Crypto: Bridging Inequality or Widening the Financial Divide in Africa?

Cryptocurrencies are a hot topic for the financial sectors around the world, raising questions about their role in a modern, ever digitizing world. Some believe crypto to be the cure-all for the flaws in traditional financial systems, others worry that it’ll doom the world, referring to its environmental impact or how it is uncontrolled. It raises the question, what is the impact on the continent that has the fastest-growing market for cryptocurrencies?

Cryptocurrencies, or virtual currencies, are digital means of exchange created and used by private individuals or groups. The fact that most cryptocurrencies are not regulated by national governments, they’re considered alternative currencies and also as mediums of financial exchange that exist outside the bounds of state monetary policy. Among all cryptocurrencies,  Bitcoin (BTC), currently valued at $47,729.70 per bitcoin, is the most pronounced cryptocurrency and the first to be used widely. However, hundreds of cryptocurrencies exist, and more spring into being every month. Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.

Today, 81 countries are exploring central bank digital currencies, according to a new tracker. The Atlantic Council’s Geoeconomics Center recently unveiled a new central bank digital currency tracker featuring an interactive database. The centre adds that the five countries that have fully launched a digital currency are the Bahamas, Nigeria, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada. According to the centre, of the countries with the four largest central banks (the US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England), the United States is furthest behind in developing a state-backed digital currency. This attests to the fact that cryptocurrencies are probably on their way to becoming legal tender.

Source: Chainanalysis

Africa- the fastest-growing market for cryptocurrency adoption

Over the past year, Africa has been widely reported as one of the fastest-growing markets for cryptocurrency adoption. A new report from blockchain research and analytics firm Chainalysis lends credence to this fact. 

The African crypto market has grown by over 1,200% in terms of value received over the past year. Chainalysis estimates that African countries collectively received around $105.6 billion worth of cryptocurrency between July 2020 and June 2021. However, Africa is still the smallest crypto economy of all the regions that the research firm studies. 

Despite the relatively minute crypto economy in Africa, Chainalysis noted that Africa “has some of the highest grassroots adoptions in the world, with Kenya, Nigeria, South Africa and Tanzania all ranking in the top 20 of our Global Crypto Adoption Index.”

One way to determine grassroots adoption is to look at the portion of a region’s overall transaction volume that features retail-sized transfers. For Africa, that figure is just over 7%, higher than the global average of 5.5%, Chainalysis’ data shows. 

While P2P volumes account for a tiny part (2.6% for bitcoin and 1.6% for all cryptocurrencies) of all African transaction volume, no other region uses P2P services at a higher rate than African crypto users, according to Chainalysis.

An important driver of this trend is the fact that the governments of Nigeria and Kenya, two of the leading African countries in terms of crypto adoption, have made it difficult for crypto companies (such as exchanges) to work with banks.

Balancing the pros and cons 

Defining crypto as a pro or a con depends to some extent on who you are addressing, while something might be a pro for investors, it might be considered a con by governments or traditional banks. Still, we tried to balance this in the breakdown, you can decide for yourself if these are pros or cons.

Self-governed and managed: The fact is nobody regulates cryptocurrency. It is easy to trade and exchange even though it is not legal tender. It offers an option for people who might traditionally be excluded from the banking system. 

Decentralized: The decentralization keeps the cryptocurrencies monopoly free and in restraint, so nobody or organization can determine the flow and worth of the coin, which, unlike fiat currencies which are controlled by the Government.

Cost-effective mode of transaction: With the help of cryptocurrency, the transaction fees paid by a user are reduced to a negligible or zero amount. It does so by eliminating the need for third parties, like VISA, Mastercard or PayPal, to verify a transaction. It removes the requirement to pay any extra transaction fees.

Illegal transactions: Since the privacy and security of cryptocurrency transactions are high, it’s hard for the government to trace down any user by their wallet address or keep tabs on their data. Bitcoin has been used as a mode of payment (exchanging money) during many illegal deals in the past, like buying drugs on the dark web.

No refund or cancellation: If there is a dispute between concerned parties, or if someone mistakenly sends funds to the wrong wallet address, the coin cannot be retrieved by the sender. It might be utilized by some persons to cheat others out of their money. 

Price fluctuation: One of the biggest disadvantages of cryptocurrencies is price fluctuation. It may rise sharply today and drop drastically tomorrow.

Is Crypto Bridging Inequality or Widening Financial Divide in Africa?

As more people across Africa own smartphones and have access to the internet, cryptocurrency has the potential to reach even more users and bridge inequality. Because cryptocurrency is only transferred electronically, having the most basic internet connection immediately helps anyone access and trade the currency. As stated in the advantages earlier mentioned, it is not regulated by the government and is decentralised. In other words, everyone has unhindered access to it.

In Nigeria,  the country’s Apex bank has prohibited banks and other financial institutions from dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges. Meanwhile, in 2018, Kenya’s central bank also warned banks in the East African country against dealing with cryptocurrencies or facilitating transactions for crypto-related entities. Regardless, Kenyans and Nigeria diverted their attention to peer-2-peer and as a result, p2p transactions in these countries have skyrocketed. It,  therefore, comes as no surprise that residents of these two countries are turning to P2P platforms, which do not directly facilitate transactions.

This simply shows that Africans are resilient. They are always looking for ways to emancipate themselves even without the help of the government. Interestingly, cryptos have become the most available tool for this. One must also put into consideration the fact that there is a high rate of unemployment across Africa. Just like placing a bet, young Africans put their money into bitcoin and other cryptos with the hope it will rise and they will ‘cash out’. 

Unfortunately, this is only for those who have internet-enabled smartphones. Clearly, you would find most of them in the city. While crypto might bridge the inequality gap in Africa cities, it is not doing the same in the rural areas, due to low internet penetration. Consequently, widening the financial divide between urban and rural areas. Although financial technology firms are trying to reach those in the rural areas and provide them with financial services which include crypto, there is still a lot to be done in the area of onboarding, education and accessibility.

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