Cross-border payments with cryptocurrencies
With the entrenchment of mobile money in key African markets already, the transition to blockchain-based digital payments should ideally be relatively easy. And while blockchain infrastructure like central bank digital currencies (CBDCs) for digital payments are still aspirational, Africans already use the closest private cryptocurrency alternative: stablecoins.
A stablecoin is a cryptocurrency or crypto asset whose value is linked to an outside asset like the US dollar or gold to stabilize its price. Stablecoins are designed to eliminate the currently high volatility of many cryptocurrencies by pegging their market value to highly-traded fiat currencies or precious metals. Stablecoins also use other cryptocurrencies as collateral (Hertig, 2020).
Due to their relative stability, traders are able to use stablecoins for transactions without having to change their cryptocurrencies into fiat currencies, reducing costs associated with going through the banking system. Examples of stablecoins are Facebook’s Diem (previously known as Libra), Tether, USD Coin, and Dai (Hertig, 2020).
In the African case, where hard currency is scarce in many countries, stablecoins allow traders to buy and sell goods and services with international trading partners without having to go through the central-bank regulated banking systems of their respective countries. “Stablecoins are particularly popular in East Asia as a result of the Chinese government’s decision in 2017 to ban exchanges of yuan for cryptocurrency.”
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With cryptocurrencies gathering momentum, central banks are increasingly open to the idea of digital currencies. A central bank digital currency (CBDC) is simply a digital version of a fiat currency. Thus, most of the features of a potential CBDC are already available within existing digital payments infrastructure. However, CBDCs would have additional advantages.
Since central banks would be able to issue CBDCs directly to citizens without having to go through commercial banks, the potential to increase financial inclusion is huge. With banks expectedly at a disadvantage owing to disintermediation consequently, there is not much impetus to issue CBDCs at scale as yet; especially in developing and emerging economies.
China is already experimenting with a digital yuan, however. In the specific African case, South Africa is already in the second phase of its CBDC project. In this regard, the South African Reserve Bank is benefiting a great deal from the Monetary Authority of Singapore’s experience using blockchain-based real time gross settlement (RTGS) system.Similarly, Tunisia’s central bank is exploring a potential CBDC issuance (Smart Africa, 2020). Ghana has also indicated it plans to issue a CBDC in the near future. Incidentally, Nigeria has also announced that plans are afoot to issue a digital currency.
Many African economies are characterised by high inflation, volatile and weak currencies, capital controls, hard currency shortages and weak banking infrastructure. Cryptocurrencies allow discerning citizens to ameliorate or escape some of these economic challenges. Bitcoin is the pioneer and most popular cryptocurrency. There are other notable ones. They are Ethereum, Litecoin, Cardano, Polkadot, Bitcoin Cash, Stellar, Chainlink, Binance Coin, Tether, and Monero.
In the African case, where hard currency is scarce in many countries, stablecoins allow traders to buy and sell goods and services with international trading partners without having to go through the central-bank regulated banking systems of their respective countries.
“Africa will define the future (especially the bitcoin one!)”. This was a tweet by Twitter chief executive Jack Dorsey in November 2019. His optimism is not farfetched.“While much of the focus elsewhere has been on investment, speculation and trading, Africa, more than any other continent, has a need for the utility of cryptocurrencies.”
Diaspora remittances are expensive through traditional banking channels. Sometimes, recipients have a hard time receiving payments in hard currency. When converted to local currency instead, commercial bank rates tend to be below market rates, with high fees in tandem. And there is a time lag of at least two days from the time of the initial transaction.
Cryptocurrencies overcome these constraints. Fees are relatively low (Arcane Research, 2020). FX conversion rates tend to be market competitive. There is almost zero lead time, as recipients get their money almost instantaneously or same day. And in most African countries, crypto transactions remain unregulated and thus tax-free.
Cryptocurrency adoption in Africa is relatively high. According to Arcane Research (2020), crypto infrastructure has not grown in tandem, however. African nodes are few and mining operations are not significant. Less than 0.5% of all global Bitcoin and Ethereum nodes are in Africa, for instance, with the majority domiciled in South Africa (Arcane Research, 2020). There are a number of cryptocurrency merchants, ATMs and exchanges around the continent, though, but they are not as widespread as elsewhere (Arcane Research, 2020).
An edited version of this article was first published by Nanyang Business School’s NTU-SBF Centre for African Studies, Singapore. References, figures and tables are in the original article. See link viz.https://www.ntu.edu.sg/cas/news-events/news/details/can-blockchain-and-cryptocurrencies-facilitate-african-trade
