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Cryptocurrencies and blockchain have been making inroads across Africa, promising to fix some of its most deeply rooted problems, from economic segregation to the transparency of public governance and poor intra-regional trade. But results have yet to come through, as Jacopo Dettoni reports. 

The hype surrounding cryptocurrencies and blockchain has not spared Africa. Local digital currency exchanges have multiplied as profit hunters turned their eyes to the phenomenal rise of Bitcoin, which reached its climax at the end of 2017, when the digital currency almost touched $20,000.

At that point, cryptocurrencies looked to be in a position to challenge the status quo of Africa's fiat currencies, emerging as a possible alternative to volatile and constantly devaluating currencies in countries such as Zimbabwe. The same blockchain – the technology behind Bitcoin – appeared able to fix many of the continent’s problems, from economic segregation to transparency of public governance. 

Minority status

The slump that followed, with Bitcoin falling back to about $7000 at the end of March 2018, provided a reality check. While blockchain-backed cryptocurrencies do take money out of the control of highly inefficient and often corrupt monetary authorities across the continent, they offer no guarantee of being less volatile than local fiat currencies, nor are they immune to cyber heists. Besides, just a small minority of merchants accept them, making them little more than a speculative asset at the moment.

At the same time, in the land of mobile money services pioneered by companies such as M-Pesa in Kenya, competition for domestic uses still appears too much for cryptocurrencies, at least for now.

However, the argument for using cryptocurrencies in crossborder transactions is more solid. Poor banking infrastructure and regulation, as well as shortage of hard currency, are creating hurdles to intra-African trade, and remittances from outside the continent have little alternative to costly money transfer services. In both cases, the use of cryptocurrencies could help overcome existing obstacles.

Mobile money 2.0

“I see digital currency as the next interaction of mobile money,” says Elizabeth Rossiello, CEO and founder of BitPesa, a start-up launched in 2014 to create a bridge between mobile money and digital currencies. “Mobile money is a domestic solution. It has great purposes locally, but it’s not open source – in fact, the power of that technology is in the hands of very few companies, who are responsible for the whole infrastructure across the continent.

“Besides, they can change fares [at will]. If they don’t want to be interoperable, there is no interoperability; if they don’t give away their application programming interface, nobody can build on their technology. On the other hand, digital currency is in the cloud, it’s open source, low cost, robust and global.”

If BitPesa started off with the idea of facilitating micro-payments, it soon shifted its model to a business-to-business payment platform using Bitcoin, but also fiat money to process payments to and from African frontier markets. BitPesa now allows parties from all over the globe to use Bitcoin to immediately pay a trade partner in four African countries – Kenya, Nigeria, Tanzania and Uganda – in local currency through mobile money and vice versa, 24 hours a day all year round.

The company is now handling transactions for about $20m a month across its markets and is in expansion mode after the acquisition of European money transfer service firm TransferZero in February. “We are using blockchain and cryptocurrencies, but we are actually using it as a tool in the bigger business to solve foreign exchange and treasury problems in frontier markets,” says Ms Rossiello.

A question of trust

Other start-ups are trying to leverage blockchain to unlock intra-regional trade. Despite a recent surge, intra-African trade still accounts for only 16% of the continent’s total foreign trade, according to figures from the African Development Bank, way below continents such as Europe and Asia.

“People don’t trust banks,” says Isaac Muthui, the Kenyan entrepreneur behind Nuru Coin, a local crypto token that raised $3.8m in an initial coin offering (ICO) that ended in March. “It takes too long to cash in a cheque, let alone [worry about] the volatility of local currencies. For merchants, it’s easier to do business with Europe than with customers just across the border. The blockchain can fix many of these problems,” he adds.

Nuru Coin will now be used to power up pan-African business-to-business e-commerce platform The platform only has 150 merchants on board and raised a few eyebrows locally, but Mr Muthui is already aiming high, saying: “We want to become the African Alibaba.”

A small sample

Beyond an emerging use case for crossborder transactions, the rise of cryptocurrencies in Africa bears little difference with what is happening elsewhere in the world.

“The reality is that where the market is now, transactional use of cryptocurrencies is still quite small [in Africa],” says Marcus Swanepoel, co-founder and CEO of Africa’s most established Bitcoin exchange platform, Luno, which has a major footprint in 40 countries in Africa, south-east Asia and Europe and 1.7 million active users. “Users in Africa are typically high-income individuals; it’s similar to what you would find in places such as London.”

Yet Mr Swanepoel still sees the current phase as a step in the direction of a wider adoption of cryptocurrencies beyond speculation. “This investment phase is a facilitator to drive the market to broader adoption and when the transactional element becomes more valuable, we will see those use cases becoming more prominent,” he says.

Through a partnership with South African online payment technology provider FastPay, Luno has integrated about 1000 merchants through a payment platform accepting Bitcoins, and is already thinking big, aiming at 1 billion users by 2025, also by putting to work established connections with its backers.

“If you think there is value to unlock in transactional cases, our lead investor owns most of its companies in this space in emerging markets,” says Mr Swanepoel, hinting at further co-operation with Cape Town-based tech investment firm Naspers. It features among Luno’s early-day backers and garnered headlines for being an early investor in Chinese tech powerhouse Tencent.

A fix for Africa?

Developers are at to work to explore the possibility of blockchain beyond cryptocurrencies to fix some of Africa’s most deeply rooted problems, from economic exclusion to land registry and even democracy governance.

“In Africa there 350 million economically active people that are unbanked,” says Justin McCarthy, CEO of South Africa-based Project UBU. “They will never been included unless they have liquidity.”

Launched in September 2017, Project UBU is now in the process of wrapping up a three-phase ICO to raise $1.5m to distribute digital liquidity in the form of free tokens among those who sign up to the project to buy goods and services provided by the merchants participating in the project. Mr McCarthy aims to hit 1.5 million users by January 2019, and “scale very rapidly from there”.

More broadly, the UN's Economic Commission for Africa (ECA) believes the distributed, transparent nature of blockchain databases can help governments keep better track of land registries, improve cross-border bureaucracy and trace goods (and even votes).

“However, we are talking of a very limited subset of persons that have access to this technology,” says Kasirim Nwuke, head of the ECA’s new technologies and innovation division. “We can talk about the blockchain as an additional instrument that people can use to leverage the technology to advance social and economic development, but it wouldn’t solve one-tenth of the continent’s problems,” he adds.

Besides, regulators across the region are still getting to grips with cryptocurrencies and blockchain, with approaches swinging from laissez-faire to harsh regulations. However, in the long run, African policymakers may find limited space to crack down completely on a global phenomenon such as Bitcoin, as despite its volatility it seems robust and trusted enough to survive and help unlock value in intra-Africa trade.

On the other hand, blockchain applications beyond cryptocurrencies have yet to live up to expectations. Only 8% of the 26,000 new projects tracked globally by consultancy Deloitte in 2017 are still active. They may be part of a solution, but they are not a silver bullet for Africa’s problems.

This article is sourced from fDi Magazine
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