Interest and speculation in cryptocurrency have spiked in the last year. Most of us have heard the stories about people making crazy returns on Bitcoin and other cryptocurrencies or of the growing masses who’ve flocked the markets in an attempt to get a slice of the ‘crypto craze’.
If you’re anything like me you’ve arrived late to the party and the world of cryptocurrencies remains a complex one. Despite being a phenomenon created in the West much of the discussion into its impact has been around it’s potential in emerging economies such as Africa.
I want to look into the opportunities that cryptocurrency could present on the continent and whether despite Bitcoin’s recent market turbulence and talks of an inevitable bursting bubble, cryptocurrency technology could be monumental for Africa’s development.
Firstly though lets’ begin with some very high level and basic definitions:
What is a ‘Cryptocurrency’?
A cryptocurrency is a digital or virtual currency that can be used to buy and sell things. However, unlike traditional currencies there are no coins or notes – cryptocurrency exists only online. Transactions made with these digital coins are added to a growing database known as a blockchain – an open ledger that records all transactions.
A defining feature of cryptocurrency is that it is not issued by any central bank or government e.g. The Bank of England is the central bank in the UK. Instead, individuals undertake mining of cryptocurrencies which is the process by which transactions are verified and added to the blockchain.
So theoretically it is immune to government interference or manipulation and you and I can transact directly with one another without a ‘middleman.’ By cutting out the middleman and having an open and secured ledger stored on each user’s computer – this removes fees and potential risk of inefficiencies, manipulation or corruption that comes with having one central repository of our information.
What is ‘Bitcoin’?
The first type of cryptocurrency to enter into the public domain (2009). It is important to note that Bitcoin is just one form of cryptocurrency (although the most popular) that is available in the world at the moment. There are over 100 cryptocurrencies (e.g. Litecoin, XRP, Clubcoin, Iota etc.)
Cryptocurrencies already have an active presence on the continent with many dedicated African Bitcoin and crypto start-ups, initiatives, and individuals that are building an African cryptocurrency ecosystem and are facilitating the trading and even mining of cryptocurrencies.
There are some very clear opportunities that the development of a cryptocurrency ecosystem on the continent could bring:
Banking the “unbanked”
If you live in a ‘developed’ economy it is easy to take advantage of your ability to make transactions instantaneously and with little effort, as you make up 50% of the world that have access to bank accounts. For the remaining 50% without the financial infrastructure to participate in traditional banking as most of Sub- Saharan Africa is – technology like Bitcoin and other cryptocurrencies have the ability to bring this remaining 50% into the financial system.
Africa has already demonstrated a technological ‘leapfrogging’ as the adoption of mobile technology and fin-tech solutions have been unprecedented. The success of companies such as M-Pesa, a mobile phone-based money transfer, financing and micro-financing service (which boasts 30 million users in 10 countries) demonstrates just how ripe the market is for technological adoption.
“Much like how local fintech companies are creating products and services to plug gaps in the local financial system, cryptocurrency technology has some potential across Africa given the lack of “advanced financial infrastructure,”
Focusing on one type of financial transaction that plays a major part in local economies on the African continent is remittance which makes up a significant source of finance. In 2015, Africa received an estimated $63 billion in remittances. Companies like Western Union currently cater to the ‘unbanked’ by giving them the ability to receive and transfer money without bank accounts. However such transfers come with expensive fees as a result of currency conversions. Since crypto technology is borderless it has the potential to give many Africans the ability to send and receive money for less.
Opportunities for (intercontinental) trade
Given cryptocurrency technology’s borderless nature, its adoption could be the answer to boosting Africa’s intercontinental trade. It has long been the opinion of economists and other international institutions that for Africa to grow it must trade amongst itself consistently. Since crypto technology eases the movement of money it has the potential to facilitate cross-border trade as it opens up commerce to masses of people without discrimination. Of course physical borders and political will play a part in the ease of trade itself, but cryptocurrency allows for the type of economic flexibility that is essential for facilitating trade across different time zones and regions.
There are already companies such as Nuru Coin that offers a comprehensive Intra-African trading platform complete with its own integrated payment system by way of crypto technology. Once more entrants occupy the market, Africa can begin to build an ecosystem that could facilitate trade between every nation.
“Currently it is easier to send money from America to Nigeria than to send money from Nigeria to the Gambia but the technology can power these things,”
As mentioned much of the appeal that has been linked to cryptocurrencies has been the fact that it is not a currency issued or controlled by any central government or institution. In fact, the creation of Bitcoin coincided with the 2007/08 financial crises off the back of a very anti-establishment sentiment after the failure of our financial institutions. This is a state that many African citizens, unfortunately, know all too well. It is no coincidence that Zimbabwe’s interest in Bitcoin trade is soaring and at one point was trading at over $13,000 on the Golix (a Zimbabwean cryptocurrency exchange) nearly double the global price. This is because the nation has a long history of failures by central government and dysfunctional currencies leading to hyperinflation.
Similarly in Nigeria, when the government placed controls on access to the US dollar during a financial crunch in 2015, Bitcoin made it much easier for businesses to transfer cash abroad, something that has increased interest in cryptocurrencies in the country ever since.
Essentially, the adoption of cryptocurrency allows citizens to take back control of their finances and in economies that have been stung by their central governments many are willing to try something new and take the risk if it means taking matters into their own hands.
Much of the critique that surrounds cryptocurrencies such as regulation (or lack thereof), the facilitation of crime and illiquidity can be applied to its adoption on the African continent. Looking at two possible drawbacks which I believe to be particularly pertinent though is first, the fact that cryptocurrencies can be extremely volatile which could severely limit its use as a currency for the type of transactions we would like to see on the continent i.e. intercontinental trade. Simply because of such price swings, you cannot place a reliable price on goods and this could act as a disincentive to trade in itself.
At the beginning of 2018, Bitcoin suffered a dramatic price plunge and crashed by 40%. Arguably, extensive adoption of a volatile currency in vulnerable economies whose fortunes are already dangerously tied to the value of raw materials has the potential to be really quite dangerous.
Secondly, facilitating the trading of cryptocurrency takes extensive electricity and power. According to Digiconomist, the mining of bitcoins in 2017 consumed more energy than the average electricity consumed annually by 159 nations – including most African countries! Mining and indeed trading needs huge amounts of data and electricity that plainly most Africans do not currently have access to cheaply. This begs the question as to how local homegrown crypto traders, entrepreneurs and enthusiasts can effectively participate in the global market and facilitate a viable ecosystem.
Plainly, it is still early days for the development of digital currencies and crypto technology on the continent. There are very clear opportunities in the development of a robust cryptocurrency ecosystem made up of indigenous technology, self-taught and intelligent homegrown entrepreneurs. Where the opportunities are clear so too are its risks. It is certainly a market to closely observe on a global scale.
Are you into cryptocurrency? What are your thoughts on their potential on the continent? Comment below