Cryptocurrencies' Role in Sub-Saharan Africa

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Despite receiving only 2% of the total worldwide value of all cryptocurrencies, their rapid growth will revolutionize financing in an increasingly digital and urban Sub-Saharan Africa.

In fact, according to a recent research by Chainalysis, a blockchain analytics platform, Africans received $105.6 billion in bitcoin payments between July 2020 and June 2021, a 1200 percent increase from the previous year. Notably, Chainalysis places Kenya, South Africa, and Nigeria among the top ten cryptocurrency-using countries.

Because bitcoin platforms provide decentralized peer-to-peer lending services rather than traditional banking services, they can help level the economic playing field and offer financing options to neglected customer markets. Indeed, cryptocurrencies are well-positioned to address a variety of economic difficulties in the area, from closing funding shortages in the micro-, small-, and medium-sized company (MSME) sectors to enabling remittance transfers. In fact, of the $48 billion transmitted to Sub-Saharan Africa in 2019, Chainalysis predicts that cryptocurrencies such as Ripple facilitated up to $562 million in remittance payments. Cryptocurrencies have also expedited the availability of low-cost mortgages and are accommodating erratic income patterns that limit lending.

Empowa, a Mozambique fintech start-up, embodies the essence of this new movement—the democratization of finance—by crowdsourcing funding for residential real estate development using cryptocurrencies. As so, it exhibits the proof of concept for decentralized finance in Africa, by avoiding traditional bottlenecks in housing financing and leveraging the blockchain platform to move funds toward developers and innovators. Pezesha, a Kenyan fintech focused on MSME credit scoring and loan origination, similarly unlocked new money by transforming the cryptocurrency community into East African MSME lenders, offering a worldwide pool of lenders to invest directly in Kenyan firms. Over a four-month period, one of its short-term loan portfolios tripled in value. This venture allows foreign lenders to send USD stablecoin (a type of digital currency that is pegged to some external asset, such as fiat currency or other assets like gold), convert it to Kenyan shillings, and use other credit-scoring facilities to bridge the capital gap between MSMEs and investors. Pezesha has facilitated approximately 3,751 loans in Kenya and 344 in Ghana as of this writing.

While decentralized finance and blockchain technology are scalable and have been used in other countries and areas, African officials have grappled with how to integrate cryptocurrencies into their existing monetary system. Many African governments, in fact, have ignored this financial innovation, keeping crypto exchanges but failing to provide a regulatory framework, or allowing trade but not providing their population with an exchange.

The government is unable to "close the barn door once the horse has bolted." Blockchain technologies are the future, and any attempt to restrict them—or even overly intervene in their operations—would meet the same fate as earlier attempts by governments to limit behavior. Furthermore, banning cryptocurrencies at a time when they are supporting innovations and brimming with potential would hinder financing of important sectors such as MSMEs, affordable housing, and remittance payments at a time when Africa desperately needs these options.

Nonetheless, the government can and should play a role. Kenya, for example, has just developed a "regulatory sandbox" to crowd-source MSMEs financing. According to the Kenyan Capital Markets Authority, this sandbox is a "tailored regulatory environment that enables for the live testing of innovative capital markets related products, solutions, and services with the potential to expand and improve the capital markets prior to mass market introduction." In other words, Kenya's approach to artificial intelligence and blockchain was to provide a secure environment for the oversight of emerging technologies, processes, or services that have the potential to benefit the public. This strategy enables the government to foster experimentation and progress while not officially authorizing new practices. Countries in Africa should construct their own regulatory sandboxes in addition to building capability to identify and trace all transactions, guaranteeing adequate identification for all residents (to validate customers and assure transaction security), and establishing a robust cybersecurity system.

While no one can anticipate the future of cryptocurrencies, we do know that their uniqueness necessitates a similarly unorthodox regulatory approach—one that is as invested in the principles of experimentation and entrepreneurship as the behaviors it seeks to regulate.

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