As a white-label digital asset exchange provider, we are constantly analyzing the landscape for technological innovation, adoption, and regulatory changes. We continue to share an overview of this information with our community, and assist them in making more informed decisions. This path has taken us to far-out regions and special case countries. Some of them included Latin America – Brazil, Mexico, Colombia – and Africa – Nigeria, Kenya, and South Africa. We will now take a look at the state of digital asset adoption in the Middle East.

The relationship between adoption and regulation

It appears natural to intuitively link digital asset adoption with any given regulatory landscape. Yet one must not fall into the correlation trap. The evidence does not support this implicit relationship – at least not as much as one would think. For example, take Nigeria and Venezuela – countries where adoption rates have been skyrocketing despite the hostile regulatory landscape. 

Yet there is a distinction between correlation and causation. Causation – as opposed to correlation – can trace a distinct cause-and-effect relationship between two variables. While an uncertain regulatory landscape does not necessarily mean low adoption rates, a friendly regulatory landscape invites innovation and therefore has a stronger relationship with high adoption rates. Switzerland, one of the most prominent blockchain hubs, has demonstrated this multiple times.

What does this mean? Finding cases where the regulatory landscape is slowly positioning itself as open can be a strong proxy of digital adoption in the coming years. We’ll see that the disposition of some Middle Eastern countries makes them a suitable and potentially profitable option for those seeking the next region on the brink of blockchain disruption.

Reasons for the shift and steps towards adoption

The case for the adoption of digital assets in the Middle East stems from a similar tree to that of Latin America. Fundamental economic situations – such as hyperinflation – and macro consumption trends have forced Latin American countries to adopt digital currencies. In the Middle East, the drive was born out of a necessity to shift away from oil-like economic revenue sources to cleaner ones – the “green revolution” has led to increased diversification within the Middle East towards investments in alternative sectors like tourism, technology, and finance. Nowadays, ME countries leverage blockchain to reach their sustainability agendas. Thus, the Middle East has established itself as a global hub for innovation in financial technology.

Specific accomplishments toward the goal of responsible adoption encountered a joint CBDC project called Project Aber, where half a dozen commercial banks participated. Furthermore, central banks from Saudi Arabia and UAE have been collaborating on blockchain and its involvement in the financial sector. Project tests were a success, showing as a result that CBDCs would be technically viable for cross-border payments – an  improvement over current centralized systems in costs and processing speed [1]. 

Cryptocurrency adoption trends

Appetite for digital assets has been growing in this region as well. In 2020, the total value of digital payment transactions more than doubled when compared to its previous year –  achieving a vast $US 18.5 Bn [2]. 

According to a McKinsey survey carried out in 2020, even though the region’s population can be categorized as ‘digitally savvy’ – smartphone penetration reaches ~90% in leading markets – the region has remained heavily dependent on cash. Underdeveloped digital payment infrastructure results in underbanked consumers and a cultural bias towards cash (65% of retail transactions) [3]. New developments and digital payment awareness have demonstrated that 58% of ME consumers expressed a ‘strong preference for digital payment methods,’ suggesting that a cultural shift may be underway.

 

 

Source: Most preferred payment mode in 5 years. McKinsey (2020) [3].

A special Crypto Center project launched and managed by the DMCC – Dubai-based world’s No.1 Free Zone – to promote blockchain technology has become the home to hundreds of organizations, with +900 awaiting licence approval. Over 400 crypto businesses already operate in the UAE, with many more expected. Ahmed bin Sulayem, executive chairman and chief of the DMCC, is optimistic that the UAE will have +1000 crypto businesses running by the end of 2022 [4].

Regulation in the Middle East

The need for a regulated marketplace has become the focus of attention for both digital asset adopters and those reluctant to include them in their daily lives. While both positions can passionately argue about their stance, one thing is clear. Digital asset users need a safe space to utilize the technology. Also, countries need a way to control extreme situations. An example of this is the recent incident that included a falsely-claimed official cryptocurrency of Dubai, Dubacoin, which surged in price by over 1,000% in under 24 hours. It subsequently decreased almost as spectacularly – leaving investors empty-handed.

The regulatory stance on digital assets across the world has been as heterogeneous as the coin offering itself. While some government agencies have had a rigid attitude towards cryptocurrencies, others have seen the potential that could be harnessed by embracing them, and are acting accordingly. Several Middle East and North Africa (MENA) countries have chosen this route [2]. 

In 2018, the Abu Dhabi Market regulatory authority (FSRA) introduced a framework for operating digital asset businesses. This has made Abu Dhabi an appealing jurisdiction for blockchain-based financial services firms [2]. 

Later, the ME SEC-equivalent authority (SCA), in partnership with the Dubai World Trade Center Authority, signed an agreement to support trading and other financially-related activities within its free zone. While digital assets are not licensed by the Central Bank – the UAE dirham is the only legal tender recognised by the central bank – the agreement established a framework for the DWTCA to regulate and issue necessary the licences for financial activities related to crypto assets, and the SCA would oversee and monitor operating entities [5]. 

Scalable Solutions

At Scalable, we can help you make the journey of building an exchange seamless. Also, we are there to advise you on the regulatory implications to keep in mind. Get in touch by booking a demo today.

 

 

 

References 

[1] Team, Editorial. “Middle Eastern Central Bank Digital Currencies and the World.” Finextra Research, 3 May 2021, https://www.finextra.com/blogposting/20249/middle-eastern-central-bank-digital-currencies-and-the-world.

[2] Hensel, John. The UAE’s Growing Appetite for Crypto and Blockchain. The National, 21 Sept. 2021, https://www.thenationalnews.com/opinion/comment/2021/09/12/the-uaes-growing-appetite-for-crypto-and-blockchain/.

[3] Chan, Jon, et al. “The Future of Payments in the Middle East.” McKinsey & Company, 26 Aug. 2021, https://www.mckinsey.com/industries/financial-services/our-insights/the-future-of-payments-in-the-middle-east.

[4] Cabral, Alvin R. Dubai Expects to Have More than 1,000 Cryptocurrency Businesses by 2022. The National, 19 Oct. 2021, https://www.thenationalnews.com/business/cryptocurrencies/2021/10/18/dubai-expects-to-have-more-than-1000-cryptocurrency-businesses-by-2022/.

[5] Mansoor, Zainab. “UAE Stock Market Regulator, Dubai World Trade Centre Authority Agree to Support Crypto Assets Trading.” Gulf Business, 23 Sept. 2021, https://gulfbusiness.com/uae-stock-market-regulator-dubai-world-trade-centre-authority-agree-to-support-crypto-assets-trading/

Following our series of African countries with the highest adoption rates of digital assets, we find South Africa – the third African country to embrace crypto the most. 

While South Africa may share similarities in the growing mainstream adoption to its sibling countries Nigeria and Kenya, it has several distinct differences. The most important one? Its financial sector. 

 

South Africa’s financial sector

South Africa has the most sophisticated financial sector on the entire continent. Composed of four main sub-sectors – banking, insurance, asset management, and the stock exchange – it distances itself from the whole continent. Even though it still has room for improvement in financial inclusivity – a factor being addressed by its rising Fintech market- it expects to stimulate demand for credit through an economic plan of policy rate cuts. Its insurance penetration reached 17% in 2018 according to PwC, followed by Namibia (6.7%) and Lesotho (4.76%) – Kenya only reached a mere 2.83% in the same period. Its asset management subsector is characterized by numerous offerings of both domestic and international suppliers. Lastly, the Johannesburg-based SE Exchange is seen as one of the best destinations for reliable quotations and deep organic liquidity, compared to its regional competitors [1].

The case for the adoption of digital assets in South Africa is an interesting one. Recent research carried out by global exchange Luno estimates that over 15 percent of South Africans own cryptocurrency. Still, at least a quarter of that figure owns between R100 and R1,000, a low amount. This could infer that digital asset holders may very well be scratching the surface, but the underlying reasons will be revealed soon enough [2].

Adoption in South Africa can be further fuelled by cryptocurrency applications for cross-border payments. The South African Reserve Bank has entered into a partnership with the Central Banks of Australia, Malaysia, and Singapore to develop a shared platform for cross-border transactions. This innovative platform would eliminate the need for intermediaries, and significantly reduce time and trading costs [3]. 

Regulatory framework of digital assets in South Africa

Not surprisingly, South African laws on digital assets have been following the slow and reluctant worldwide trend – no specific laws or regulations governing digital assets, their holding, or treatment. 

The South African policy on digital assets is neither hostile nor friendly, and regulators seek to remain neutral with a responsive position – that is, to maintain a non-pioneer stance, but one that can discriminate and act on responsible innovation while ensuring a level playing field for all players. In the South African context, “legal tender (i.e. money) is limited to banknotes and coins issued by the SARB. From a legal perspective, crypto assets are therefore not recognised or viewed as money” [4][5].

Last November, a draft regulation by the Financial Conduct Authority (FSCA) proposed cryptocurrencies to be considered and treated as financial products under the Financial Advisory and Intermediary Services (FAIS). Cryptocurrency intermediaries, advisors, and other actors would therefore be required to comply with the requirements of the FAIS act [6].

However, a ‘Crypto Assets Regulatory Working Group’ was recently created by South Africa’s Intergovernmental Fintech Working Group (IFWG). Its aim is to review the country’s position on digital assets. This group will propose a framework for establishing Know-Your-Customer (KYC) protocols, as well as some surveillance mechanisms to prevent money laundering. After the framework is set, investor-protection guidelines will be designed to manage capital risk effectively [7]. 

 

Regulating digital assets in South Africa

In June 2021, the group presented a staged approach to regulating both digital assets and service providers. Over 20 recommendations broken down into three categories were laid out for “a revised South African policy, legal and regulatory position on crypto assets and related activities” [6].

• Implementation of AML/CFT framework. Crypto Asset Service Providers (CASPs) would be added to the list of accountable institutions. Once completed, they must comply with AML/CFT provisions, register with the Financial Intelligence Centre (FIC), conduct customer due diligence and report suspicious cash transactions over 25,000 rands.
• Framework for monitoring cross-border financial flows. It was recommended that the Financial Surveillance Department (FinSurv) supervise and regulate the cross-border flow of crypto assets. It was also recommended to amend certain parts of the exchange control regulations to allow crypto-asset trading platforms (CATPs) to source or buy crypto assets offshore to sell to the local market, subject to specified limits to be determined by Finsurv.
• Application of financial sector laws. The working group recommended that crypto assets be defined as financial products. This required CASPs to become licensed intermediaries, thereby facilitating regulatory oversight and reducing the risk of unscrupulous entities taking advantage of investors [6]. 

 The South African Revenue Service (SARS) released new guidelines that clarify the correct treatment of taxable crypto events in August, further exacerbating the uncertain climate. Digital asset gains will now be treated as capital gains under the Capital Gains Tax (CGT) paradigm and must be reported, under the threat of criminal offense. Notwithstanding, the lack of details made public might ultimately result in taxpayers falling on the wrong side of the law even when following the guidance provided by SARS [8].

This article concludes the African continent overview and country revision on the status of digital asset adoption and regulation. Stay tuned as we explore new markets and potential opportunities for digital assets and cryptocurrency exchanges.

Interested in setting up a professional exchange in the region and beyond? Book a demo with our team today.

 

 

 

 

References

[1] Flanders Investment & Trade Market Survey (2021). The financial sector and fintech sector in South Africa. Available at https://www.flandersinvestmentandtrade.com/export/sites/trade/files/market_studies/The%20financial%20sector%20and%20Fintech%20in%20SA%20-%202021.pdf

[2] “Research Gives Some Idea about How Much South Africa’s Cryptocurrency Owners Have.” BusinessTech, 14 Sept. 2021, https://businesstech.co.za/news/banking/521294/research-gives-some-idea-about-how-much-south-africas-cryptocurrency-owners-have/.

[3] Tassev, Lubomir. “Australia, Singapore, Malaysia, and South Africa to Trial Cross-Border Digital Currency Payments.” Bitcoin News, 3 Sept. 2021, https://news.bitcoin.com/australia-singapore-malaysia-and-south-africa-to-trial-cross-border-digital-currency-payments/.

[4] Crypto Assets Regulatory Working Group. Position Paper on Crypto Assets. 11 June 2021. Available at http://www.treasury.gov.za/comm_media/press/2021/IFWG_CAR%20WG_Position%20paper%20on%20crypto%20assets_Final.pdf.

[5] Crypto Assets Regulatory Working Group (2021). Frequently asked questions about crypto assets. Available at http://www.treasury.gov.za/comm_media/press/2021/IFWG_CAR%20WG_Crypto%20assets%20FAQs_Final.pdf.

[6] “The Briefing: Africa Crypto Regulations.” Blockchain Intelligence Group, 21 July 2021, https://blockchaingroup.io/the-briefing-africa-crypto-regulations/.

[7] “Cryptocurrency Adoption in Africa.” DO4AFRICA, https://www.do4africa.org/en/cryptocurrency-adoption-in-africa/9087/.

[8] Zimwara, Terence. “South African Tax Body Updates Crypto Tax Guidance, Confusion Persists – Taxes Bitcoin News.” Bitcoin News, 2 Sept. 2021, https://news.bitcoin.com/south-african-tax-body-updates-crypto-tax-guidance-confusion-persists/.

Sources

Chainalysis (2021). The Chainalysis 2021 Geography of Cryptocurrency Report. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index.

A wide number of heterogeneous factors drive digital asset adoption throughout the world. In the case of many African countries – and especially Kenya – we find three main drivers:

1.  The weakening of its local currency, 
2. Inefficient value-transfer mechanisms,
3. An unclear legal landscape and treatment. 

We will review the above factors and how they affect digital asset adoption in Kenya. 

i) Weakening local currency 

Similarly to many Latin American countries – and several African regions – the Kenyan currency has been depreciating against the US dollar since December 2019. The case for inflation hedging and salary preservation has stepped firmly in Kenya. For example, a blog article from Chainalysis showcases the inverse relationship between the Shilling/USD exchange rate and the Kenyan shilling P2P trading volume [1].

 

ii) Inefficient value hold and transfer mechanisms

According to the World Bank’s Global Findex Database, Sub-Saharan African countries account for a large majority of total global unbanked adults (2017). This situation, on top of the weakening local currency, has forced Africans to turn to centralized exchanges and cryptocurrencies in the hope of finding an alternative way of circumventing the banking system. Therefore, people in Africa have been opting to send remittances using cryptocurrencies, resulting in cross-regional transfers; these transfers make up 96% of Africa’s cryptocurrency market. 

The African regulatory authorities’ reactive solution was to make it difficult for banking customers to send money to cryptocurrency businesses; in the specific case of Kenya, banks have issued alerts to customers who used debit or credit cards to buy digital assets on centralized exchanges [2]. Yet this measure only drove cryptocurrency holders to turn once again to an alternative solution. Decentralized peer-to-peer (P2P) platforms filled this need and have become more popular than ever across Africa as a way of sending crypto. In fact,  P2P lead exchange Paxful has seen growth trends that reached 57% for Nigeria over the last year and 300% in Kenya.

iii. Regulatory Framework

To this day, digital assets are neither regulated in Kenya nor backed by any governmental institution. This is a consistent theme for the past six years. Notwithstanding, the stance that the original public notice cautioning the public on virtual currencies [3] evolved into a more embracing exploratory analysis carried out by the official Distributed Ledgers Technology and Artificial Intelligence Task Force [4]. There are also discussions on whether they might be treated as securities and not currencies. This could potentially make them regulated under the securities act umbrella.

Current state of affairs

Digital assets fall under the scope of the The Central Bank of Kenya (CBK) through legal avenues and broad discretion. While the Kenya Money Remittance regulations and the AML Act are the major laws that govern cryptocurrency trading, cryptocurrency regulation falls under three acts in Kenya [5] [6]: 

• The Capital Markets Authority (CMA), is the body in charge of regulating the securities public offering process through the Capital Markets Act. It is also responsible for detailing which assets are considered securities.
• The Central Bank of Kenya (CBK) on the other hand, supervises payment systems through the National Payments Systems Act – bringing all payment system providers under one regulatory roof, and ensures the safety and security of each one.
• Finally, additional regulations like the Kenya Information and Communication and Data Protection Act administered by the Communication Authority, the Banking Act, and others are and/or might become relevant depending on the official treatment of digital assets in the future. 

Authorities build up interest

While the regulatory landscape remains static, there has been increased interest from governmental authorities. In March 2019, the Regulatory Sandbox Policy Guidance Note was issued to set a framework for the live tests of innovative fintech products. The program admitted seven firms earlier this year. Less than a year ago, the CBK Governor Dr Patrick Njoroge said in an online interview that the CBK had entered into discussions with other central banks on the possibilities of entering the digital currency space [6]. 

The path moving forward

To conclude, Kenyans’ desire to embrace blockchain continues to promote innovation in several financial spaces within the region. The effective use of the technology and its possibility to improve their industries also requires consistent and clear regulation – a task that must be addressed by all pertinent authorities. With this in mind, digital asset adoption in Kenya will continue to expand and make cause changes in the traditional finance sector. 

 

 

 

 

References

[1]“P2P Platforms, Remittances, and Savings Needs Power Africa’s Grassroots Cryptocurrency Adoption.” Blog, Chainalysis, 14 Sept. 2021, https://blog.chainalysis.com/reports/africas-grassroots-cryptocurrency-adoption.

[2] Crawley, Jamie. “Kenyan Banks Warn Customers about Buying Crypto: Report.” CoinDesk , 8 June 2021, https://www.coindesk.com/markets/2021/06/08/kenyan-banks-warn-customers-about-buying-crypto-report/.

[3] https://www.centralbank.go.ke/images/docs/media/Public_Notice_on_virtual_currencies_such_as_Bitcoin.pdf.

[4] The Distributed Ledgers Technology and Artificial Intelligence Task Force. Ministry of Information, Communications and Technology (2019). Emerging Digital Technologies for Kenya – Exploration and Analysis. Available at: https://www.ict.go.ke/blockchain.pdf.

[5] Njogu, Muthoni. “Blockchain & Cryptocurrency Laws and Regulations: Kenya.” Global Legal Insights, Global Legal Group, https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/kenya.

[6] Imani, Kevin. Kenyan Regulators’ Response to Growing Blockchain & Crypto Adoption. Sankore 2.0, 30 Aug. 2021, https://medium.com/sankore2-0/kenyan-regulators-response-to-growing-blockchain-crypto-adoption-b201fe49f854.

Sources

• Chainalysis (2021). The Chainalysis 2021 Geography of Cryptocurrency Report. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index.

Nigeria has become one of the African countries with the highest digital asset adoption rates when measured by P2P volume transactions, adjusted for PPP per capita and internet-using population. According to the 2021 Global Crypto Adoption Index, Nigeria ranks 6th at a global level, second only to Kenya in the African continent [1]. Below we further explore  factors that contribute to digital asset adoption in Nigeria. 

Nigeria adopts digital assets

Digital asset adoption in Nigeria has been steadily increasing for the past half-decade. According to the Global Consumer Survey carried out by Statista, Nigeria is the leading country (per capita) for Bitcoin and cryptocurrency adoption in the world. The 2020 global survey estimates that approximately 300 million people have owned or used digital assets at some point, with Nigerians achieving an impressive response – 32% of surveyed Nigerians reported to have used or owned digital assets at some point [2].

“How Common is Crypto?” Statista, 2020

Naturally, country-specific factors fuel digital asset adoption throughout the world. The case of Nigeria is no different. Currency controls and pervasive inflation light the spark of the remarkable rise of cryptocurrencies in Nigeria. 

The value of the Nigerian naira has plummeted almost 30% against the dollar in the past five years. Additionally, the Nigerian currency has been suffering from variable inflation rates, increasing from a 10 year low of 8% to a current 17%, according to the National Bureau of Statistics of Nigeria [3].

Digital asset adoption as insurance

Nigerians have also been subject to political repression, sowing an uncertainty that inadvertently propitiated the scene for digital assets to arrive. This repression was not only physical in nature, but financial, as well. Thousands of citizens marched last October against police brutality and the Sars police unit, resulting in hundreds suffering tangible afflictions. During these protests, several bank accounts belonging to groups that raised funds to free protesters and supply first aid were temporarily suspended. This scenario provided yet another strong argument in favour of digital assets,which are now also considered as a key insurance against hostile interventions [4].

Adapting the Regulator Speech

Despite adoption advancements, it wasn’t until relatively recently that the regulator started to show its official position regarding cryptocurrencies. In 2021, central authorities and regulators in Nigeria have shared their stance on cryptocurrency usage, though not in a consistent manner.

After initially warning users on the dangers of investing and trading digital assets, the Central Bank of Nigeria (CBN) ordered banks to close accounts of all cryptocurrency users. Following a worldwide trend of regulatory institutions repelling the use of digital assets, the CBN submitted a letter in February 2021 signed by the Director of Banking Supervision, Bello Hassan. With it, it reminded regulated banking institutions that dealing in cryptocurrencies or facilitating payments for cryptocurrency exchanges was “prohibited.” Banking institutions -DMBs, NBFIs, and OFIs – were therefore directed to “identify persons and/or entities” transacting with cryptocurrency or operating crypto exchanges on their platforms and immediately close their accounts. Finally, it clearly stated that any breaches would face severe regulatory sanctions  [5][6]. 

This state did not deter Nigerian citizens from getting hold of cryptocurrencies. In fact, Bitcoin demand in this region increased after the public ban, reaching highs of over USD 86,000 – nearly a ~ 70% premium over average market prices [7][8].

The official speech rapidly changed as the regulator faced both public unease and observed how the same actions that were designed to disincentivize digital asset use resulted in the exact opposite – an increment in usage and transactions [9]. Less than a month after the letter was submitted, the CBN issued a statement of clarification, where bank officials said the directive should not be mistaken for an outright ban. Instead, the alleged initial communication was only meant to prohibit transactions of cryptocurrencies in the banking sector [10]. 

Down the road

Less than a year since its mostly debated announcement against digital currencies, the Central Bank of Nigeria announced that it will launch the pilot scheme of its digital currency by October 1, 2021. Apparently, the CBN has been carrying out research on CBDC’s since 2017, and might conduct a proof of concept before the end of this year [11]. 

With the current pressures piling up in favour of digital assets, there is no time like now to take the opportunity and discover more about the industry. 

Learn more about the benefits of blockchain solutions and how to build a digital asset exchange by exploring our blog and subscribing to not miss any news.

Our range of clients include the international digital asset exchange, TradeFada. Together, we explored the rise of cryptocurrency in Africa in a webinar, which you can view here. 

 

 

 

 

References

[1] Chainalysis (2021). The Chainalysis 2021 Geography of Cryptocurrency Report. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index.

[2] Buchholz, Katharina, and Felix Richter. “Infographic: How Common Is Crypto?” Statista Infographics, 17 Mar. 2021, https://www.statista.com/chart/18345/crypto-currency-adoption/.

[3] https://tradingeconomics.com/nigeria/inflation-cpi.

[4] Akinwotu, Emmanuel. “Out of Control and Rising: Why Bitcoin Has Nigeria’s Government in a Panic.” The Guardian, Guardian News and Media, 31 July 2021, https://www.theguardian.com/technology/2021/jul/31/out-of-control-and-rising-why-bitcoin-has-nigerias-government-in-a-panic.

[5] https://www.cbn.gov.ng/Out/2021/CCD/Letter%20on%20Crypto.pdf.

[6] Akhtar, Tanzeel. “Nigeria’s Central BANK ORDERS Banks to Close Accounts of All Crypto Users .” CoinDesk, 5 Feb. 2021, https://www.coindesk.com/policy/2021/02/05/nigerias-central-bank-orders-banks-to-close-accounts-of-all-crypto-users/.

[7] Pechman, Marcel. “Why Is Bitcoin $86K in Nigeria ? Here’s Why the BTC Premium Is Huge in Some Countries.” Cointelegraph, 26 Feb. 2021, https://cointelegraph.com/news/why-is-bitcoin-86k-in-nigeria-here-s-why-the-btc-premium-is-huge-in-some-countries.

[8] Adesina, Olumide. “Nigerians Increasingly Using Bitcoin since CBN’s CRYPTO BAN.” Nairametrics, 21 Apr. 2021, nairametrics.com/2021/04/21/nigerians-increasingly-using-bitcoin-since-cbns-crypto-ban/

[9] Avan-Nomayo, Osato. “Bitcoin Adoption in Nigeria Soars as Central Bank Blocks Remittances in Naira.” Cointelegraph, Cointelegraph, 18 Dec. 2020, https://cointelegraph.com/news/bitcoin-adoption-in-nigeria-soars-as-central-bank-blocks-remittances-in-naira.

[10] Sinclair, Sebastian. “Nigeria’s Central Bank: We Didn’t Ban Crypto Trading .” CoinDesk , 22 Mar. 2021, https://www.coindesk.com/markets/2021/03/22/nigerias-central-bank-we-didnt-ban-crypto-trading/.

[11] Essien, Hillary. “CBN’s Digital Currency Cbdc Set for October 1.” Peoples Gazette, 23 July 2021, https://gazettengr.com/cbns-digital-currency-cbdc-set-for-october-1/.

Understanding the forces that drive digital asset adoption in heterogeneous regions throughout the world can be a complex endeavour. While the process involves high initial fixed costs and variable (constantly updating) ones, it acts as an authentication level needed before setting out to undertake any new venture in the digital asset world.

Following an overview and subsequent detailed analysis on some of the Latin American countries with the highest potential for digital asset adoption -such as Brazil, Mexico and Colombia – we turn our attention to digital asset adoption in Africa. 

Digital asset adoption landscape in Africa

The African continent provides a curious case for analyzing a number of phenomena. As the largest continent with almost 30,000,000 square kilometers (second only to Asia) and a population of approximately 1.3 billion people living in 54 countries, it naturally raises questions about the place it should be occupying at a global scale.

What makes this region interesting for digital assets from a business perspective?

The answer to this particular question – and any others that may be derived from it – lies in its realized development in relation with its potential. More specifically, Africa represents an array of untapped markets, from commodities to finance, that presents time-sensitive opportunities to those that pay close attention.

Let us limit the analysis to our interest in blockchain technology. Blockchain has the potential to fill the gaps that are plaguing African communities, most of them based on financial inclusion; this includes personal credit availability, infrastructure funding, currency stability, and more. According to the International Monetary Fund, internet penetration in sub-Saharan Africa has grown tenfold since the early 2000s, compared with a mere threefold increase in the rest of the world [1].

Still, Sub-Saharan Africa is reported to have the second highest population of unbanked adults in the world, at about 350 million people, or 17% of the global total. Citizens need new, better and more efficient ways of sending and receiving funds, as well as transacting or maintaining a stable reserve currency.

This is easily evidenced in the category distribution of main blockchain projects being developed in Africa estimated by PositiveBlockchain.io

Source: Blockchain projects in Africa by sector, according to PositiveBlockchain.io [2]

A large market opportunity is therefore present for blockchain to step in and become the main underlying financial infrastructure throughout the region.

As per this report by Smart Africa, there are a number of use cases that appear most feasible or outright needed throughout the African continent. Some of these use cases include:

• Digital payment infrastructures, including central bank digital currencies,
• Public spending and governance,
• Peer-to-peer energy trading,
• Digital claims to land ownership,
• Digital claims to education credentials,
• Tracing agricultural goods along supply chains and
• Trade facilitation.

Digital asset adoption in Africa

In a region plagued by a lack of access to financial instruments, high transaction fees [3], unemployment, inflation and more, it is but natural to understand the power that a technology such as blockchain can have. By combining cheaper and easier money transfers with access to stable currencies, alternative systems can easily compete and take market share away from fiat currencies. KamPay, a continent-long borderless DeFi solution is a clear example of the potential of blockchain in this region – with over 50 million potential users, it elevates main African digital asset uses such as commercial transactions. KamPay is also developing a suite of possible products to incentivize further adoption, such as their 50k farmer pilot program in Zimbabwe that will gain access into blockchain and provide micro lending [4].

A report by Binance showcases a surge in the number of African users on its platform. It saw an increase of 2228.21% in P2P users on the platform and 386.93% in P2P volumes across Africa [5].

Despite the range of possibilities, the advancement of blockchain in the continent is naturally related to its regulatory landscape. While some specific cases explicitly banned or prohibited digital assets, others have yet to have an official stance.

Source: Geographical overview of country-level stance on digital asset adoption (2019) [6]

Cardano to take part in African special projects

To further understand the necessity of an inclusive technology-based system, you can analyze Caradano’s involvement in the region. A conversation between Charles Hoskinson and James B. discussed the role IOHK and Cardano will have on Africa’s special projects, including digital identity and blockchain-based schooling information. Furthermore, having a verifiable ID means that “users can get a passport or driving licence, register property and access vital financial services like banking and loans.”

It seems that one of Cardano’s goals is to deliver economic identity to those currently left behind by current systems – a world’s estimate of 2.2bn unbanked [7].

Main African countries adopting digital assets

According to UsefulTips, four main African currencies have been taking the spotlight in USD denominated weekly volume transactions. These are the Nigerian Naira, South African Rand, Kenyan Shilling and Ghanaian Franc [8]. 

This assessment is in line with the 2021 Global Crypto Adoption Index, where several African countries appear in the top 20: Kenya (5), Nigeria (6), Togo (9), South Africa (16) and Tanzania (19). Some of these, among other emerging countries including Vietnam and Venezuela, rank high on their index largely because they have huge transaction volumes on peer-to-peer (P2P) platforms when adjusted for PPP per capita and internet-using population. 

Nigeria

Notwithstanding its place in world rankings on digital asset adoption, Nigerian authorities do not share its citizen enthusiasm. The Central Bank of Nigeria (CBN) recently directed banks to stop offering services to cryptocurrency providers.

Last February, the CBN issued a circular prohibiting banks and financial institutions from facilitating payments for cryptocurrency exchanges. This followed a trend of governments worldwide pushing back on the use of cryptocurrencies, with United States Federal Reserve Chairman, Jerome Powell [9]. 

Kenya

So, what makes Kenya the right place for blockchain technology?

Firstly, Kenya is already an innovation hub in Africa. Connectivity, infrastructure, high literacy rate, and other high-achieving status on distinct categories evidence that Kenya is well-developed and a natural place to start. Moreover, Kenya has already benefited from the adoption of M-PESA – an electronic mobile money service that allows you to store, send and receive money on your mobile phone, which was key to solving the problem of remittance in several African countries. After M-PESA, the demand for other technology solutions in Kenya started to rise. 

Conclusion

Stay tuned as we develop upon some of the most interesting cases in the African digital asset market, reviewing both adoption and specific regulatory landscapes. We will further take a look at digital asset adoption in Nigeria, Kenya and South Africa. 

 

 

 

 

References

[1] Baker McKenzie (2019). Blockchain and Cryptocurrency in Africa.  Stolp J., Perumall A., Selfe E. Available at https://www.bakermckenzie.com/-/media/files/insight/publications/2019/02/report_blockchainandcryptocurrencyreg_feb2019.pdf

[2]  Smart Africa Secretariat (2020). BLOCKCHAIN IN AFRICA: OPPORTUNITIES AND CHALLENGES FOR THE NEXT DECADE. How African countries can take advantage of distributed ledger technologies as they are maturing. Available at: https://www.giz.de/expertise/downloads/Blockchain%20in%20Africa.pdf

[3] Based on a report from the World Bank, remittances worth less than $200 to sub-Saharan countries cost an average of about 9% compared to a global average of 6.8%

[4] Marcus, Dov. “With Crypto Adoption on the Rise across Africa, the Need for a Leading Digital Currency Grows Stronger.” KamPay, 23 Aug. 2021, www.kampay.io/post/with-crypto-adoption-on-the-rise-across-africa-the-need-for-a-leading-digital-currency-grows-stronger

[5] Nwokoma, Chimgozirim. “Despite Clampdowns on Cryptocurrency Usage, African P2P Users on Binance Grow by over 2000%.” Techpoint Africa, 16 May 2021, techpoint.africa/2021/05/17/binance-users-grow/

[6] Devermont, Judd, and Marielle Harris. “Digital Africa: Leveling up through Governance and Trade.” Digital Africa: Leveling Up through Governance and Trade | Center for Strategic and International Studies, 8 Sept. 2021, www.csis.org/analysis/digital-africa-leveling-through-governance-and-trade

[7] “Africa’s Huge Potential Could Be the Key to Mass Adoption for Crypto.” CityAM, 29 Apr. 2021, www.cityam.com/africas-huge-potential-could-be-the-key-to-mass-adoption-for-crypto/

[8] https://www.usefultulips.org/combined_Sub%20Saharan%20Africa_Page.html

[9] Adesina, Olumide. “Nigerians Increasingly Using Bitcoin since CBN’s CRYPTO BAN.” Nairametrics, 21 Apr. 2021, nairametrics.com/2021/04/21/nigerians-increasingly-using-bitcoin-since-cbns-crypto-ban/

Sources

Chainalysis (2021). The Chainalysis 2021 Geography of Cryptocurrency Report. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-crypto-adoption-index.

Chainalysis (2021). The Chainalysis 2021 Global DeFi Adoption Index. Chainalysis. Available at https://blog.chainalysis.com/reports/2021-global-defi-adoption-index.

Bilotta, Nicola, and Fabrizio Botti. The (Near) Future of Central Bank Digital Currencies: Risks and Opportunities for the Global Economy and Society. Peter Lang International Academic Publishers, 2021.

Kingsley, Alo. “Exploring the Landscape of Crypto Regulations in Sub-Saharan Africa.” Cointelegraph, Cointelegraph, 19 Oct. 2020, cointelegraph.com/news/exploring-the-landscape-of-crypto-regulations-in-sub-saharan-africa.