The role of cryptocurrencies in sub-Saharan Africa

Although the African continent receives only 2 percent of the global value of all cryptocurrencies, their rapid growth will transform financing in an increasingly digital and urban sub-Saharan Africa. In fact, a recent report by Chainalysis, a blockchain data platform, found that between July 2020 and June 2021, Africans received $105.6 billion worth of cryptocurrency payments—an increase of 1200 percent from the year before. Notably, Chainalysis ranks Kenya, South Africa, and Nigeria among the top-10 countries for cryptocurrency use.

Because cryptocurrency platforms bypass traditional banking services by introducing decentralized peer-to-peer lending services, they can help level the economic playing field and expand finance options to underserved customer markets. Indeed, cryptocurrencies are well-positioned to address a number of economic challenges in the region, from reducing financing gaps for micro-, small-, and medium-sized enterprise (MSME) sectors to facilitating the transfer of remittances. In fact, of the $48 billion remitted to sub-Saharan Africa in 2019, Chainalysis estimates that up to $562 million worth of remittance payments were facilitated by cryptocurrencies such as Ripple. Cryptos have also accelerated affordable mortgages and are accommodating irregular income patterns that limit credit.

Because cryptocurrency platforms bypass traditional banking services by introducing decentralized peer-to-peer lending services, they can help level the economic playing field and expand finance options to underserved customer markets.

Empowa, a Mozambique fintech start-up, exudes the spirit of this new movement—the democratization of finance—by crowdsourcing funding to finance residential real estate development through cryptocurrency. As such, it demonstrates decentralized finance’s proof of concept in Africa, circumventing traditional bottlenecks in financing homes and harnessing the blockchain platform to channel finances toward developers and innovators. Similarly, Pezesha, a Kenyan fintech focused on MSME credit scoring and loan origination, unlocked new capital by converting the cryptocurrency community into MSME lenders in East Africa, introducing a global pool of lenders to invest directly in Kenyan enterprises. It saw a threefold turnover for one of its short-term loan portfolios in a four-month period. This venture enables foreign lenders to send USD stablecoin (a type of digital currency that is pegged on some external asset, such as fiat currency or other assets like gold), convert it to Kenyan shillings, and leverage other credit-scoring facilities to bridge the capital divide between MSMEs and investors. As of this writing, Pezesha has facilitated over 3,751 loans in Kenya and 344 in Ghana.

While decentralized finance and blockchain technology are scalable and have been operationalized in other countries and regions, African policymakers have struggled with how to reconcile cryptocurrencies with their existing monetary system. Many countries in Africa have, in fact, overlooked this financial innovation—maintaining crypto exchanges but failing to offer a regulatory framework or begrudgingly allowing trading but not providing their citizens an exchange.

Blockchain technologies are the future, and any effort to ban them—or even excessively intervene in their operations—would meet the same fate as other state attempts to circumscribe behavior.

Government cannot “shut the stable door after the horse has bolted.” Blockchain technologies are the future, and any effort to ban them—or even excessively intervene in their operations—would meet the same fate as other state attempts to circumscribe behavior. Moreover, restricting cryptocurrencies at the moment, when they are facilitating innovations and brimming with potential, would undermine financing of critical sectors like MSMEs, affordable housing, and remittance payments right when Africa needs these options most.

Still though, government does—and should—have a role to play. Kenya, for example, has recently established a “regulatory sandbox” to crowd-source financing for MSMEs. This sandbox, according to the Kenyan Capital Markets Authority, is a “tailored regulatory environment that allows for the live testing of innovative capital markets related products, solutions and services with the potential to deepen and develop the capital markets prior to launching into the mass market.” In other words, Kenya’s approach to artificial intelligence and blockchain was to offer a safe space for the supervision of burgeoning technologies, techniques, or services with the potential to benefit the public. This approach allows the state to encourage experimentation and development without officially authorizing new practices. In addition to building capacity to track and trace all transactions, ensuring proper identification for all citizens (to validate clients and ensure the security of transactions), and shoring up a robust cybersecurity system, countries in Africa should establish their own regulatory sandboxes.

While no one can predict the future of cryptocurrencies, what we do know is that their novelty requires an equally nontraditional regulatory approach—one as invested in the virtues of experimentation and entrepreneurship as the practices it aspires to oversee.