• Sun. Aug 14th, 2022

Cryptocurrencies are gaining traction across Africa. It’s both good and bad news

ByHazel R. Lang

Jul 25, 2022

Cryptocurrencies have become popular in Africa and other developing countries. It is according to a guidance note recently published by UNCTAD, an agency of the United Nations. Significant proportions of Kenya (8.5%), People in South Africa (7.1%) and Nigeria (6.3%) use these digital currencies. In June, the Central African Republic adopted bitcoin as legal tender.

The report warns that the widespread use of unregulated digital currencies poses a danger to the continent’s financial system. In an interview with The Conversation Africa, fintech law and regulation expert Iwa Salami examines the future of digital currencies in Africa.

Why is cryptocurrency becoming popular in Africa?

Cryptocurrencies have been accepted by a large portion of the low-income population that was previously financially marginalized. Most banks in Africa were not accessible to this segment. Even when they were, low-income account holders were discouraged by high transaction costs.

Another factor is the economic stagnation aggravated by debt crises and the political instability of African economies since the era of independence. The result has been inflation-ridden weak currencies in countries like Kenya and Nigeria.

Cryptocurrencies promised to tackle both financial exclusion and the problem of weak national currencies.

Cryptocurrency gives anyone with access to a mobile device and internet connectivity the ability to engage in activities similar to those carried out through financial institutions and intermediaries. This includes payments, remittances and investments.

The investment is particularly attractive to technically savvy. This gives them the ability to hold assets that are unaffected by rising inflation and depreciating national currencies.

Cryptocurrencies are also faster, cheaper and easier to use than conventional methods. This is because technology facilitates equals transactions rather than relying on intermediaries. These currencies were more accessible than traditional banks during the pandemic and lockdowns. This has further boosted their use and growth across Africa.

What does a high number of people holding crypto imply?

This can facilitate economic activity in African countries. People without access to banks and banking services can pay for goods and services using cryptos.

Crypto transactions are also considered a safer way to transact. Unless someone has access to your crypto wallet’s private key, they cannot sign transactions or access your funds.

The system also facilitates transparency. All cryptocurrency transactions take place on the publicly distributed blockchain ledger. There are tools that allow anyone to look up transaction data, including where, when, and how much cryptocurrency someone sent from a wallet address.

But there are also risks. What are these?

First, cryptocurrencies are very complex. They require a bit of technological savvy to adopt. A significant proportion of the adult population in sub-Saharan Africa (34.7%) is illiterate and may not be able to grasp it. This, to some extent, reverses the financial inclusion argument.

Second, while it is argued that blockchain is a more secure way to transact, the downside, of course, is that if you lose your private key, there is no way to get your funds back. It’s a threat that doesn’t exist if you have a bank account.

Third, cryptocurrencies have a history of volatilityas is currently the case experimented in the crypto market). This hurt retail investors, especially those who don’t understand this type of asset class.

Another issue of deep concern to African states is the potential threat to monetary sovereignty. If crypto were to be used more widely than national fiat currency, national monetary agencies such as central banks might not be able to manage their savings towards a growth trajectory using monetary policy. Such policy is, after all, primarily administered through national currencies.

An associated threat is the weakening of effective capital controls in African states. These are necessary to prevent capital flight national economies. Any weakening can lead to significant exchange rate volatility and rapid depreciation of national currencies.

Read more: Decentralized finance questions the possibility of regulating the crypto industry

Financial stability is also threatened. This could result from significant exposure that financial institutions, such as banks, have to crypto businesses, for example through lending. Regulations in some African countries, like Nigeria solves this problem by restricting transactions between banks and crypto-asset service providers.

What is the future of cryptocurrencies in Africa?

Despite the continued market downturn, cryptocurrency represents the future of finance and financial transactions. And there are indications that cryptocurrencies are here to stay, as evidenced by their growing recognition by countries. At one extreme, the governments of El Salvador and the Central African Republic have adopted bitcoin as legal tender, although the implementation and impact of this on their wider economies has faced challenges. harsh criticism.

Others, like Nigeria, have recognized the need for state representation of digital currencies in the form of central bank digital currencies. Many other countries are now exploring this option.

It is important to note, however, that the adoption central bank digital currencies has been very slow in developing countries that have deployed them. There is also in progress surveys by countries on the economic impact of central bank digital currencies and whether adoption is the right approach.

Read more: Nigeria’s Digital Currency: What eNaira is for and Why It’s Not Perfect

But if cryptocurrencies are to deliver on their promise, both on the African continent and elsewhere, there must be a coordinated and holistic approach regulation, since the transactions are global. Although some action on this front is emerging, the current fragmented approach to regulation across the world is not ideal.

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