaries. These activities include making payments, sending remittances, and making investments.
Investment is especially attractive to people who are good with technology. They can own assets that are not affected by inflation or the decrease in value of the domestic currency.
Since cryptocurrencies don’t rely on intermediaries, they are quicker and cheaper to use than conventional methods. This makes them more accessible than traditional banks, which drove their use and growth across Africa during the pandemic and lockdowns.
What does a high number of people holding cryptos imply?
The lack of access to banking services in African countries can make it difficult for people to participate in the economy. However, cryptocurrencies can provide a way for people to pay for goods and services without needing a bank account.
Crypto transactions are believed to be more secure because only the person with the private key for the wallet can access the funds.
The system also makes it easy to track cryptocurrency transactions. All cryptocurrency transactions are recorded on the publicly distributed blockchain ledger. There are tools that allow anyone to look up transaction data, including where, when, and how much of a cryptocurrency someone sent from a wallet address.
But there are risks, too. What are those?
First, cryptocurrencies are complex and require some understanding of technology to use. A significant proportion of the adult population in sub-Saharan Africa is illiterate and may not be able to understand it. This turns the financial inclusion argument on its head to some extent.
The blockchain is often touted as a more secure way to transact than traditional methods, but if you lose your private key, you lose your funds with no way to recover them. This is not a threat when you have a bank account.
Thirdly, cryptocurrencies have been known to be volatile, which has negatively affected retail investors, especially those who do not understand this type of asset class.
The potential threat to monetary sovereignty is a profound concern for African states. If crypto is ever more widely used than domestic fiat currency, national monetary agencies such as central banks may not be able to use monetary policy to steer their economies to a path of growth.
The weakening of effective capital controls in African states is a potential threat to those states’ economies. Capital controls are necessary to prevent capital flight from a domestic economy. If controls are weakened, it can result in drastic fluctuations in currency rates and a quick devaluation of the domestic currency.
Banks could be in danger if they have a lot of exposure to crypto firms. For example, if they give crypto firms loans. In some African countries, there are rules that stop banks and crypto assets service providers from working together.
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