HANNES WESSELS: Digital currencies poised to deliver transformation and financial inclusion in Africa

Over about the past decade the significant opportunities presented by cryptocurrency for fast wealth creation, albeit at significant risk, have created a skewed perception of crypto as primarily an investment asset class. This is not the case.

While well-considered investment in many types of crypto has the potential to augment the value of many portfolios, the most significant impact of cryptocurrency in future is likely to come from the steadily increasing acceptance of its function as a decentralised finance solution. 

This is especially true in the African context, where the acceptance of cryptocurrency as a way of making and receiving daily payments for goods and services is steadily gaining momentum. A June policy brief by the UN Conference on Trade & Development showed that 7%-9% of people in SA, Kenya and Nigeria are regularly using digital currencies as a way to pay.

The recent adoption of crypto as legal tender by the Central African Republic points to the fact that digital currencies are not just gaining acceptance among the public; their potential for economic transformation is also increasingly being recognised by African governments.

The reason for the good, and growing, acceptance levels of crypto in the emerging African economies is not hard to see. A long history of colonialism, and in SA’s case apartheid, left most low-income citizens of African countries isolated from mainstream financial systems.

While the “traditional” financial services industry has been working to rectify this situation in recent years, many poor Africans still find themselves financially marginalised due to the high transaction costs involved in accessing mainstream banking and financial services.

Including local currency weakness in many African countries, and the high cost and low value of money in general due to rampant inflation and interest rates, it becomes clear why the people of Africa are ready for a viable, cost-effective and affordable alternative to fiat currencies. 

Low cost

The potential for digital currencies to not only transform lives and businesses but also underpin the development of entire economies, cannot be underestimated. For example, crypto allows families of migrant workers to receive money transfers far quicker, and at a higher value, thanks to fees of about 0.1% per transaction vs the 3%-5% they are now paying.

Consumers don’t have to first open bank accounts before making payments, nor do they need to risk carrying cash. Merchants, service providers and even taxi owners will be able to receive immediate digital payments, also at a very low cost and with no risk of theft. 

As most African people and businesses already use their mobile devices to make and receive payments, the step from costly, often cumbersome, fiat-based peer-to-peer payments to easy, affordable and fully secure blockchain-driven payments ecosystem is a small one. 

The value of digital currencies to Africa’s economic development is not limited to their use as a currency. As crypto gains acceptance as an institutional investment vehicle it will undoubtedly become an increasingly important and valuable component of most institutional investment structures, from retirement funds to various public sector investment vehicles. 

Then there is the catalytic impact blockchain is having on vital entrepreneurial development on the continent. Blockchain start-ups in Africa are on a stellar trajectory, accompanied by a steady increase in funders and venture capitalists ready to back the trend. Some tech commentators even contend that the continent will be a global leader in blockchain innovation and capitalisation by the start of the next decade. 

There is a long way to go for the full potential of crypto to be realised in Africa. Despite being among the world’s fastest-growing cryptocurrency markets over the past year, the African region remains one of the smallest crypto markets in absolute terms.  

Effective connectivity

There are still many hurdles that digital currencies and blockchain technology need to overcome if they are to be the enablers of economic inclusion and development that they can be in Africa. For one, the exponential growth in uptake that is needed will only happen as more advocates for crypto emerge, within government circles and in the business and consumer environment.

Effective, efficient digital currency connectivity needs to be established with fiat currencies, which are still essential links in the crypto value chain. And that ever-elusive regulatory balance needs to be achieved in which the potential for criminal activity using crypto is limited without inhibiting its value as a legitimate currency, investment and tech development vehicle. 

But while these challenges to full-scale adoption of crypto as a currency of choice in Africa still exist, they are steadily being chipped away. And as they are, even more opportunities are emerging for digital currencies to finally deliver the real financial inclusion and economic transformation for which Africa has so long been waiting.

• Wessels is country head at Binance SA.