May 11th 2021

Africa banks on cryptocurrency

Cryptocurrency markets are booming once again. Ethereum has hit its all-time high and Dogecoin is riding Elon Musk’s coattails to the moon. But with so much talk about cryptocurrency prices, NFTs and get rich quick stories, it is worth analysing what the practical applications of these cryptocurrencies are and how people are benefitting from them. There is no better example of this than in Africa.

In Africa, cryptocurrency is not just an asset to include in one’s investment portfolio, it is a real alternative to a national currency, and the revolution is only just beginning.

Why is cryptocurrency a legitimate alternative to national currency?

To understand the impact that cryptocurrency and blockchain platforms have in Africa, it is important to know how cryptocurrency has developed. Cryptocurrencies can be broken down into three generations, the first generation is Bitcoin (BTC).

Bitcoin is essentially digital gold; it is used to transport and store virtual money but it is plagued with scalability issues. The second generation started with Ethereum, which brought smart contracts with it. The second generation improved upon the first generation as a useable currency, but it still did not fix the scalability issue. The third generation of cryptocurrencies has the potential and the power to be used as a worldwide currency. The best examples are Cardano (ADA) and Iota (IOTA).

To give an idea of the difference between the three generations it is best to look at the number of  transactions per second (TPS): Bitcoin can process 7TPS, Ethereum can process 15-18TPS (although Ethereum expects to increase TPS to 100,000 with the ETH 2.0 update) and Cardano can process 257TPS, but will be able to process 1,000,000TPS once Hydra is implemented.

TPS is important because it determines how long it would take for a transaction to be verified and completed. If you paid for a coffee with Bitcoin it could take 10 minutes for the transaction to be verified. If Cardano can process 1,000,000TPS then verification could be instantaneous, resolving the scalability issues that limit many cryptocurrencies.

Why has Africa adopted cryptocurrency?

Government projects 

Cryptocurrencies like Bitcoin, Cardano, and Ethereum are applications that run on blockchain platforms, but there are many applications for a blockchain platform. Blockchains work as a decentralised digital ledger. This means the data cannot be fraudulently altered once on a blockchain because any change can be cross-referenced for validity. This immutability will never change because of the decentralised nature of blockchains; no one governing body has control to change it.

African governments are starting to adopt blockchain platforms to deliver government services. At the end of April 2021, IOHK, the company behind the cryptocurrency Cardano (ADA) and the Cardano blockchain, announced its partnership with the Ethiopian Ministry of Education. The partnership will help the Ethiopian government leverage blockchain technology to overhaul its education system.

This will work by creating Cardano Blockchain IDs for five million students across 3,500 schools, benefiting Ethiopia by legitimising academic records. At present, there is a serious problem with falsified certifications in Ethiopia. This has imposed limitations on young Ethiopians because some western institutions cannot trust their academic records. Running the education system on a secure blockchain will prevent this kind of fraud and increase opportunities for young Ethiopians.

This will be the world’s largest deployment of blockchain technology. If it is successful, expect to see more governments in Africa integrate blockchain technology with government services. When people see the government using the blockchain platforms, it will build trust in the Cardano blockchain and the Cardano (ADA) cryptocurrency.

Mobile banking

There is a large unbanked population in Africa. With much of Africa’s population living in rural areas, it would be very expensive to reach much of the population with traditional banking infrastructure. Due to this barrier to entry, much of Africa has skipped traditional finance and gone straight to mobile finance. Mobile finance has been very successful. M-Pesa, the mobile money transfer service debuted in 2007, now has over 37 million active users across Kenya, Congo, Egypt, Ghana, Lesotho, and Mozambique.

The adoption of mobile finance allows for an easy transition to cryptocurrency because as long as a person has a smartphone and access to the internet they can buy, sell and transfer cryptocurrency. Cryptocurrency is attractive to many Africans as they are already familiar with the concept of digital money wallets.

Remittances

A large part of income for many African countries is remittances from diaspora abroad. Nigeria alone received 23.8 billion USD in remittances in 2019. The global cost of sending money remains high, but it is no higher than when sending money to Sub Saharan Africa where there is an 8.9% fee.

In contrast, there is almost no cost associated with sending cryptocurrency through cryptocurrency remittance companies. This is why in Sub-Saharan Africa, retail-sized transfers, defined as transfers under 10,000 USD, make up a larger share of cryptocurrency activity than any other region according to Chainalysis.

Economic instability

Over the last decade, many African countries have seen high inflation rates and currency devaluation. Millions of people have seen their wealth diminished. Whilst some see cryptocurrency to be an unstable, volatile investment, ironically many in Africa see cryptocurrency as safer and more reliable than many national currencies.

In April 2021, the inflation rate of the Zimbabwean dollar was over 194%. It is no surprise that many have turned to cryptocurrency instead.

What does this mean for the future of Africa and cryptocurrency?

On the one side of the coin, cryptocurrency is a risky game. Cryptocurrencies are highly volatile, very unpredictable and there is a lot of regulation to be expected in its future. There are also many environmental concerns associated with cryptocurrency mining.

However, the future all depends on whether cryptocurrencies like Bitcoin can stabilise. If you are an optimist and believe that cryptocurrencies and decentralised finance having staying power in the global economy, then Africa is perfectly positioned to be a trailblazer for the practical application of cryptocurrency and blockchain platforms. If more projects like that of IOHK come to fruition, then we can expect the African economies to grow along with them.


Henry Young
Henry Young Consultant