Many societies are experiencing a gradual transition towards cashless-ness, positioning digital currencies as the future of banking and commerce.
In developed regions, the adoption rate of cryptocurrencies is slow, as it is hampered by the traditional financial sector. Meanwhile, in Africa, these currencies are being readily adopted. This is because they enable African populations to leapfrog traditional banking institutions, just as the mobile money phenomenon allowed them to do.
Sub-Saharan Africa suffers from a high proportion of unbaked citizens, with 66% of the population unbanked as of 2014. Banks, found in cities, are hard to access from remote, rural villages. This, coupled with high transaction costs, are the main reasons for the limited penetration of traditional banking services amongst Africans.
This is where cryptocurrency comes in.
Cryptocurrency, a completely digital currency traded online, offers additional opportunities for African economies due to its unregulated nature and the economic flexibility it provides.
Cryptocurrency and Blockchain Explained
According to Investopedia:
"Cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation."
Cryptocurrencies, such as the popular Bitcoin, use cryptography to secure transactions. Another important security measure integrated in cryptocurrency is the Blockchain.
Blockchain is a peer-to-peer network of transactions, which are recorded in a public ledger over a shared, decentralized database of computers. Each transaction executed linearly adds another block to the chain, so that all money can be traced backwards via these transactions. The blocks are secured using cryptography. All the network computers receive a copy of the chain and it updates in real-time, making it virtually impossible to breach the system and change previous transactions, allowing for a high level of security.
Benefits and Opportunities for Cryptocurrencies in Africa
Because cryptocurrencies are a non-regulated digital currency, they offer economic flexibility and the opportunity to execute transactions with various financial markets across the world. This highly secure currency offers an alternative to traditional banking and cash-based transactions, creating a host of added benefits to individuals, companies, and even African economies. The opportunities for cryptocurrencies in Africa include:
Financial inclusion for Africa's unbanked
Cryptocurrencies offer all the advantages of traditional currencies with added security and unparalleled accessibility, making them ideally suited for Africa's unbanked population.
Use of cryptocurrency accounts enable simple payment of utilities, for example, which saves time and resources compared to physical payments as they have been carried out to date. Furthermore, adoption of digital banking enables the creation of a credit history and digital financial footprint, crucial for loan receipt, which can be used to invest in business opportunities.
Alternative to high inflation rates of local economies
Cryptocurrencies are decentralized, meaning, they are not subject to government regulation, and governments do not have access to a citizen's acquired cryptocurrency. This offers an additional layer of security. This virtual currency is immune to government interference and inefficiencies.
Africa has a history of economic dysfunction and suffers from frequent occurrences of hyperinflation. For instance, South Sudan struggles with an inflation rate of over 280%, or Nigeria, where inflation was “only" 15.37% in 2017. In such cases, cryptocurrencies offer a relatively stable alternative to volatile local currencies.
Leading international institutions, including the World Bank, believe that trade between African countries can serve as a catalyst for economic growth. Digital currencies support cross-border and international trade. Local businesses understand the significance of this currency as a means for accepting cross-border payments, such as for African products or for hospitality and services within the growing African tourism market. Access to a larger customer base via cryptocurrency acceptance offers potential for increased sales and growth.
Additionally, with 30 million Africans working abroad, cross-border remittances directly fuel the economy. Six African countries rely on remittances for 10% or more of their GDP, with 19 countries relying on diaspora remittances for 3% or more. For instance, in Kenya, diaspora remittances reached $1.95 billion in 2017, up over 13% from 2016. This money is not only used to sustain families, but also to help set up business and support expansion.
Cross-border payments directly to cryptocurrency accounts offer a secure and efficient method to send money home. As cryptocurrency transactions are subject to lower fees compared to traditional international money transfer alternatives, cryptocurrency transfers are significantly preferable.
Cryptocurrency Startups in Africa
In addition to offering Africans financial inclusion, cryptocurrencies have been shown to generate employment opportunities, such as in the growing cryptocurrency startup industry.
Many African countries have recognized the opportunities cryptocurrencies offer their economy. To this end, numerous cryptocurrency startups have been established in the past years, such as:
Based in Nigeria, Bitkoin is a peer-to-peer bitcoin trading platform, offering instant exchange of Bitcoin between traders.
With offices in Nigeria, Kenya and Uganda, BitPesa, is an online payment platform that leverages Blockchain for low cost and quick business payments to, from and within sub-Saharan Africa.
These and other African-based cryptocurrency startups are developing an ecosystem which supports financial inclusion and growth in African economies.
Opportunities for cryptocurrency in Africa stem from the very nature of this digital currency.
First, based on a financial infrastructure, it offers an easily accessible alternative to traditional bank accounts and promotes financial inclusion.
Second, as cryptocurrencies are not regulated by governments, they are less subject to volatility, and therefore relatively stable compare to many African currencies where inflation levels are high.
Third, cryptocurrencies facilitate cross-border trade and remittances at lower costs to the participants, while offering a highly safe method to transfer funds.
With international trade linked to economic growth, especially within Africa itself, this flexible currency indeed creates opportunities for many citizens and enterprises in Africa.