Crypto in Africa: A coming money revolution?

Cryptocurrencies have the potential to revolutionise the financial system, but following a series of scams there is still a good deal of scepticism about them. Dr Desné Masie talks to some leading players to assess the value of this innovation to Africa

Following the announcement by Facebook in 2019 that it would be launching its own crypto coin, cryptocurrencies are beginning to be taken a lot more seriously after a rocky start to entering the mainstream, when increased speculative investment led to regulatory crackdowns in 2018 on the back of the negative attention created by various crypto scams. 

This market backlash slowed down the development of the sector and its potential positive contribution to financial innovation through its underlying blockchain technology. The backlash also led to a spectacular crash in the price of bitcoin, of over 80% – from around $20,000 in late 2017 to around $3,000 at the beginning of 2018, leading many financial experts to predict the end of crypto. 

But the revolutionary contributions to payments efficiency and investment diversification instead saw the sector proving resilient. 

The industry went from strength to strength over 2019. It has been professionalising and the bitcoin price has been stabilising, and much like the dotcom boom and crash, the products and services that offer real value to consumers and investors are proving to have staying power.  

It is also becoming apparent in the geopolitical tumult of the US-China trade war and Brexit, and alongside government failures such as those in Venezuela and Zimbabwe, that crypto is an important hedge against political risk, in providing a means to diversify assets externally.

This levelling has been supported by the announcement of Libra, and also by central banks, which have now started to announce plans for Central Bank Digital Currencies (CBDCs) worldwide – backed by themselves – as the competition from private money at scale to fiat currencies becomes apparent. 

From the World Bank to the Bank for International Settlements, regulators have now had to play catch-up with a sector the majority of them had long dismissed; their failure to understand its revolutionary impact means that the stalwarts of the crypto industry are now several steps ahead in their expertise. 

As one of the most outstanding fintech innovations of the decade, crypto holds enormous promise for allowing countries to restructure their economies and leapfrog the constraints of the global economy, although there is still a long way to go. 

Race for Africa’s crypto market

In Africa in particular, where the payments revolution has seen 60% of the world’s mobile money pass through Africa-based and led payments platforms, a race to capture the African crypto market has accompanied wider increased investment interest in cryptocurrencies. 

Twitter’s CEO, Jack Dorsey, recently announced he would be moving to Africa to explore the opportunities in crypto. Nicolo Stoehr, host of the prestigious Crypto Finance Conference (CFC) held this January in St Moritz, has said the potential on the continent is enormous. CFC will be attended by some luminaries of the crypto world, such as the Winklevoss Brothers who run the exchange and custodian, Gemini, and Meltem Demirors, the chief strategy officer of crypto hedge fund, CoinShares.

Africa has, like everywhere else, had issues with opportunistic crypto fraudsters and many Ugandans lost money from the OneCoin ponzi scheme. Many African regulators over 2018 cautioned investors they would have zero protections from losing money from crypto. However, all industries have their fraudsters and the negative news that got the attention should not detract from the fact that there are without doubt scalable and world-leading commercial projects taking off alongside amazing opportunities for development.

For example, decentralised payment network OmiseGO in March 2018 airdropped (gave away free) $650 worth of crypto tokens to 4,400 refugee families in Uganda via the East Africa-based charity GiveDirectly as an experiment in universal basic income. OmiseGO is supported by Vitalik Buterin, co-founder of Ethereum, which provides the blockchain for Ether.

What to expect in 2020

In light of these developments, we spoke to experts working on the ground in exciting projects in Africa to get a sense of recent developments and trends to expect in 2020. 

South African economist and bitcoin enthusiast, Dawie Roodt, says while things went a little quiet on the private side in South Africa in 2019, because the hype of the past few years has slowed down, it does not mean that South Africans are disinterested. Roodt says the interest now is in a much more realistic exploring of long-term, practical ideas and the bigger financial players are engaging. 

“Much of the progress has been at the South African Reserve Bank (SARB), which seems to be planning a regulatory sandbox to allow private sector players to come and experiment with real ideas with real consumers under regulatory supervision. But they are very thorough, very careful to take too big steps as far as cryptos are concerned, as they are overly conservative, like regulators everywhere,” Roodt says. 

The SARB has issued a number of recent determinations with a view to also preventing people from using crypto to take money out of the country, by using the technology to circumvent foreign exchange regulations with encrypted, anonymous transactions. The SARB, alongside its proposed cryptocurrency sandbox, is also running Project Khokha to explore the use of DLT (decentralised ledger technology) in interbank settlements.

Roodt believes that government failures in South Africa and Zimbabwe have also put more power in consumers’ hands, as bitcoin has become a particularly popular means to hedge against political risk in South Africa by means of investment diversification, and in Zimbabwe it has offered an alternative means of payment. 

Global crypto hubs

Some African governments, such as the Seychelles, have been actively positioning themselves as global crypto hubs along the lines of Zug in Switzerland, and offshore island states like Malta, Gibraltar, Jersey and the Caymans, which have offered welcoming regulatory frameworks for crypto and blockchain in a tax-neutral setting. 

Says the CEO of UK-based Chainvine, Oliver Oram: “We are working closely with the Republic of Seychelles to create a Seychelles National Asset Management facility [using a blockchain platform from Chainvine], which in the first instance will help the Seychelles manage a key asset – fisheries, which is roughly 24% of GDP.

“It will in the future also allow Seychelles to issue UN Sustainable Development Goal certificates for exports and make them one of the most sustainable ethical fishery systems in the world. The system will be unveiled on 20-21 April 2020 at the Data Management Workshop for international and local participation in Seychelles.” 

Oram says that not only is Seychelles making advances in blockchain in logistics and asset management, but recently its stock exchange conducted a token issuance. He says “this shows that this is one African country with their eye on technology and the future of technology in the economy for both private and public enterprises”. 

New choices for consumers

Monica Singer, South Africa lead for ConsenSys, the blockchain company started by Ethereum co-founder Joseph Lubin, is overwhelmingly positive. She says: “Binance [the world’s largest crypto trading platform with over 100 coins] is looking to open offices from Cape Town and to offer the trading of all their cryptocurrencies to South Africans.

“Soon one of the South African banks will allow the conversion of the rand into the Binance exchange so South African investors will have the option to use this very efficient cryptocurrency exchange. There are other highly successful cryptocurrency exchanges operating in South Africa, like Luno and ValR.” 

Singer believes Binance’s move into South Africa will open up choices for consumers. She says these are “very exciting times for South Africa, as the crypto exchanges not only expand their product offerings in cryptocurrencies, but most probably they will consider stable coins and even security and other tokens representing all types of assets – from real estate, to gold and diamonds.

“The traditional exchanges are losing a number of listings and the liquidity is drying. It is clear that these new asset classes that are more efficient, less costly and bring liquidity from all over the world will become the way of the future in the search for investment returns. As these new exchanges comply with relevant regulations and achieve credibility, they will attract the money looking for yield.”

Singer says that the full potential for crypto will be unlocked by access to the internet and education about these new asset classes to ensure that the investors can control their own portfolios and trade without having to rely on intermediaries or the high costs of listing in traditional stock exchanges. 

Cryptocurrencies ‘misunderstood’

Amidst the exuberance, Professor Njuguna Ndung’u, former central bank governor of Kenya, who was instrumental in the development of M-Pesa alongside the UK Department for International Development and Vodafone, takes a more nuanced view.

“Cryptocurrencies in Africa have been purely misunderstood. They have entered the market as payments instruments but not as currencies. Some people have even gone so far as to request the central banks to regulate cryptocurrencies.

“But others have used the idea to defraud unsuspecting investors. The success of electronic money using mobile phones is in no way related to the cryptocurrencies – this has supported retail electronic payments more than any crypto will ever do,” he says. 

Towards digital money issuance?

Phil Mochan, founder of Koine Finance, based in the UK, echoes Prof Ndung’u. While Mochan sees great opportunities in West Africa in particular, he thinks it will be some time before there are broad-based financial system changes.

He says: “Africa is a relatively nascent market regarding cryptocurrencies. Nigeria is a popular place for trading in bitcoin, and has the continent’s largest [and the world’s largest] crypto community, mainly due to the size of its economy. Many parties across the continent are seeking to use blockchain-based architecture – for example, Libra – to deploy fiat money. However, infrastructure like this is insufficient in itself to make a significant impact.”

Mochan think that central banks need to become more involved, saying: “What we need is much more engagement at a central bank level. Ghana looks to have an open approach to the industry, an attitude that will play into their favour.

“With that engagement, we see the potential for digital money issuance, which in the context of Africa is more significant than asset issuance. In reality, these types of projects take many years to come to fruition. We may see the first announcements at the end of 2020, but at Koine we believe it will be a number of years before we see proper ‘lift-off’ in terms of industry advancement.”

Creating confidence

Stephany Zoo and Elizabeth Rosiello of ‘Africa’s cryptocurrency exchange’ – BitPesa in Nairobi – offer some solutions for scaling up with a global view.

They say: “In developed markets, crypto is typically very polarising, but there are a fair number of adopters. In Africa and other frontier markets, there are higher barriers to entry, upfront costs, and slower user adoption so crypto players have to rely on what exists.

“Perhaps we have more risk-averse customers, so we need to stop reinventing the wheel and start working together, like BitPesa. We need to focus on building hybrid systems and leveraging existing incumbent financial infrastructure. By thinking about crypto and blockchain as infrastructure, it creates more confidence and less fear of technical aspects that regulators, customers and partners may not understand.” 

Only time will tell if crypto will completely revolutionise the financial system and global economy, as its proponents say, or only offer some incremental efficiencies to payment systems. 

Listen to Dr Desné Masie’s full interview with Monica Singer, South Africa lead for ConsenSys, on African Business Podcast Episode 5 “Crypto and Blockchain in Africa with ConsenSys”

Glossary

What are cryptocurrencies?

Cryptocurrencies were originally designed to be an alternative, secure means of payment to state-issued fiat currency, and are peer-to-peer cash payment systems that used blockchain technology to encrypt transactions on decentralised ledgers. Bitcoin is the most well-known of these, and its price is a bellwether for the health of the sector, but the surge in interest in crypto has seen the development of alternative coins to bitcoin – altcoins – such as litecoin, ripple, and ether, rise in popularity.

These coins are also sometimes called ‘crypto-assets’ or ‘digital assets’ due to the speculative investment activity that has also developed in the sector since around 2017. The stores of value represented by cryptocurrencies brought them into the mainstream and to regulatory attention because their cross-border nature meant that they could potentially be used for money laundering, circumventing currency controls and to scam investors.

What is blockchain?

Blockchain is the technological infrastructure that enables crypto, and is a variant of decentralised ledger technology (DLT). A blockchain is therefore always a DLT but a DLT is not always a blockchain. DLTs have other industrial applications beyond cryptocurrencies, for enterprise, trade, and determining the credibility of transactions in investment or banking. The hype around blockchain has accompanied the hype around crypto and the two, though closely related industries, especially with regard to digital asset tokens, are sometimes confused.