While there are already two regional currencies — the West African CFA franc and the Central African CFA franc — efforts by the rest of the continent to consolidate behind similar common denominations are still a morass.
In recent years, there has been increased cross-border mobile money use. Now cryptocurrency is coming to play, presenting another level that African countries can engage in their efforts to build cross-border trade. For regulators and businesses in these countries, cryptocurrencies remain off their radar for now. But for how long?
While crypto removes the regulatory challenges presented by conventional currencies, its volatility makes it too erratic to be used as fiat, said Aly-Khan Satchu, a Nairobi-based analyst and CEO of investment advisory firm Rich Management.
“The main challenge with using crypto-currency like a fiat currency is the price volatility. It’s off the charts,” Satchu told AFKInsider.com. “Essentially crypto has worked very effectively where there exist parallel exchange rates a la Zimbabwe and Nigeria.”
In Zimbabwe, cryptocurrencies such as Bitcoin were treated as an asset class rather than a currency during the recent soft coup by the country’s military that toppled President Robert Mugabe from power after a 37-year iron-fist rule.
Fear of the return of hyperinflation that made US$1 worth 35 quadrillion Zimbabwean dollars at the dawn of the century pushed investors to the safety of Bitcoin, nearly doubling – at the time – its price to US$13,499 on Golix, the only cryptocurrency exchange in the Southern Africa nation.
Bitcoin, which expanded faster in emerging markets this year, has since skyrocketed past US$16,000, more than 1,300 per cent return to investment year-to-date, creating a new crop of dollar millionaires in its wake. And that’s not the only African country where investors have turned to cryptocurrency as a viable asset class.
About a year ago, Senegal joined Tunisia in introducing a digital currency based on blockchain — the technology behind cryptocurrencies — that is regulated by the country’s central bank.
Crypto common currency
Like the world over, the main challenge in adoption of crypto as a local or regional currency in Africa has been the stiff resistance from almost all financial market regulators. This despite crypto’s fast-rising popularity among a digital-savvy population across the continent.
“The way Africa’s financial systems are set up today, any instance of cross-border money transfer has to use the US dollar as a bridge, which means it has to go through the central bank,” said Michael Kimani, a Bitcoin market analyst and founder at Bloc Chain East Africa Ltd., a company bridging the gap between East Africans and Bitcoin blockchain technology.
“The challenge is how to process payments because every country in Africa has a different regime on payments and moving money,” Kimani said.
The challenge is further compounded by the difficulty in making online payments from an African country. This has either led to expensive, convoluted payment processes or a total shut-out in some cases.
Cryptocurrency however effectively solves this challenge at no extra cost.
“With cryptocurrency, it is now possible for an African company to set up a payment corridor between say East Africa and China and completely bypass the US dollar,” Kimani told AFKInsider. “This saves time, money and ease of doing business.
There are several million digital currency users and investors across the continent. The number is growing as the bubble-like euphoria that gripped the rest of the world quickly filters into Africa.
But even with these changing demographics, digital currencies largely remain off the menu for many African countries. It would take a significant shift for them to be considered a mainstream asset class by regulators across the divide.
Cutting through the regulatory resistance and the unwarranted euphoria, the role and importance of crypto cannot be overlooked, first as a store of value and a second as a peer-to-peer trading enabler.
Nigeria, Africa’s most populous nation and second largest economy, is now considered one of the largest players in the world in peer-to-peer Bitcoin transactions after China. Many of the online payment platforms — Paypal, Mastercard, Visa, Skrill — are foreign owned and in most cases unfriendly to users in the African regions due to the inherent risk of money laundering, according to Bloomberg data.
“Crypto has a bright future in Africa as can be seen by peer-to-peer trading volumes,” Satchu said. “Of course the caveat is it does not crash and burn.”