What are our Future FinTech Champions learning at the moment? And what are their thoughts on the current development of FinTech? Read through this submission from one of our FFCs, Mary Oladimeji, currently studying Law (LLB) @ Middlesex University [Submission made in September 2023].

The image of cryptocurrencies has been marred by negative news, primarily focusing on crypto crashes, hacks and scams. One of the most notable instances was in 2018 when Bitcoin’s price plummeted from its all-time high of nearly $20,000 to below $4,000 (Huang, 2018). However, in Africa, this negative perception is giving way to a realisation of its potential for positive change. Blockchain technology, the underlying infrastructure for cryptocurrencies, is poised to revolutionise the continent’s cross-border payment solutions.

In Sub-Saharan Africa, the impact of cryptocurrency payments has been steadily growing. Between July 2021 and June 2021, the volume of on-chain payments amounted to $106 billion, an increase of 16 per cent from the previous year (Chainalysis, 2022). Nigeria, in particular, has experienced growth in its volume of cryptocurrency transactions, which surged by 9 per cent year-over-year to reach $56.7 billion between July 2022 and June 2023 (Chainalysis, 2023). Notably, 96 per cent of Africa’s cryptocurrency volume is attributed to cross-border payment.

Source: Chainalysis

Drivers of Adoption

Several factors drive the adoption of cryptocurrencies in Sub-Saharan Africa, such as:

Inflation: Many countries in the region have struggled with rising inflation, making cryptocurrency an appealing option for saving and achieving financial freedom. For instance, Ghana’s inflation reached 54.1 per cent in December 2022 (Ghana Statistical Service, 2022). Given the limited financial prospects available, a growing number of Ghanaians have turned to Bitcoin (Chainalysis, 2022). Nigeria, Kenya, and South Africa have encountered similar challenges, which might explain the surge in cryptocurrency adoption.

High costs of cross-border payments: Overseas remittances have held significant economic importance for Sub-Saharan Africa, with the region experiencing a 14.1 per cent increase in inflows, reaching $49 billion in 2021 (World Bank, 2022). Traditional cross-border payments in Africa are among the most expensive globally, with an average cost of 8.9 per cent of the transaction value in 2020, notably higher than the global average of 6.8 per cent (World Bank, 2020). However, cryptocurrencies can significantly reduce these expenses and time by eliminating intermediaries and providing direct peer-to-peer (P2P) transactions.

Currency devaluation: The devaluation of a national currency can drive cryptocurrency adoption. Firstly, it provides a means of preserving value, and it also offers a sense of financial autonomy, allowing users to have control over their finances independent of centralised authorities. This is evident in Nigeria, as periods of pronounced devaluation of the Naira show an increased interest in cryptocurrencies like Bitcoin and stablecoins (Chainalysis, 2023).

Source: Chainalysis

Commercial transactions: There are challenges faced by African businesses when making international payments to suppliers. Due to stringent capital controls (Ohuocha, 2021), many companies have resorted to using cryptocurrencies for cross-border payments, particularly for procuring materials from countries like the United States and trading with partners like China (Fuje, Quayyum, & Molosiwa, 2022). This shift towards cryptocurrency payments is born out of necessity, filling a void created by limitations of the traditional financial institutions.

From the above, the transformative role of cryptocurrency in facilitating cross-border payments across Africa is evident. These digital assets offer a means of storing value and achieving financial freedom amid inflation. One of the advantages lies in its ability to significantly cut costs and expedite transactions by eliminating intermediaries. For instance, stablecoins, which are cryptocurrencies pegged to the value of another currency, commodity, or financial instrument, offer a reliable and steady store of value. This provides an alternative to the popular highly volatile cryptocurrencies like Bitcoin (Hertig, 2023). Stablecoin remittances have proven to be up to 20 times more cost-effective than traditional money transfers in Sub-Saharan Africa, with transfer fees for stablecoins like USDT and USDC often ranging from 0 per cent to 1 per cent (Idris & Karombo, 2021).

Furthermore, their accessibility sets them apart. Cryptocurrencies like stablecoins, offer a permissionless approach that extends accessibility to anyone, regardless of their geographical location. Beyond this, blockchain-based transactions are known for their speed, with most being completed within seconds, in sharp contrast to traditional transfers that can often take days.

Challenges

While cryptocurrencies offer benefits, they are not without their share of challenges, some of which extend beyond documented issues like hacks, crashes, and scams.

Complexity: One major challenge lies in the complexity, which can prove difficult for the average user. Digital currencies involve complex technical concepts and a variety of wallets and platforms, making them less accessible to those who are not well-versed in the technology.

Regulations: Secondly, the reliance on P2P trades for cross-border solutions can be slow and inefficient, particularly when dealing with large transaction volumes. The speed of P2P trades often depends on the availability of willing counterparts, and regulations further complicate the process. Policymakers are concerned that cryptocurrencies can be used for illegal fund transfers and to avoid capital control rules, potentially undermining monetary policy and posing risks to macroeconomic stability (Fuje, Quayyum, & Molosiwa, 2022). In sub-Saharan Africa, only 25 per cent of countries have formal regulations in place for cryptocurrencies. The majority of the countries have imposed restrictions (IMF, 2022). The absence of an established regulation framework raises concerns about security and compliance, particularly when handling significant sums of money.

Solutions

In order to make blockchain-powered payments more accessible and user-friendly in Africa, several steps should be taken:

Simplifying the process: Measures to streamline the crypto experience, making it as straightforward as using conventional banking or Fintech applications, should be implemented. Simplification extends not only to the ease of transacting but also to educating users about the security aspects associated with adoption. This involves developing user-friendly platforms and applications that provide a simplified, yet comprehensive, introduction to cryptocurrency usage. Such platforms should not only facilitate transactions but also educate users about the security risks and best practices, ensuring that even the average individual can access blockchain-powered payments.

Integration with traditional methods: Hybrid fiat and crypto payroll, for instance, is a compensation method that combines traditional fiat currencies with options for payment in crypto and stablecoins (Neville, 2014). Using the hybrid fiat model can bridge the gap between traditional financial systems and blockchain-powered payment solutions. This integration also provides users with a familiar and user-friendly experience.

Regulatory framework: The emergence of blockchain products, innovations and failures in the industry has further underscored the need for regulation. However, applying regulation is a complex task due to the rapid evolution of the field and resource constraints faced by regulators. National and international regulatory efforts in the crypto asset space have been active but varied, with countries taking different approaches (Narain & Moretti, 2022). Therefore, it is important for regulators to create a global and transparent regulatory framework that ensures consumer confidence while fostering innovation in blockchain-based payments.

Conclusion

While blockchain-based payments present their unique set of challenges and complexities, they can provide innovative solutions to the current African payments landscape. By addressing these challenges and establishing comprehensive global regulations, Africa can harness the benefits of blockchain technology, resulting in more cost-effective and readily accessible cross-border payment solutions. Ultimately, this approach can stimulate economic growth and foster financial inclusion throughout the continent.