Dr. Estelle Brackfounder and president of KiraliTexplains some reasons behind an increase in the adoption of digital assets on the African continent

The IMF* has discussed, in its latest Global Financial Stability Report (April 2022), the significant increase in crypto asset trading volumes against some emerging market currencies since the start of the pandemic.

Why are emerging countries adopting digital currency?

A large part of this increase is due to speculative investment activities by residents of emerging markets. But a more structural shift towards crypto assets as a means of payment and/or store of value is also an explanation for this rise, and that could pose significant challenges for policymakers (see the October 2021 GFSR for a discussion on the cryptography).

For example, Tether, the largest stablecoin used to settle spot and derivatives trades, has seen

a notable increase in trading volumes against emerging market currencies. The steepest increase is in Turkey, where exchange rate volatility has been particularly high, and the general use of crypto assets appears to have gained momentum in recent years.

More recently, trading volumes have skyrocketed following the introduction of sanctions against Russia and the use of capital restrictions in Russia and Ukraine.

The war in Ukraine has highlighted some of the challenges that stakeholders face in terms of the enforcement of AML/FT regulations and capital flow management measures and, to some extent, sanctions. Crucially, the implementation of such measures requires intermediaries to verify the identities of transacting parties, which significantly burdens procedures for banks and limits the ability of non-major banks in the global agent banking network to serve their customers. customers willing to buy USD to export. goods to Turkey or China, for example.

It is considered that, to some extent, the crypto ecosystem allows users to circumvent such requirements through various means, including (1) the use of exchanges and other crypto asset providers that would not comply with sanctions and/or risk management measures; capital flow; (2) poor implementation of proper due diligence procedures by crypto asset providers; Y

(3) the use of technologies and platforms that increase the anonymity of transactions (such as mixers, decentralized exchanges, and privacy coins).

Crypto in Africa

A host of factors, from political repression to currency controls to rampant inflation, have fueled the stunning rise in crypto assets in emerging countries, especially in Africa.

According to the latest Triple A cryptocurrency ownership data from September 2022, with an estimated 53 million cryptocurrency owners, the African continent now accounts for 16.5% of the global total. Nigeria, which has more than 22 million cryptocurrency owners, currently accounts for more than a third of the total number of holders on the continent (the United States has 46 million, India 27 million, Pakistan 26 million, Nigeria 22 million and Vietnam 20 million).

According to Bitcoin trading platform Paxful, Nigeria was second only to the US in Bitcoin trading in July 2021. The dollar volume of cryptocurrency received by users in Nigeria in May 2021 was 2.4 billion. USD, up from $684 million in December 2020, according to blockchain research firm Chainalysis.

And the true scale of crypto flows through Africa’s largest economy is likely to be much larger, with many exchanges impossible for analysts to trace.

Nigeria has one of the youngest populations in the world and is ripe for digital finance. With many people looking for ways to escape widespread poverty, pyramid schemes are proliferating.

Forex trading is an everyday activity for many. Remittances to Nigeria from those working abroad, which increased to $5,147.40 million in Q1 2022 from $5,021.57 million in Q4 2021, have played a role.

Digital currencies can also provide insurance against exchange rate fluctuations; the value of the nigerian naira has plummeted nearly 30% against the dollar in the last five years.

In February 2021, the Nigerian government freaked out and banned cryptocurrency transactions through licensed banks.

In late July 2021, it announced a pilot plan for a new central bank-issued digital currency (CBDC), eNaira, in the hopes of reducing incentives for those who want to use unregulated crypto. Today all Nigerians can and do exchange eNaira via mobile phone text messages.

The Central African Republic became, in April 2022, the first country in Africa to welcome a crypto asset into its sovereign ranks by granting legal tender to Bitcoin, after El Salvador in South America.

In both Nigeria and the Central African Republic, the use of digital currencies may be limited to individuals and businesses that already have a bank account or mobile wallet. In Nigeria, the issuance of eNaira by CBN, and the potentially associated trust, could be the solution to convince more Nigerians to adopt this digital means of payment. However, it may not solve all the difficulties that led Nigerians, and Africans in general, to adopt crypto assets for cross-border transactions or investment purposes. In the case of CAR (and in Salvador), considering the particularly low level of banking in the country, including mobile wallets, adopting Bitcoin and allowing its use by the population, with protection against exchange variations, using Bitcoin for its infrastructure , would only be beneficial if associated with the imperviousness of international markets and high volatility. A kind of white label Bitcoin. But simply using Bitcoin as it is, and keeping its potential levels of volatility high, would be a huge mistake and a self-defeating idea, confusing the currency as a means of payment, a store of value, and an investment asset. Bitcoin is still, so far, the second.

This editorial was initially published in our Crypto Payments and Web 3.0 for Banks, Merchants and PSPs report. The first edition of our report aims to provide a payment resource of crypto terms and concepts for those interested in understanding the basics of crypto payments and their long-term impact. In addition, it shares practical examples of cryptocurrency-enabled banking and e-commerce services and presents the latest developments in the regulatory landscape. Furthermore, it reveals which are the most innovative companies in this space, which are building the crypto rails.

*IMF Global Financial Stability Report, Chapter 1, April 2022 – https://www.imf.org/en/Publications/GFSR/Issues/2022/04/19/global-financial-stability-report-april-2022

About Dr. Estelle Brack

Dr. Estelle Brack is the founder and president of KiraliT, providing advisory and training services in money, banking and financial services in the EMEA region. Ella estelle has a PhD in Economics and Banking and has 25 years of operational experience in the banking sector, especially in Payments, with a global vision.

About KiraliT

KiraliT is an advisory firm that focuses on banking and financial services, including payments and new forms of money. We provide strategic advisory services to established institutions in Europe, Africa and the Americas, helping them to expand their businesses and build strategies for financial education and training.