Fifteen years after mobile banking changed Africa’s economic landscape forever, a new battle is being fought over the direction of the continent’s next major financial leap forward.
On one side stand the continent’s central banks, who are pressing ahead with plans for central bank digital currencies (CBDCs) as a means of improving financial inclusion, lowering the cost of processing cash, improving cross-border trade and reducing the size of the informal economy. Nigeria made headlines last October as the first major country in the world to launch a CBDC, branded as the eNaira, with more than a dozen other African states currently researching or piloting their own digital currencies.
These initiatives are pitted against the dramatic increase of cryptocurrency usage across the continent, to the rising consternation of regulators. As the eNaira continues to find its feet, a staggering 35% of Nigerians between the ages of 18 and 60 are believed to have either owned or recently traded cryptocurrencies, according to a survey by cryptocurrency exchange KuCoin, with significant growth in a number of other countries.
Much of this dramatic increase has been fuelled — as elsewhere — by the recent bull run of cryptocurrencies such as bitcoin and ether. Yet while the dramatic correction of this year’s ‘crypto winter’ may dampen enthusiasm, a more rounded use case is emerging for cryptocurrencies among African investors and businesses that goes beyond a ‘get-rich-quick’ mentality. Despite recent falls, cryptocurrencies are increasingly seen as a viable asset class for local investors, both for wealth creation and a hedge against inflation and currency depreciation.
More worryingly for regulators, cryptocurrency usage is increasing as a more efficient means of making international payments by regional businesses, and as a more cost-effective pathway for regional and international remittances, circumventing official channels.
Local authorities have been quick to highlight the unregulated nature of crypto asset markets and the lack of consumer protection, as demonstrated by this year’s ongoing correction, which has seen prominent firms go out of business and bitcoin shed 70% of its value since November.
Yet while regulators hope that CBDCs will provide safer alternatives to cryptocurrencies from within the established financial sector, restoring financial control in the process, the genie is unlikely to be forced back into the bottle so easily.
“Crypto has been described as being the fourth industrial revolution, but it’s the first one that we, as Africans, can take advantage of at the same time as everyone else,” says Nelly Chatue-Diop, founder and CEO of west African crypto investment platform, Ejara.
“Just as Africa leapfrogged landlines with mobile phones and then pioneered deeper financial inclusion via mobile money, this new technology can help us pioneer a new means of building and protecting wealth beyond the traditional financial infrastructure.”
Crypto usage rising
Africa’s cryptocurrency market is the smallest of any region in the world. The continent received $105.6bn worth of cryptocurrency value between July 2020 and June 2021, representing just 3% of the total value received worldwide during the period, according to industry analysts Chainalysis.
From such a small base however, the market for cryptocurrencies is expanding rapidly, growing by 1200% during the period, making it the third-fastest growing crypto market worldwide behind western Europe and North America.
“There’s a high grassroots adoption in a number of countries in sub-Saharan Africa, such as Nigeria, Ghana, Kenya and Morocco,” says Kim Grauer, head of research at Chainalysis.
“What we’re seeing is pockets of adoption in response to very specific needs within each individual country; we’re not yet at a place where there’s a true region-wide trend. Progress is slow and steady so far, with people still finding out how to use crypto in a way that benefits them.”
Beyond the bubble
At face value, the rise in trading volumes in the 12 months to the end of June 2021 comes as little surprise, given the trebling of the price of bitcoin during the period. Yet the growing popularity of bitcoin as an asset class extends beyond the promise of a quick return.
Even as valuations have tumbled in 2022, cryptocurrencies continue to hold attractions as an asset class for African investors, providing a point of entry for first-time investors empowered by the declining cost of smartphones and mobile data.
“While there’s a ‘get-rich-quick’ mentality to cryptocurrency investing in places like the UK and the US, there are many countries around the world where there isn’t an easy way to grow wealth by investing in the stock market, for example,” says Ms Grauer.
“In such places, cryptocurrencies are enabling young and tech-savvy populations to participate in the financial ecosystem for the first time.”
Even the recent collapse in prices needs to be seen in the context of an often challenging investment climate in many African economies, according to Ms Chatue-Diop, given both the regular failure of smaller microfinance institutions and the instability of local currencies.
Sub-Saharan African currencies have depreciated by 7% on average per year since 1973, rising to 10.6% for the Nigerian naira, according to International Monetary Fund (IMF) data.
“We in the CFA franc zone are still living with the trauma of France’s decision to devalue the currency in 1994, which plunged millions into crisis in an instant,” she says.
“The option that we have available today, which we didn’t have then, is to diversify part of our savings into decentralised assets such as cryptocurrencies and stablecoins.”
Ms Chatue-Diop notes that Ejara’s customer base has continued to grow steadily even throughout this year’s crypto winter, and that around 40% of its active users are women.
“All of the reports from people like the World Bank say that it is women who are the greatest savers in Africa, so they are the ones who understand crypto as building for the future, rather than just as a get-rich-quick scheme,” she says.
Remittances and e-commerce
An important feature of the growth of cryptocurrency in Africa is that it is a primarily grassroots phenomenon compared with other regions. The continent has a larger share of its overall transaction volume attributable to retail-sized transfers (7%) than any other region, with the global average standing at just 5.5%, according to Chainalysis data.
Of particular interest is the popularity of peer-to-peer (P2P) platforms, such as Paxful and Remitano, which are once again used more in Africa than anywhere else in the world. While much of this is in response to increasing restrictions on banks and exchanges — in 2021, the Central Bank of Nigeria (CBN) instructed banks to close accounts transacting with or operating on crypto exchanges — there is increasing usage of such platforms for remittance purposes, both within Africa and to and from outside the continent.
After dropping 8.1% in 2020, remittance inflows to sub-Saharan Africa rose 14.1% to $49bn in 2021, according to the World Bank, with inflows to Nigeria increasing by 11.2%. Yet the cost of sending remittances to the region remains higher than any other region, with the cost of sending $200 averaging 7.8% in the fourth quarter of 2021.
Chainalysis notes that cryptocurrency payments below $1000 in value have been increasing steadily, pointing to a rise in remittances. Ms Grauer notes that a number of smaller Nigerian businesses have been conducting remittances via crypto-based channels not only as a means of reducing costs, but also as a way of circumventing capital controls.
Related to the increased use of cryptocurrencies for regional and international remittances is their rising use by businesses for cross-border and overseas purchases, creating a greater integration into the global economy.
“Africa is the only region in the world where we don’t have a direct marketplace for African currencies; we have to go through a hard currency,” says Antonia Esser, engagement manager with Cenfri, an economic impact think tank based in Cape Town.
“If you’re a business that wants to make trade payments, it makes absolute sense to use a distributed ledger technology like blockchain or even a cryptocurrency like bitcoin, where you don’t have to pay multiple conversion and transaction fees,” she adds.
Such a phenomenon is particularly important for the burgeoning trade between Africa and China, despite the latter placing a ban on all cryptocurrency transactions in September.
“If you’re working with a partner in China to import goods to sell in Nigeria or Kenya, it can be hard to send enough fiat currency to China to complete your purchases,” Artur Schaback, co-founder and chief operating officer of Paxful, told Coinalysis. “It’s often easier to just buy bitcoin locally on a P2P exchange and then send it to your partner.”
Barriers and risks
While the use cases for cryptocurrencies are growing, all but the continent’s most dyed-in-the-wool crypto-evangelists are keen to temper expectations for the technology’s spread in the short term at least, particularly in the wake of this year’s crypto winter.
While the GSMA estimates that three out of four Africans will own a smartphone by 2025, high mobile data prices remain a barrier to entry for many across the continent. A 2021 survey by cable.co.uk found that the average cost of one gigabyte of mobile data in sub-Saharan Africa was $6.44, significantly higher than any other region worldwide and more than four-times higher than the average for northern Africa ($1.53).
For those that can afford to experiment with cryptocurrencies, the risks and potential pitfalls remain high.
“There is still this huge black hole for those that really don’t understand this technology, and/or the risks involved with it, who are likely to keep on falling prey to fraud and scams,” says Ms Esser. “That is why proper regulation is so important, especially for African markets.”
Chainalysis data showed a huge spike in the number of African users caught up in crypto scams from mid-2020 onwards, although numbers have subsequently fallen (see figure).
Since its imposition of restrictions on cryptocurrencies last year, Nigeria in May issued new regulations offering a slightly more open approach. The regulations, issued by the country’s Securities and Exchange Commission, stipulate that cryptocurrency exchanges are required to have a minimum paid-up capital of N500m ($1.18m), while those wishing to launch initial digital asset offerings are instructed to submit a white paper.
Overall, however, governments remain wary of cryptocurrencies’ impact on national economies.
“The volatility [that cryptocurrencies create] can become a source of instability in the system,” Kingsley Obiora, deputy governor of the CBN, told a virtual event on CDBCs and private digital payments organised by the IMF’s Africa Department in June.
Speaking at the same event, Patrick Njoroge, governor of the Central Bank of Kenya, said that crypto assets carried “huge risks” for both financial stability and the threat of money laundering.
“Regulators are still trying to keep the crypto genie in the bottle because they don’t understand the effects yet on financial stability, and there aren’t many examples internationally — let alone in Africa — of what it means to open up, so they’re taking a tough stance for the moment,” says Ms Esser.
CBDC’s ‘cautious’ start
Following the launch of the eNaira in October, Kenya, Ghana, South Africa and Tanzania are among the major economies looking at launching their own CDBC. The Central African Republic — which took the world by surprise in April when it announced it would accept bitcoin as legal tender — announced in July that it plans to launch Sango Coin, which it describes as “the first digital monetary system powered by the bitcoin blockchain”. Sango Coin was set to launch as The Banker went to press.
“Countries are focusing on CBDCs to drive digital payments,” says Chirayu Gandhi, an associate partner with McKinsey & Company in South Africa.
“Currently when a merchant accepts a payment, [they] may end up paying 3% [as a handling fee.] With a CBDC, that cost could drop to zero, leading to a lot of efficiency savings, which is why governments are pushing for them.”
Of the many countries in Africa examining CBDCs, South Africa and Ghana are at an advanced stage of their research, he says.
It is hard to judge the success of the eNaira since its October launch. After some early teething problems that saw the eNaira wallet app briefly withdrawn from the Google Play store, the CBN reported that it had recorded 34,000 transactions amounting to more than N188m by late December, with local press reporting 700,000 wallet downloads as of late January. The CBN did not respond to requests for more up-to-date data.
While touted as an answer to financial inclusion, the eNaira’s October launch made the CBDC open to only a handful of users initially; while eNaira wallets can be opened with only a phone number, users require a bank verification number — available only to customers that already have bank accounts — to be able to store more than N300,000 and conduct more than N50,000 worth of daily transactions. Critically, wallets at time of writing remain only available for smartphone users.
The CBN’s Mr Obiora said that the service would soon be available for USSD-enabled phones (a messaging protocol similar to SMS that allows users without an internet connection to access mobile banking), but gave no further details as to when this would be.
Early reports suggested a hesitancy among local merchants and customers to accept eNaira payments on top of more popular local options, with initial transactions dominated by bank-to-person transfers.
“You can either operate a CBDC in a way where it runs over existing channels and people aren’t really aware that they’re using it, or you need to show people the benefit of using it compared with what’s already in the market,” says Ms Esser.
Cross-border retail payments — also still not yet possible with the eNaira — arguably remain the biggest potential area of benefit offered by CBDCs. In November, the Bank for International Settlements (BIS) announced Project Dunbar in collaboration with the central banks of South Africa, Australia, Malaysia, and Singapore to test the use of CBDCs for international settlements.
Participants in the initial pilot scheme could hold each other’s CBDCs directly without the need for opening accounts with correspondent banks, enabling participant banks to directly transact with one another and access foreign currencies.
In late March, the BIS announced that the initial phase of the project “successfully developed working prototypes and demonstrated practicable solutions, achieving its aim of proving that the concept of multi-CBDCs was technically viable”.
Realising such gains is likely to be challenging going forward, according to Ms Esser, requiring a degree of coordination among states in the continent and beyond that has so far been lacking.
“There are currently 28 national instant payment systems and three regional ones on the continent, with three more regional systems and 17 national ones under development, and now everyone is starting to talk about CBDCs as well,” she says.
“All of these systems promise huge benefit, but only if you dedicate serious resources to them to develop them properly and in a way they will connect with other systems in other countries. The big concern is that there will be a fragmented approach, with some systems talking to each other and some not, which is not going to significantly boost cross-border trade or payments.” – The Banker