It is widely agreed that for a continent to fully achieve its potential in human and societal development, reduce inequalities and improve standard of living, trade is an important sector that must be developed, improved and maintained. Africa has numerous potentials in terms of population and natural resources, but according to the World Bank, 39 of the 50 countries with the lowest GDP per capita are located in Africa.
Intra-African trade is essential in addressing impoverishment in the continent. Unfortunately, trade between African countries is still very low when compared to the levels in other continents such as Europe and Asia. This can be attributed to barriers including protectionist trade policies, infrastructure deficits, lack of efficient cross-boundary payment systems, and political instability.
There is a straight line between trade development and poverty reduction. This link has been recognised by African governments, and the African Union (AU), as they have taken crucial steps to address the inefficiency of trade in the continent.
Here comes the African Continental Free Trade Agreement (AfCFTA), poised to remove the obstacles of trade by creating a synergised free trade system in the continent. This means goods from South-Sudan can easily move to Madagascar, and vice versa, with little or no extra expenses due to tariffs. According to estimates, the AfCFTA has the potential to increase intra-Africa trade by 52.3 percent.
AfCFTA is only the first point of call to promote trade, which is still inhibited by issues such as absence of cross-boundary payment schemes, and lack of infrastructure. Currently, the majority of cross-border transactions are settled in foreign currencies, which creates barriers for small and medium sized enterprises (SMEs). Cross-boundary transactions often involve high transaction costs, lengthy processing times, and increased risk of fraud. This inefficiency makes it difficult for businesses to operate and trade effectively, particularly for SMEs with limited resources.
The African Export-Import Bank (Afrexim) in collaboration with the AfCFTA Secretariat initiated the Pan African Payment Settlement System (PAPSS) to facilitate cross-border transactions. PAPSS is a legitimate attempt to solve a spectrum of the challenges of intra-African trade. However, the system is also rife with potential challenges as well; for example it relies on the discretion of the central banks of the participating countries to decide on which businesses or individuals should partake in the payment system. Also, not all central banks may have the necessary infrastructure, resources or technical capabilities to support PAPSS.
An alternative solution to this particular challenge is the utilisation of cryptocurrencies. Sub-Saharan Africa, which has a population of around 350 million adults has the second-highest number of unbanked globally. The absence of formal financial services, including banking and credit, poses a significant challenge to intra-African trade as it limits access to financial resources and inhibits businesses’ growth. The unbanked population is unable to participate fully in economic activities, and this tends to hinder the growth of trade and commerce. Conversely, there has been an increase in mobile phone adoption in the continent, which means the mobile economy can offer a more accessible solution to cross-border trade.
Since the inception of cryptocurrencies in 2009, Africa has seen a significant increase in its use with multiple functions. Paxful, a peer-to-peer exchange platform, recorded over $400 million dollars worth of bitcoin transactions in just the first quarter of 2022 and a new report indicates African blockchain firms raised over $474 million also.
With the rise of mobile technology, increasing internet access and digital inclusion in Africa, cryptocurrencies have become a more viable and convenient option for transactions across the continent. One of the main drivers of this growth has been the need for more efficient and cost-effective cross-border payments. Cryptocurrencies offer a faster and cheaper alternative for remittances and cross-border transactions, as they are decentralised and do not rely on legacy financial systems.
With cryptocurrencies, individuals and businesses can access financial services that were previously unavailable, without the need for a traditional bank account. Bitcoin communities such as Bitcoin Ekasi in South Africa are an evidence of this, as the community pays students who engage in their educational activities, and are not yet old enough to own bank accounts, through bitcoin.
Secondly, cryptocurrencies reduce transaction costs in international trade. Traditional methods of international payment involve several intermediaries, which leads to high transaction fees and lengthy processing times. With cryptocurrencies, transactions can be completed quickly and securely without the need for intermediaries.
This will reduce the cost of cross-border trade, making it more accessible to SMEs in Africa. Payments are made directly from one party to another, without the need for banks but through exchange/payment platforms such as Luno, or Machankura (which operates on feature phones).
Cryptocurrencies are also based on blockchains that provide transparent and secure ways to record transactions, which will help to reduce border corruption and increase trust in cross-border trade. The question arises consequently, do African countries have the infrastructure to facilitate these decentralised currencies? The answer is, these technologies are already being used.
The commercial sector in Africa constitutes a significant portion of economic activity, and has seen an up-shoot of use of digital payment services. However, with the advent of cryptocurrencies, there has been a growing shift in the way businesses in Africa operate, with examples such as SureRemit, which uses crypto to facilitate payments and remittance.
They have a network of over 1,000 merchants and partners, including Jumia, the e-commerce company, to facilitate payment, without bank accounts. Also, Binkabi is a supply-chain trading and financing platform for farm commodities, allowing produce-related transactions to take place via smart contracts on the blockchain, making trade of agricultural produce a lot more efficient.
However, there are also potential downsides to the use of cryptocurrencies for trade in Africa. Firstly, the volatility of cryptocurrencies could pose a risk to African economies, as they are subject to significant fluctuations in value. This can have negative implications for African countries that rely heavily on exports, as in the event of a sudden drop in the value, these countries can experience significant economic losses.
Secondly, there are concerns around the regulation of cryptocurrencies in African states. Most African countries do not have efficient regulatory frameworks to manage cryptocurrencies, which sets the bedrock for potential issues around money laundering and lack of consumer protection. It is therefore important for African countries to develop effective regulatory frameworks to mitigate these risks.
Zambia is settling an example with her test-run digital currency regulation, to properly regulate the cryptocurrency space. The AU can follow the lead of the European Union which just accented to its innovative crypto regulation – the Markets in Crypto Assets regulation, and pass such regulations for the recognition and regulation of cryptocurrencies, premised on the AfCFTA.
Despite the potential challenges, cryptocurrencies can foster and improve free trade in Africa, although there are nuances that must be considered to ensure that the benefits are maximised and the risks are mitigated. AfCFTA cannot work in a vacuum, African countries ought to work towards engaging in innovative and less costly means to support and leap-frog the continent to achieve the Africa of our dreams.
African states should develop effective regulatory frameworks for cryptocurrencies, while also exploring opportunities to use the technology to enhance financial inclusion and reduce transaction costs.
Tonya is a PhD candidate at the University of Bradford, and a Free Trade Fellow at Ominira Initiative