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Monday, April 22, 2024

Why is Crypto Adoption Growing in Africa?

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Africa is going through an economic revolution never seen before. Interestingly, the process has nothing to do with outdated economic policies or commercial banks-enabled transactions but virutual currency adoption. Africa has already adopted mobile money like MPesa; experts predict that the market is ripe for another wide adoption of crypto.

Reuters in September 2020 reported that cryptocurrency transfers reached a peak of USD 316 million last June. Three countries that account for most of the transactions are Nigeria, South Africa, and Kenya. What is unique is crypto for commercial transactions, unlike other parts of the world, where cryptocurrencies are used mainly for financial trading.

Let’s find out why Africa is becoming a fertile ground for virtual currencies.

Reasons for Growth

There are several factors at play in fueling the crypto growth in Africa.

  1. Growth in remittances:

A big part of income for many African countries is remittances from diaspora abroad. According to World Bank, remittance flows to sub-Saharan Africa for 2019 were close to USD 48 billion. Nigeria received almost half of the total remittances sent to this region, USD 23.8 billion.

The World Bank report also states that it is costlier to send money in sub-Saharan Africa than most other regions. On average, a sender occurs an 8.9% cost to send money to their home country. On the other hand, the global average for the same stands at 6.8%.

Many Nigerians are choosing to use cryptocurrency to send money across borders over Naira. Instead of sending money via banks, they transfer money through bitcoin remittance company. Sending remittances through these platforms bear almost no cost or much cheaper than banks. It helps people to avoid bank fees and currency conversion charges.

To give you a snapshot of the wide adoption of virtual currencies, look at the number of transfers from Jan to June 2020.

Month 2020 Total Volume in Millions Estimated Number of Transfers 
Jan 154.5 306k
Feb 147 305k
March 165.2 364k
April 202.6 509k
May 283.5 585k
June 316.1 601k

Source: The Reuters

Note: Total value of bitcoin transfers under USD 10000.

  1. Currency Devaluations in Africa

In the last decade or so, many African countries have gone into an economic tantrum with skyrocketing inflation and devaluation of national currencies.

For instance, the World Bank reported that South Sudan’s inflation rate was roughly 102% between 2016 and 2017. Other countries facing higher inflation & currency devaluations included Nigeria, Zambia, Ghana, Kenya, Mozambique, and Zimbabwe. It shouldn’t be surprising to find out some of the biggest crypto economies are also these countries. The primary drivers of the African bitcoin economy are Ghana, Kenya, Nigeria, South Africa, and Botswana.

Just five years back, when Zimbabwe was facing hyperinflation, some young Zimbabweans turned to Bitcoin. Similarly, many people from Nigeria, Kenya, and others joined the cryptocurrency bandwagon. They saw virtual currencies as a safer means to transact and avoid their inflated currencies or store value against USD as compared to their national currency.

The major example of this is Nigeria, where is the crypto adoption is one of the highest in the world.

According to a survey report of Statista, Nigeria ranked first, with 32% of people saying either they have used or owned the cryptocurrency.

Although Nigeria has been recovering from recession rapidly, the economic woes continue for Nigerians. The global pandemic COVID-19 further aggravated the situation. Last year, the Central Bank of Nigeria devalued Naira by 24%, prompting citizens to look for other alternative income sources. The cryptocurrency trading and use of bitcoins for transactions seemed attractive to many Nigerians. Moreover, many businesses have added crypto plugins to make phone payment options.

  1. Similarities to Mobile Money

Another major reasons why Africa has high crypto adoption is said to be the lack of banking infrastructure.

Mobile money platforms such as MPesa have helped provide banking access to millions of Kenyans in the last few years. People not having access to traditional banking systems in rural areas in Kenya use digital platforms to transact.

It is no surprise why cryptocurrency has become attractive to many Africans, who are already familiar with concept of digital money wallets, according to financial experts.

The Challenges

  1. Not a value store

Cryptocurrency is not without its challenges. Firstly, Bitcoin and others are not legal tenders in many African countries; many African central banks have clarified multiple times.

That means there is no safety valve if you lose from your crypto account. Converting local currencies into bitcoin is a complex process, often mediated by informal brokers.

Apart from being largely unregulated, cryptocurrency is very volatile in nature. Short-term investors are at risk of losing a hefty amount due to a downfall in crypto values.

For instance, the value of a bitcoin has skyrocketed since June 2020.

2019 to 2021 has been a remarkable period of growth for cryptocurrencies, especially bitcoin. The above line graph shows how one bitcoin’s value from USD 3500 has now reached close to USD 60,000. But this is half the story. Bitcoin values often plunged by 10% or more in quick succession, which can be detrimental for small investors in Africa.

Multiple factors make cryptocurrencies highly risky as a value store:

  1. Bitcoin valuation

How do you determine a value of a share? –  by looking at financial reports, balance sheets, income statements, and so on.  But how about a bitcoin? There is no actual data to wrap your head around. There are only transaction sentiments that fuel the value of a bitcoin.

  1. Utility or Usage problem

There are roughly 18.51 million Bitcoins in circulation, but only few investors hold almost 40% of the total supply. This means that a few million Bitcoin are actually available for transactions, which is relatively small compared to the global GDP, making it difficult to be used for transactions as per some experts.

Still, only a few businesses accept virtual currencies as payment.

  1. The bubble can burst

There is always a risk of rapidly rising investment bubbles eventually burst. History suggests that every volatile asset has a higher risk of losing. Compared to other forms of investments, bitcoin is a highly volatile and risky investment that is not backed by anything & driven by sentiment.

  1. Financial scams

According to Trade Forex Kenya, most of the people in Kenya, Nigeria & other African countries are interested in cryptos because they see them as a lucrative investment with high potential returns. Many Africans easily fall for scams such as MMM, that promise high returns & regular income. There has been a significant rise in number of fake crypto trading & similar scam websites that promise returns in the name of crypto & other financial investments.

Central Bank of Nigeria (CBN) issued statement that cryptocurrencies are increasingly being used for money laundering and other illegal activities.

People with no experience in blockchain technology or understanding of cryptocurrencies are at a higher risk of falling prey to crypto-scams or investing through the wrong channels. It’s easier for people with some background in technology, but a vast section of African crypto traders is attracted towards lucrative returns rather than underlying technology.

There are currently no regulators for cryptocurrency in most countries, and this poses a severe risk for ordinary investors. There is no escape route or way of getting the money back once the virtual currency crashes or there is some scam.

Regulatory Concerns

Binance Faces Probe by U.S. Money-Laundering and Tax Sleuths (Bloomberg)

Binance Holdings Ltd. is under investigation by the Justice Department and Internal Revenue Service, ensnaring the world’s biggest cryptocurrency exchange in U.S. efforts to root out illicit activity that’s thrived in the red-hot but mostly unregulated market.

As part of the inquiry, officials who probe money laundering and tax offenses have sought information from individuals with insight into Binance’s business, according to people with knowledge of the matter who asked not to be named because the probe is confidential. Led by Changpeng Zhao, a charismatic tech executive who relishes promoting tokens on Twitter and in media interviews, Binance has leap-frogged rivals since he co-founded it in 2017.

The firm, like the industry it operates in, has succeeded largely outside the scope of government oversight. Binance is incorporated in the Cayman Islands and has an office in Singapore but says it lacks a single corporate headquarters. Chainalysis Inc., a blockchain forensics firm whose clients include U.S. federal agencies, concluded last year that among transactions that it examined, more funds tied to criminal activity flowed through Binance than any other crypto exchange.

“We take our legal obligations very seriously and engage with regulators and law enforcement in a collaborative fashion,” Binance spokeswoman Jessica Jung said in an emailed statement, while adding that the company doesn’t comment on specific matters or inquiries. “We have worked hard to build a robust compliance program that incorporates anti-money laundering principles and tools used by financial institutions to detect and address suspicious activity.”

Spokespeople for the Justice Department and IRS declined to comment.

U.S. Concerns

U.S. officials have expressed concerns that cryptocurrencies are being used to conceal illegal transactions, including theft and drug deals, and that Americans who’ve made windfalls betting on the market’s meteoric rise are evading taxes. Such worries have been a hindrance to the industry going mainstream, even as Wall Street increasingly embraces Bitcoin and other tokens amid a global investing frenzy.

Read More: How Bitcoin Is Edging Toward Financial Mainstream

This month’s cyber-attack against Colonial Pipeline Co. that’s triggered fuel shortages across the Eastern U.S. is the latest sign of what’s at stake. Colonial paid Eastern European hackers a nearly $5 million ransom in untraceable cryptocurrency within hours of the breach, Bloomberg News reported Thursday, citing two people familiar with the matter.

Bitcoin losses accelerated Thursday after Bloomberg reported the investigation into Binance.

While the Justice Department and IRS probe potential criminal violations, the specifics of what the agencies are examining couldn’t be determined, and not all inquiries lead to allegations of wrongdoing.

The officials involved include prosecutors within the Justice Department’s bank integrity unit, which probes complex cases targeting financial firms, and investigators from the U.S. Attorney’s Office in Seattle. The scrutiny by IRS agents goes back months, with their questions signaling that they’re reviewing both the conduct of Binance’s customers and its employees, another person said.

The U.S. Commodity Futures Trading Commission has also been investigating Binance over whether it permitted Americans to make illegal trades, Bloomberg reported in March. In that case, authorities have been examining whether Binance let investors buy derivatives that are linked to digital tokens. U.S. residents are barred from purchasing such products unless the firms offering them are registered with the CFTC.

Analyzing Transactions

Zhao has said Binance closely follows U.S. rules, blocks Americans from its website, and uses advanced technology to analyze transactions for signs of money laundering and other illicit activity. Last year, the firm warned that U.S. residents would have their accounts frozen if they were found to be trading, crypto trade publications have reported.

The inquiries follow a Chainalysis report on criminal transactions involving digital tokens. The firm tracked Bitcoin worth $2.8 billion that it suspects crooks moved on to trading platforms in 2019. Chainalysis determined that roughly 27%, or $756 million, wound up on Binance. Binance responded by saying it adheres to all anti-money laundering regulations in the jurisdictions in which it operates and works with partners like Chainalysis to improve its systems.

In the U.S., authorities have been cracking down on exchanges for flouting laws that are meant to prevent financial crimes, with officials citing the platforms use by terrorists and hackers. Tax violations have also been a priority, with the government recently winning a court order as it seeks to unmask U.S. clients of Kraken, a San Francisco-based exchange.

Read More: Crypto’s Anonymity Has Regulators Circling After Colonial Hack

In October, federal prosecutors in Manhattan announced charges against the founders of Seychelles-based BitMEX, accusing them of violating the Bank Secrecy Act by permitting thousands of U.S. customers to trade while publicly claiming to restrict their access. The claims included failing to register as a futures merchant with the CFTC and not having adequate anti-money laundering controls. Three of the BitMex officials pleaded not guilty and a trial has been scheduled for March 2022. One remains at large.

Washington Presence

With the U.S. circling, Binance has stepped up its presence in Washington and retained a former Treasury Department official and top white-collar defense lawyers to represent it in legal cases and matters being reviewed by regulators. In March, the firm tapped former U.S. Senator Max Baucus, a Montana Democrat, to advise it on policy and government relations.

Read More: Crypto Lobby Forms to Shake Reputation as Criminals’ Currency

In September 2019, Binance partnered with a firm called BAM Trading Services Inc., which launched Binance.US to cater to American clients. Brian Brooks, who was a top banking regulator when he led the Office of the Comptroller of the Currency during the Trump administration, became chief executive officer of Binance.US this month.

Amid the hiring blitz, the company has popped up in U.S. cases tied to criminal activity. In February, two Florida men were charged with running an online fentanyl trafficking operation, with one of them accused of depositing the proceeds in a Binance account. That same month, the Justice Department sought the forfeiture of cryptocurrency worth $450,000 traced from ransomware attacks that hit several U.S. companies to a Binance account held by a 20-year-old Ukrainian national. The government didn’t accuse Binance of wrongdoing in either enforcement action.

Disguising Locations

Along with the CFTC, the Justice Department is likely to examine steps that Binance has taken to keep U.S. residents off its exchange. One person familiar with Binance’s operations said that prior to the establishment of Binance.US, Americans were advised to use a virtual proxy network, or VPN, to disguise their locations when seeking to access the exchange.

Jung, the Binance spokeswoman, said the exchange has never encouraged U.S. residents to use VPNs to get around its rules, as doing so would be something “that has always been contrary to our company’s principles.” In January, Zhao tweeted that Binance’s security systems block Americans even if they try to connect through one of the networks.

“We have implemented strong access controls that have been tested via external audit and are under continuous review and evaluation by Binance to ensure that the appropriate restrictions are in place and are effective,” Jung said.

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