How Africa will leapfrog currency
Money makes the world go around. But cold hard cash is no longer the most popular form of payment in South Africa. It’s plastic money. Debit cards are used by 84% of South Africans. Or so says the 2017 Payments Landscape Report by Sage. And just as debit cards disrupted cash, so cryptocurrencies will disrupt all of our current payment methods. I predict that they will also bypass a common African currency.
Here are a few ways that I believe Africa will leapfrog currency.
Cryptocurrencies are growing exponentially
Virtual currencies, digital currencies, internet currencies or cryptocurrencies, whatever you call them, they’re here to disrupt the financial industry. Mostly thanks to their flexibility, security features and payment anonymity. Unlike monetary currencies, cryptocurrencies have a low correlation to other assets, which make them more stable. They also operate on a decentralised platform called the blockchain, which means they can’t be controlled by a single governing body, even though private blockchain networks are being created too.
The exponential rise of FinTech has introduced innovative ways of banking, which I never could have imagined two decades ago. Cryptocurrencies can be likened to e-mail. There’s power in numbers. They become more valuable the more people use them. By October 2017 there were more than 800 kinds of cryptocurrencies with around 16 563 500 bitcoins in circulation, which is the most popular cryptocurrency.
The Bloomberg Barclays Global Aggregate Total Return Index reports that “investment returns in cryptocurrencies for 2017 year-to-date have by far outperformed traditional assets such as global stocks and bonds.” The performance of the blockchain asset class is up +374%, while the world primary equity index is at +15.7% and bonds are at +3.95%.
At this rate, I predict that by 2025 cryptocurrencies will be competing with national currencies, with widespread adoption by the public and industries. Central banks are going to have to adapt or risk being disrupted.
The case for and against African cryptocurrencies
Cryptocurrencies will allow Africa to leapfrog traditional banking systems. As Microsoft founder, Bill Gates, famously said: “Banking as a function is necessary, banks are not”. Cryptocurrencies democratise financial services and support cross-border remittance payments. This is great news for intra-African trade. Cryptocurrencies offer African countries an inflation hedge and create an asset-based economy, unlike the debt and credit-based traditional banking system.
There are no or very minimal transaction fees when using cryptocurrency, which is awesome news for Africa’s economic migrants. User’s data remains anonymous, which means your personal information can’t be linked to a transaction. And transactions can’t be manipulated by third parties, which means there are no chances of fraud. I already know of 10 Bitcoin exchanges that offer services across Africa.
On the down side, cryptocurrencies will only become less volatile once they become more widely used. Many people are still reluctant to use cryptocurrencies because they don’t understand how blockchain technologies work. There are still fears of hacking attacks and ransom requests. Certain governments worry that cryptocurrency may be used for illegal purposes.
Some cryptocurrency transactions may take up to an hour, which makes it perfect for remittance payments, but more challenging when it comes to merchant sales.
Africa’s cryptocurrencies on the rise
By July 2017, there were around 100 000 South Africans using cryptocurrency. In August 2017 the South African Reserve Bank decided against launching its own cryptocurrency. The reason? It stated the high risks involved and that it can’t guarantee that cryptocurrencies won’t be used for illegal activities, such as funding crime, terrorism or money laundering.
I predict that in the not too distant future cryptocurrencies will become a feasible payment method at all retailers. Just take a look at Takealot, one of South Africa’s largest e-commerce retailers. It already accepts payments in bitcoins, alongside other local companies like Audico, Cape Coffee Beans and RunwaySale. Even Pick n Pay ran a successful bitcoin payment trail earlier this year. These early adopters are leapfrogging ahead and won’t be disrupted by blockchain technology because they are moving with the times.
Kenya’s digital platform BitPesa is hitched to M-Pesa. It allows its 6 000-odd users to buy bitcoins using their M-Pesa wallets and to convert them to Kenyan Shillings or to receive international bitcoin remittances. All transactions carry a 3% charge, which is about half the cost of the average international transactions. BitPesa also operates in Tanzania, Uganda and Nigeria. It has already processed more than 17 000 transactions. It claims to “offer businesses the fastest and most cost-efficient way to make and receive payments in African currencies” thanks to its same-day payments. As a true example of its growing popularity, Mann Made was offered to be paid in Bitcoin by one of our Nigerian clients.
Tanzania and elsewhere
Tanzania and Zanzibar are looking to adopt bitcoin or their own cryptocurrency so tourists won’t have to pay for hotels, taxis and other travel-related services using foreign currency. This means locals won’t lose money when they exchange their hard-earned money into Tanzania Shillings and many tourists won’t have to look for forex
While in neighbouring Zimbabwe, digital wallet Bitmari is partnering with the Zimbabwe Bank of Agriculture. It has also applied for an international remittance service with the country’s reserve bank.
Meanwhile Ghana is launching an open-source cryptocurrency called Dynamic Coin. It will be tied to the US dollar, making it a safe store of value and eliminating sharp value fluctuations. It will also process transactions faster than many other cryptocurrencies making it the perfect solution for merchant sales. It’ll be scalable and inflation-proof with the possibility of an unlimited number of coins.
So should we scrap a common African currency?
Despite the African Union’s proposition for a common currency and the eagerness of many African economic communities, I foresee that Africa will sooner embrace cryptocurrencies. There are far too many restrictions and regulations that need to be adhered to among collaborating nations for a common currency. Each would need to achieve a single-digit inflation rate and a low fiscal deficit, among many other requirements. Cryptocurrencies will sooner transcend that. They will shake up the financial sector and will help propel Africa’s economies into the future.