Blockchain & cryptocurrencies: Prospects for African trade (5)
The crypto ecosystem relies on the internet and electricity. At 26 percent, African mobile internet adoption remains very low. Electricity grids are still weak and supply epileptic and inadequate. Additionally, unlike mobile money, which only requires a basic mobile phone, cryptocurrency wallets require a smartphone. Africa accounts for more than half of the global population without a mobile broadband connection, according to the GSM Association (GSMA). And while there are more than a hundred ongoing African Union ICT infrastructure projects aimed at upgrading broadband and other related internet infrastructure across the continent, much more remains to be done.
African governments are increasingly wary of cryptocurrencies and the ecosystem that sustains them. In Nigeria, for instance, the central bank has barred commercial banks from facilitating crypto transactions. Other African countries with crypto bans are Algeria, Libya, Morocco, and Egypt (Arcane Research, 2020). In some other African countries like Kenya, Ghana, Lesotho, Swaziland, Uganda, Zambia and Zimbabwe, advisories have been issued about the risks of crypto transactions (Arcane Research, 2020). In Namibia and Burundi, the use of crypto is allowed but trading is banned (Arcane Research, 2020).
In any case, there is growing acceptance of cryptocurrencies for online payments by mainstream firms like PayPal, Visa and Mastercard. Also, American banks plan to start allowing their customers to buy, hold and sell bitcoin directly from their accounts instead of going through cryptocurrency exchanges.
With cryptocurrencies, cross-border payments are easier, cheaper and less cumbersome owing to lax or no regulation. “Cryptocurrencies allow users to transact across borders, without KYC or AML checks and in some cases with far superior privacy (Arcane Research, 2020).”According to Chainalysis (2020), Kenya, South Africa and Nigeria are among the top ten global adopters of cryptocurrencies. Remittances account for a greater share of African cryptocurrency transactions, mostly retail-type transfers of less US$10,000 (Chainalysis, 2020). Africans in the diaspora remitted US$48 billion to the continent in 2019 (Chainalysis, 2020).
More interestingly, a significant portion of African cross-border cryptocurrency transactions are business-related, according to Chainalysis. Africa’s international trade with Asia accounts for 31 percent of its exports. In the face of Covid-19 difficulties, African MSMEs were able to continue their international trade businesses with their Asian counterparts unhindered using cryptocurrencies. In one use-case example by Chainalysis (2020), a Nigerian video game importer from China hitherto could not wire hard currency directly to China for his purchases, routing it via Hong Kong instead. With crypto exchanges, he simply sells a cryptocurrency like bitcoin in exchange for Chinese yuan renminbi (CNY) and sends directly to his Chinese counterparty (Chainalysis, 2020).
Chinese residing and working on the African continent also increasingly account for a significant portion of crypto transactions between Africa and China for remittances or sending proceeds from business activity that may not be legal (Chainalysis, 2020). In African countries like Zimbabwe and Nigeria, where local currencies are continually debased, amid high inflation and unstable political environments, cryptocurrencies increasingly serve as a store of value. Understandably, many more Africans increasingly see greater utility in cryptocurrencies.
Crypto-based cross-border payment initiatives are springing up across the continent. African examples are Kenya’s BitPesa, Ghana’s BTCGhana and Uganda’s Remit.ug (Ganne, 2018). Traders in any African country can now easily transact with international partners more cheaply and conveniently. With cryptocurrency exchanges, there is no need to go through banks or money transfer firms to buy hard currency for international transactions.
Using blockchain, the settlement risk associated with cross-border payments that forces many African banks into costly correspondent banking relationships becomes needless. And it is quicker and cheaper for the customers too. Singapore’s largest bank DBS Group, Singapore’s sovereign wealth fund Temasek and America’s JP Morgan plan to launch “Partior” in Q3-2021, a blockchain-based global payment system that “will employ distributed ledgers to reach final, instantaneous settlements between two banks anywhere in the world.”
The primary attraction of blockchain technology and cryptocurrencies on the African continent is its relatively unrestricted cross-border capabilities as a medium of exchange and store of value. And even as regulators are becoming increasingly wary of these technologies, especially cryptocurrencies, their resilience thus far suggests they are likely to endure.
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