EVOLUTION

Is Africa ready for the use of cryptocurrencies?

Cryptocurrency use gaining increased market interest

In Summary

•Bitcoin has hit levels above $45,000 in February 2021, up from $8,000 in January 2020

Over the past two months of 2021 we have witnessed a boom in the cryptocurrency markets. Indeed, cryptocurrencies such as Bitcoin, Ether, Litecoin and Dogecoin have received renewed market interest with the value of these cryptocurrencies, among others, reaching record levels.

Bitcoin, the obvious leader in the pack, has hit levels above $45,000 in February 2021, up from $8,000 in January 2020. For Dogecoin, a little-known cryptocurrency, while the value of one unit is yet to breach the $1 mark, its growth has perhaps been fuelled by social media interest by prominent persons, pushing the niche cryptocurrency’s total value over the $10 billion mark.

The above growth, while not unexpected, seems to indicate a divergence in views between the general populace and the corporate world together with central banks. Specifically, despite warnings by corporate bodies and central banks the world over regarding the risky and volatile nature of cryptocurrencies as opposed to traditional currencies, public interest in the same does not seem to be waning. Both institutional and amateur investors have remained bullish in the value of cryptocurrencies, particularly bitcoin, with the impact being the continued upward growth of cryptocurrencies.

This divergence in views between policy makers and the public is perhaps more evident in the African context. While the absolute value of traded cryptocurrencies in the African market is much lower than that evidenced in the global west, growth with respect to the same can not be ignored.

Per analysis conducted by US blockchain research firm Chainalysis, cryptocurrency transfers into and out of the African market below $10,000 grew 55 per cent in the year 2020, reaching a peak of $316 million in June 2020. However, unlike the global west where the cryptocurrency craze is largely propelled by financial traders, in Africa the growth is largely due to commerce, with individuals and small businesses in Nigeria, South Africa and Kenya leading the pack.

The allure of cryptocurrencies in the African continent is based on numerous factors. Key amongst them is the non-regulated nature of cryptocurrencies, which prevents market interference from governments, and strikes out the need for middlemen. Similarly, due to the transactions only being reliant on the internet, cryptocurrency transactions are not geographically bound. This presents a nimble tool for concluding transactions, akin to the mobile money systems that dominate the financial scene in Africa.

The growth of cryptocurrency use and trade within the continent has central banks in Africa scrambling for solutions. For now, the knee-jerk reaction is aimed at limiting trade in cryptocurrencies with a view to protect domestic economies from adverse effects that may be heralded by the volatility of cryptocurrencies.

This has seen the government of Nigeria, for instance, implementing stringent restrictions on the trade of cryptocurrencies. Indeed, recent guidance from Nigeria’s central bank requires commercial banks and other financial institutions to close accounts transacting in, or operating on, cryptocurrency exchanges, with all deals involving cryptocurrencies prohibited and severe regulatory sanctions imposed on non-compliant financial institutions.

For now, cryptocurrency use may yet take some time to enter the mainstream financial scene in Africa. However, all factors seem to indicate that that time may be sooner rather than later.

Karen Kandie – MD, IDB Capital