29.11.2021

Cryptocurrency in Africa: Why is the African Crypto Market the Most Undervalued?

African countries have huge potential for the adoption and distribution of cryptocurrencies . The region now accounts for just 2% of all crypto transactions in the world, but the total volume of crypto transactions has grown by 1200% over the past year, according to a recent Chainalysis report.

In Africa, most people do not have access to traditional financial services, and remittances are the most expensive in the world. As a result, in many countries of the continent, the popularity of digital currencies is growing for international and peer-to-peer transfers , as well as as a tool to fight inflation. All this creates the preconditions for the massive adoption of cryptocurrencies by African countries.

We figured out how the African crypto market is developing, what problems it faces and what its prospects are.

Crypto market volume in Africa

Africa is one of the fastest growing crypto markets in the world. From July 2020 to June 2021, residents of the continent transferred $ 105.6 billion in cryptocurrencies, which is 1200% more than a year earlier.

These are the  data of the  analytical company Chainalysis, which published them as a preview to its annual Geography of Cryptocurrency Report, which assesses the level of distribution of cryptocurrencies in the world (the report itself will be released later, at the end of September). Such high growth rates are on average 50% higher than in other regions.

The region also has one of the highest rates of mass adoption of cryptocurrencies. Thus, Kenya, Nigeria, South Africa and Tanzania are in the top 20 countries   of the Chainalysis Global Cryptocurrency Adoption Index, ranking 5th, 6th, 16th and 19th, respectively.

At the same time, South African Republic is the absolute leader in terms of the number of currency holders and market volume. So, according to the results of a study conducted by another research firm KLA, up to 47% of adults in South Africa are holders of cryptocurrencies, and a third plan to invest in them in the future. But if we take into account the size of the country’s GDP and its population, then Kenya and Nigeria are outperforming.

 Cryptocurrency adoption rates by country according  to the Chainalysis Global Cryptocurrency Adoption Index.

Reasons for the growth of the African crypto market

Let’s highlight the main drivers of the sharp growth of the African crypto market.

  1. Low base effect.  A year ago, the total volume of crypto transactions was only $ 8 billion. Although Africa’s share in the global crypto market remained minimal, its initially low starting indicator allows it to grow rapidly from year to year.
  2. Lack of access to banking infrastructure.  Most Africans do not have access to the banking system, and the banking infrastructure itself is underdeveloped. As a result, people are forced to use electronic transfer services like PayPal or various p2p platforms, for example, the Kenyan mobile payment platform MPesa, which operates throughout Africa. For ordinary residents of the region, cryptocurrencies are similar to electronic transfers they already know.
  3. The popularity of p2p transfers. Africa is the leader in terms of the share of transactions accounted for by transfers between ordinary users within the region: 7% against 5.5% on average worldwide. These transfers account for up to 96% of all transactions on the continent, most of which are transfers up to $ 1,000. This explains why so many African countries are included in the Chainalysis Index: smaller transfers mean more widespread adoption among ordinary users.

Share of the volume of transactions depending on the size of the transfer: Africa and the rest of the world (large institutions, institutions, professionals, large retail, small retail).
Back in 2020, the most popular platform for transfers was the Binance crypto exchange . But in the past two years, governments in some countries, such as Zimbabwe, Nigeria and Kenya, have made it difficult for customers to send money to cryptocurrency companies from their bank accounts.

This has led to an increase in the popularity of p2p platforms that are not related to the storage of cryptocurrencies and allow customers to exchange cash for cryptocurrency among themselves.

The most popular exchangers are international LocalBitcoins and Paxful , as well as Kenyan Mpesa and Pesalink. The first two accounted for 1.2% of all crypto transactions in Africa, and 2.6% of the region’s operations in bitcoin. Over the past year, Paxful’s audience has grown by 57% in Nigeria and 300% in Kenya.

In June, the Ray Yousef, CEO Paxful, in comments to Coindesk  noted that Africa is in the lead in the global implementation cryptocurrency. Nigeria is by far Paxful’s largest market, with approximately 1.5 million users and $ 1.5 billion in trade. Yousef expects the market to grow sharply in the coming years in Cameroon, Ethiopia, Kenya and Ghana.

In terms of local exchanges , Mpesa’s monthly transfers are up 55% year-over-year, peaking at $ 316 million this June.

The share of p2p transfers in the total volume of transactions by region from July 2020 to June 2021.

The Chainalysis report also emphasized that the region has a high level of informal p2p trade without the help of services – that is, directly through WhatsApp and Telegram. Millions of dollars worth of deals go through them. Therefore, the real volumes of p2p transfers should be even higher than the stated ones.

Growth in monthly crypto payments in Africa from April 2019 to June 2021: total transaction volume below $ 1000, total received transfers below $ 1000.

The popularity of cryptocurrencies for international transfers.   Africa is the most expensive region for international transfers. So, with $ 100, you will have to pay an average of $ 8.9 in commissions (around the world, the average commission is 6.8%.). Considering that the volume of international transfers in the region exceeds $ 48 billion a year, it is easy to calculate that in this case we are talking about several billion dollars that residents of this region spend on commissions. It is not surprising that in these cases people turn to cryptocurrencies – after all, many of them allow you to transfer funds by paying only a few cents.

The growing popularity of cryptocurrencies for foreign transfers is also facilitated by the actions of the authorities of some countries, which have introduced restrictions on the amount of money for international transfers. For example, in Nigeria, some banks limit customers to sending as little as $ 500 per transfer.

At the same time, a significant part of international transfers, primarily with East Asian countries, is commercial. These are deals between Asian exporters and African firms purchasing goods for resale. It is cheaper and easier for local companies to use cryptocurrencies for settlements than to officially conduct a transaction through a bank: transactions with digital assets are faster and more profitable, plus they do not need supporting documents. Moreover, some banks prohibit their business clients from transferring money to China. In the past, entrepreneurs bought US dollars on the black market and smuggled them into China. With cryptocurrency, everything has become much easier.

It is not only Africans who transfer money to East Asia, but also the Chinese themselves: many of them do business on the continent and use cryptocurrencies to send funds home. Local Chinese also often set up mining rigs in the region – many parts of Africa have cheap hydroelectric power.

Fighting inflation.  Many Africans are turning to cryptocurrencies to preserve their savings amid high inflation and economic crises. So, the growth of Paxful users in Nigeria last year accelerated precisely because of the sharp devaluation of the national currency. Residents of South Africa, Algeria, Ethiopia, Ghana, Zambia, Kenya, Mozambique, Zimbabwe, and South Sudan also suffer from high inflation. For them, the volatility of cryptocurrencies is not so terrible – the national currency of Nigeria, naira, has lost over 25% over the past year. As a result, about a third of the country’s residents used or owned cryptocurrency.

It is noteworthy that Nigerian youth and the conditional middle class prefer to insure their savings through the purchase of stablecoins , while wealthy people buy more volatile coins for this purpose, primarily bitcoin .

Comparison of the p2p trade volumes of the Nigerian naira and the exchange rate of the naira to the US dollar: the more the national currency falls, the higher the level of p2p transfers.
Comparison of the p2p trade volumes of the Kenyan shilling and the exchange rate of the shilling to the US dollar.
Factors constraining the development of the crypto sector in the region 

Africa has all the prerequisites for the popularization of cryptocurrencies among ordinary people and businesses. But there are several factors that are hindering the development of the crypto market on the continent.

  1. Low internet coverage. Less than a quarter of Africa is covered by high-speed Internet. Mobile Internet in the region is several times more expensive than the Russian one, while it is almost non-existent outside of large cities.
  2. Lack of financial literacy. Cryptocurrencies are too complex a product for most ordinary people in Africa. After all, many of them did not have the opportunity to master at least traditional banking and financial technologies. Decentralization, private keys, seed phrases are an empty phrase, even if a bank card is still new. This significantly reduces the options for using cryptocurrencies in Africa (just limiting them to transfers) – there is no need to talk about the development of sectors like DeFi and NFT at all.
  3. High level of cryptocrime.  The Chainalysis report identifies extortion and fraud as the two main types of cryptocrimes. According to the analytical company, South Africa is one of the leaders in the transfer of illegally obtained cryptocurrencies. The largest case was the collapse in 2020 of the South African bitcoin platform Mirror Trading International (MTI) – the company defrauded 28,000 investors who entrusted it with 23,000 BTC. In April 2021, the founders of the South African project Africrypt  stole  $ 3.6 billion from investors.
Regulation of cryptocurrencies in the region

The regulation of cryptocurrencies in Africa is in its infancy. In most countries in the region, for example, Cameroon, the Central African Republic, Congo and Kenya, it simply does not exist: the authorities do not notice cryptocurrencies, and financial regulators limit themselves to statements about the dangers of investing in digital assets . But without regulation of the sector, ordinary residents have less confidence in it.

So, African countries do not have a unified approach to the regulation of cryptocurrencies. In Algeria and Morocco, the use of cryptocurrencies is legally prohibited – violators face prison terms. The authorities of Zimbabwe, Tanzania, Nigeria and Kenya have banned banks from serving crypto companies and conducting transactions related to digital assets. At the same time, Central Bank Digital Currencies (CBDC) are being developed in Nigeria, Ghana, Morocco, Tunisia, Kenya and Madagascar  .

There is no specialized cryptocurrency legislation in Nigeria. Until recently, the authorities turned a blind eye to digital assets. But in February, the central bank banned the country’s commercial banks and other financial institutions from conducting operations related to cryptocurrencies and serving crypto exchanges. As a result, many bank accounts of the bank’s clients associated with the purchase and sale of bitcoin were closed. Cryptocurrency trading and investments remain legal in Nigeria, however, Nigerians can no longer directly deposit and withdraw money from crypto exchanges. But this did not have a negative impact on the volume of crypto transactions in the country – Nigerians quickly switched to p2p platforms.

On October 1, the country’s central bank, after four years of development, will launch a pilot test of digital naira (eNaira). It is assumed that the operating model of the CBDC will be hierarchical: the regulator will issue currency to commercial banks, and they will already distribute it to businesses and retail clients. To expand access to financial services for residents of the country, CBDC will use a multi-tiered identity verification model with a transaction limit: the more information you provide, the higher the transaction limit.

ENaira’s technology partner will be Bitt Inc., a fintech company based in Barbados, which took part in the  launch of the  CBDC of the Eastern Caribbean Central Bank DCash. Since the adoption by central banks of the CBDC is seen as a government response to the proliferation of cryptocurrencies, there are concerns that crypto regulation in Nigeria will soon tighten significantly.

South Africa is the region’s leader in crypto regulation. In June 2021, the country passed legislation recognizing digital currencies as financial assets. It obliges crypto exchanges to register with the regulator, comply with KYC / AML regulations , identify users and report their suspicious transactions.

Africa is the most underrated crypto market

The African crypto market may seem insignificant: it is small, it does not have innovative projects that set the vector for the development of the industry; for local residents, cryptocurrencies are not a very clear and popular financial instrument.

But this is where digital assets can become much more in demand than in the West, Asia or Latin America. Most local residents did not have time to get used to the traditional banking system; it will be easier for them to step over to new financial technologies, including cryptocurrencies.

Under favorable conditions, African countries can become leaders in the growth rate of the crypto sector, and potentially in the adoption of digital currencies among their population.

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