Written by Khurram Shroff, the Chairman of IBC Group
The MENA region, as well as the rest of Africa, is characterised by a broad socio-economic spectrum. The area is home to some of the advanced economies, as well as few underprivileged ones. And caught between the two worlds are the frontier markets like Kenya and Nigeria, which are moderately developed, but also contain massive untapped potential, particularly in key segments like banking and finance.
Is it just a coincidence then, that Kenya and Nigeria are two economies with the largest crypto activity in all of Africa? On the contrary, it is a tell-tale sign that these markets are better aligned with trends in the global digital economy. While advanced economies continue to tread with caution, and underdeveloped economies lack the infrastructure, it is the frontier markets that may be best attuned to disruptive developments. And crypto-innovators are already making inroads into these markets. For instance, Canada-based start-up BitBit Financial has just launched a cryptocurrency exchange in Uganda, an African nation that recently allowed virtual asset licensing.
According to a comprehensive study by the Blockchain research firm Chainalysis, monthly cryptocurrency transfers under $10,000, to and from Africa, increased by 55% in the past year. They reached a peak of $316 million in June, despite a total transfer value of only $150 million in March, a mere three months prior. So, what spurred such a meteoric month-over-month surge in transaction activity?
Cracks in the System
While the greater part of the world views crypto as a hedge investment or a cash cow, African nations mainly use Bitcoin or Ethereum for commerce, as mediums of exchange. The pandemic-induced lockdown and mobility restrictions led to increased crypto transactions, particularly from Kenya and Nigeria. In fact, crypto’s entry into Africa had also been catalyzed by the crisis, but in the financial sector. Zimbabwe’s hyperinflation in 2015 and South Sudan’s 102% yearly inflation rate in 2017 opened the door for crypto to present alternatives, within unorganized economies. Outdated economic policies, inadequate financial infrastructure, and the double-digit inflation rates of recent years further prompt, citizens to look at crypto as a viable solution, in many African economies.
A lack of transparency, monopolies imposed by non-essential financial intermediaries, and substandard economic governance, have led to the uptake of Bitcoin and Ether – especially for securing international transactions. Cryptocurrencies are decentralised, secure, transparently governed, and if governments facilitate a favourable framework, cryptocurrency could draw much-needed investments and help create jobs, diversify economic opportunities and accelerate digitisation. Most importantly, digital currencies could play a key role in promoting financial inclusion. And their adoption can unlock huge opportunities in MENA and in the African continent, which boast sizable aggregate demand and a youthful population.
Empowering the Youth
Despite being in the region with the lowest internet penetration rate, African youth are extremely tech-savvy. As much is evident in the rising African share in the global gig economy. Internet connectivity is currently empowering many young Africans to make a living, regardless of their socio-political situation. However, many continue to face hurdles in receiving payments from abroad. With leading exchanges and crypto-based remittance services increasingly recognizing Africa’s untapped potential, the gig economy could soon get a new lease of life.
In a special report by Reuters, Lagos-native Odunjo shared how he got acquainted with crypto and how this impacted his business and life in general. As a mobile phone and accessory dealer, Odunjo used to source supplies from China. It was his dealer who suggested payments in cryptocurrencies, for speed and convenience. This turned out to be profitable since he no longer had to pay dollar-exchange taxes. And his business remained resilient in the face of a devaluation of the local currency, during the pandemic.
An Opportunity in Adversity
Odunjo’s story is not unique in the region. Many digital natives, wary of their weak fiat currencies against the dollar, have pivoted to crypto alternatives. In fact, many immigrant workers of Nigerian and Kenyan origin in Europe are leveraging cryptocurrencies to keep families afloat back home. However, this has not quite been plain sailing, due to a lack of regulatory support in Africa. Many are relying on unregulated markets for the exchange to fiat currencies, and are losing a fraction of the deal in commissions. This is perhaps where the advent of crypto exchanges, which can facilitate hassle-free services and pump back money into local economies, becomes consequential and necessary.
Nevertheless, despite the lack of regulatory support and reliable ICT infrastructure, immigrant African workers refuse to turn back to traditional money-transfer services. Exorbitant exchange rates continue to encourage many, particularly those in the unorganized economy, to transact in crypto. As long as governments fail to acknowledge these developments, they will miss out on opportunities to add momentum to their economies, while expanding their tax-base. For frontier markets like Kenya and Nigeria, cryptocurrencies could be the missing piece of the economic puzzle to help lead Africa’s next growth cycle. It’s time for the region’s administrations and regulators to take relevant steps, to mainstream cryptocurrencies, and unlock the huge potential for innovation and economic activity.