Dr. Estelle Brack, Founder and Chairwoman of KiraliT, explains some reasons behind an increase in digital assets adoption in the African continent
The IMF* has discussed, in its latest Global Financial Stability Report (April 2022), the significant increase in crypto-asset trading volumes against some emerging market currencies since the start of the pandemic.
A large part of this increase is due to speculative investment activities by emerging market residents. But a more structural shift toward crypto assets as a means of payment and/or store of value is also an explanation for this increase, and that could pose significant challenges to policymakers (see the October 2021 GFSR for a discussion on cryptoization).
For example, Tether – the largest stablecoin used to settle spot and derivative trades – has seen
a notable rise in trading volumes against emerging market currencies. The most pronounced increase is in Turkey, where exchange rate volatility has been particularly high, and the overall use of crypto assets appears to have gained traction over the last few years.
More recently, trading volumes spiked following the introduction of sanctions against Russia and the use of capital restrictions in Russia and Ukraine.
The war in Ukraine has brought to the forefront some of the challenges that stakeholders face in terms of the application of AML/FT regulations and capital flow management measures – and, to some extent, sanctions. Crucially, the implementation of such measures requires that intermediaries verify the identities of the transacting parties, which burden considerably the procedures for banks and limit the capacity of non-major banks in the global correspondent banking network to serve their customers willing to buy USD to export goods to Turkey or China, for example.
The crypto ecosystem is seen, to some extent, to allow users to circumvent such requirements through several means, including (1) the use of exchanges and other crypto-asset providers that would be non-compliant with sanctions and/or capital flow management measures; (2) poor implementation of adequate due diligence procedures by crypto asset providers; and
(3) the use of technologies and platforms that increase the anonymity of transactions (such as mixers, decentralised exchanges, and privacy coins).
An array of factors, from political repression to currency controls and rampant inflation, have fuelled the stunning rise of crypto assets in emerging countries, especially in Africa.
According to Triple A’s latest crypto ownership data from September 2022, with an estimated 53 million cryptocurrency owners, the African continent now accounts for 16.5% of the global total. Nigeria, which has more than 22 million crypto owners, currently accounts for more than a third of the continent’s total number of holders (the US has 46 million, India 27 million, Pakistan 26 million, Nigeria 22 million, and Vietnam 20 million).
According to Bitcoin trading platform Paxful, Nigeria was second only to the US for Bitcoin trading in July 2021. The dollar volume of crypto received by users in Nigeria in May 2021 was USD 2.4 billion, up from USD 684 million in December 2020, according to blockchain research firm Chainalysis.
And the true scale of crypto flows through Africa’s largest economy is likely to be much larger, with many trades untraceable by analysts.
Nigeria has one of the youngest populations in the world and is ripe for digital finance. With many people looking for ways to escape widespread poverty, pyramid schemes are proliferating.
Trading in foreign currencies is an everyday activity for many. Remittances into Nigeria from those working abroad, which increased to USD 5147.40 million in the first quarter of 2022 from USD 5021.57 million in the fourth quarter of 2021, have played a role.
Digital currencies can also provide insurance against exchange rate fluctuations; the value of the Nigerian naira has plummeted almost 30% against the dollar in the past five years.
In February 2021, the government of Nigeria took fright and banned cryptocurrency transactions through licensed banks.
In late July 2021, it announced a pilot scheme for a new central bank-issued digital currency (CBDC), eNaira, hoping to reduce incentives for those wanting to use unregulated crypto. Today, every Nigerian can – and does – exchange eNaira through text messages on mobile phones.
The Central African Republic became, in April 2022, the first country in Africa to welcome a crypto asset to its sovereign ranks by giving Bitcoin legal tender, after El Salvador in South America.
In both cases, Nigeria and CAR, the use of digital currencies might be limited to individuals and corporates already holding either a bank account or a mobile wallet. In Nigeria, the issuance of the eNaira by the CBN – and the potentially associated trust – might be the solution to convince more Nigerians to adopt this digital means of payment. However, it might not solve all difficulties that led Nigerians – and Africans more broadly – to adopt crypto assets for cross-borders transactions or investment purposes. For the CAR case (and in Salvador), considering the particularly low level of bancarisation in the country – including mobile wallets – adopting Bitcoin and permitting its use by the population, with protection against change variations – using Bitcoin for its infrastructure – would only be beneficial if associated with waterproofing it from international markets and high volatility. A kind of white labelling Bitcoin. But just using Bitcoin at it is – and keeping its high potential levels of volatility – would be a major mistake and counter-productive idea, with a confusion between currency as a mean of payment, reserve of value, and an investment asset. Bitcoin remains, until now, the second.
This editorial was initially published in our Crypto Payments and Web 3.0 For Banks, Merchants, and PSPs Report. The first edition of our report aims to provide a go-to payment resource of crypto terms and concepts for those interested to understand the basics of crypto payments and their long-term impact. Furthermore, it shares practical examples of cryptocurrency-enabled ecommerce and banking services and presents the latest developments in the regulatory landscape. Also, it reveals what are the most innovative companies in this space, that are building the crypto rails.
*IMF Global Financial Report, Chapter 1, April 2022 – https://www.imf.org/en/Publications/GFSR/Issues/2022/04/19/global-financial-stability-report-april-2022
About Dr Estelle Brack
Dr Estelle Brack is Founder and Chairwoman of KiraliT, providing advisory and training services in money, banking, and financial services in the EMEA Region. Estelle holds a PhD in Economics & Banking and has a 25 years operational experience in the banking sector – especially in Payments, with a global vision.
About KiraliT
KiraliT is an advisory firm focusing on banking & financial services, including payments and new forms of money. We provide strategic advisory services to institutions established in Europe, Africa, and the Americas, helping them expand their business and building strategies for financial literacy and training.
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