Cryptocurrencies have the potential to completely transform the African financial system by offering much more competition with traditional means of transaction such as banks. The success stories of cryptocurrencies in South Africa and Nigeria are worth a closer look. A trusted environment for crypto transactions has been established, allowing for significant profits to be generated.
Principle of cryptocurrency
Cryptocurrency is a digital payment or transaction system that operates without the need for intermediaries like traditional financial institutions, for example, banks. The system relies on « blockchain technologies » where all transaction data is recorded and secured. The blockchain is similar to a ledger that contains all information about each transaction procedure. One of the strengths of cryptocurrency is its « digital » nature. All transactions occur online, eliminating the need for physical cash exchange. Unlike traditional payment methods where the currency is issued by the government, cryptocurrency companies are completely independent. Furthermore, cryptocurrencies are fungible, meaning their value does not change even after a transaction.
Cryptocurrencies are created through a process called « mining », which involves solving complex codes using highly specialized software. Mining validates transactions and creates new currencies. However, it’s important to note that there are cryptocurrencies created not through the mining process but via a « hard fork », a term that denotes the creation of an entirely new process in the blockchain.
Challenges of cryptocurrency in Africa
The International Monetary Fund has expressed its opinion regarding the use of cryptocurrencies in light of these challenges, particularly in Africa, stating that more regulations need to be implemented. Governments are also concerned about the illegal use of cryptocurrencies, which could impede policy decisions related to monetary matters and disrupt the smooth functioning of Africa’s economy.
As a response to these concerns, various African countries have implemented regulations. On one hand, countries like Libya, Algeria, and Morocco have banned the use of cryptocurrencies. On the other hand, Kenya, Ghana, Lesotho, Swaziland, Uganda, Zambia, and Zimbabwe have not completely prohibited transactions but have issued strict warnings to their cryptocurrency users.
As a result, many African countries have become wary of cryptocurrencies. Some countries like Libya, Algeria, and Morocco have outright banned the use of cryptocurrencies, while others like South Africa, Senegal, and Tunisia still approve of and support the use of this mode of transaction.
Potential of cryptocurrency in Africa
The financial system in Africa needs to keep up with global trends, especially in the rapidly evolving landscape of information and communication technologies (ICT). Financial inclusion in Africa remains notably low, with access to formal financial channels available to less than 20 % of the African population. The African financial system faces numerous challenges, including currency volatility, cumbersome administrative procedures, limited credit offerings, information asymmetry in financial markets, and the presence of monopolies.
Cryptocurrency has the potential to completely transform the African financial system by making access to financing much easier. For small and medium-sized African businesses, financing options are still predominantly controlled by central and commercial banks, where regulations and funding procedures are strict. Cryptocurrencies can diversify their financing channels and, most importantly, provide access to unlimited and long-term funds.
Central banks can also derive benefits from cryptocurrencies, especially in implementing monetary policy. In simple terms, cryptocurrency transactions will enhance the efficiency of monetary policy as cryptocurrencies enable greater competition with traditional financing methods, thereby increasing demand and supply in the financial market and ensuring monetary stability.
In the realm of currency markets, cryptocurrencies have the potential to establish a trusted environment for foreign investors, underpinned by the guarantees provided by blockchain technologies.
The most recent data shows that among African countries, South Africa has the largest number of cryptocurrency users, followed by Nigeria, Kenya, Morocco, and Egypt. In 2021, cryptocurrency transactions in Africa reached 20 billion USD per month, with a growth rate of 2,500 %.
Example of Nigeria and South Africa
South Africa and Nigeria are among the African countries with the largest number of cryptocurrency users. According to a recent survey, these two African countries are leading the way in embracing cryptocurrency as a preferred mode of transaction, closely followed by Brazil. The study involved 15,158 participants from 15 countries, of all ages, aiming to gather information about cryptocurrency usage.
In Nigeria, the survey results were exceptional, with 99 % of the participants familiar with the basics of cryptocurrency, of which 70 % were aware of the concept of blockchain technology. Although the Nigerian government is inclined towards embracing crypto autonomy, the Central Bank is being careful due to potential conflicts with current regulations.
In South Africa, the popularity of cryptocurrencies continues to rise. In 2022, only 14 % of the population had no knowledge of cryptocurrencies, compared to 34 % in 2021.
The study showed that entrepreneurs are more supportive of cryptocurrency usage than individuals. 92 % of entrepreneurs are aware of cryptocurrencies, compared to 7 % for individuals. 59 % of CEOs and entrepreneurs invest their money in cryptocurrencies, especially Bitcoin. It’s important to note that South African entrepreneurs prefer investing in cryptocurrencies over the national currency as they perceive it to be less risky given the sensitivity of the ZAR. Moreover, 94 % of entrepreneurs believe that South Africa should start accepting crypto payments because companies currently accepting crypto payments have experienced significant benefits, especially in terms of their customer base.
South Africa and Nigeria have created a trusted environment for cryptocurrency transactions, which has resulted in the potential for significant profits.
