Revolutionising Intra-African Trade through Cryptocurrencies.
It is widely agreed that for a continent to fully achieve its potential in human and societal
development, reduce inequalities and improve standard of living, trade is an important sector
that must be developed, improved and maintained. Africa has numerous potentials in terms
of population and natural resources, but according to the World Bank, 39 of the 50 countries
with the lowest GDP per capita are located in Africa.
Intra-African trade is essential in addressing impoverishment in the continent. Unfortunately,
trade between African countries is still very low when compared to the levels in other
continents such as Europe and Asia. This can be attributed to barriers including protectionist
trade policies, infrastructure deficits, lack of efficient cross-boundary payment systems, and
political instability.
There is a straight line between trade development and poverty reduction. This link has been
recognised by African governments, and the African Union (AU), as they have taken crucial
steps to address the inefficiency of trade in the continent. Here comes the African
Continental Free Trade Agreement (AfCFTA), poised to remove the obstacles of trade by
creating a synergised free trade system in the continent. This means goods from
South-Sudan can easily move to Madagascar, and vice versa, with little or no extra
expenses due to tariffs. According to estimates, the AfCFTA has the potential to increase
intra-Africa trade by 52.3 percent.
AfCFTA is only the first point of call to promote trade, which is still inhibited by issues such
as absence of cross-boundary payment schemes, and lack of infrastructure. Currently, the
majority of cross-border transactions are settled in foreign currencies, which creates barriers
for small and medium sized enterprises (SMEs). Cross-boundary transactions often involve
high transaction costs, lengthy processing times, and increased risk of fraud. This
inefficiency makes it difficult for businesses to operate and trade effectively, particularly for
SMEs with limited resources.
The African Export-Import Bank (Afrexim) in collaboration with the AfCFTA Secretariat
initiated the Pan African Payment Settlement System (PAPSS) to facilitate cross-border
transactions. PAPSS is a legitimate attempt to solve a spectrum of the challenges of
intra-african trade. However, the system is also rife with potential challenges as well; for
example it relies on the discretion of the central banks of the participating countries to decide
on which businesses or individuals should partake in the payment system. Also, not all
central banks may have the necessary infrastructure, resources or technical capabilities to
support PAPSS.
This writer suggests an alternative solution to this particular challenge; cryptocurrencies.
Sub-Saharan Africa, which has a population of around 350 million adults has the
second-highest number of unbanked individuals globally.The absence of formal financial
services, including banking and credit, poses a significant challenge to intra-African trade as
it limits access to financial resources and inhibits businesses' growth. The unbanked
population is unable to participate fully in economic activities, and this tends to hinder the
growth of trade and commerce. Conversely, there has been an increase in mobile phone
adoption in the continent, which means the mobile economy can proffer a more accessible
solution to cross-border trade.
Since the inception of cryptocurrencies in 2009, Africa has seen a significant increase in its
use with multiple functions. Paxful, a peer-to-peer exchange platform, recorded over $400
million dollars worth of bitcoin transactions in just the first quarter of 2022 and a new report
indicates African blockchain firms raised over $474 million also. With the rise of mobile
technology, increasing internet access and digital inclusion in Africa, cryptocurrencies have
become a more viable and convenient option for transactions across the continent. One of
the main drivers of this growth has been the need for more efficient and cost-effective
cross-border payments. Cryptocurrencies offer a faster and cheaper alternative for
remittances and cross-border transactions, as they are decentralised and do not rely on
legacy financial systems.
With cryptocurrencies, individuals and businesses can access financial services that were
previously unavailable, without the need for a traditional bank account. Bitcoin communities
such as Bitcoin Ekasi in South Africa are an evidence of this, as the community pays
students who engage in their educational activities, and are not yet old enough to own bank
accounts, through bitcoin. Secondly, cryptocurrencies reduce transaction costs in
international trade. Traditional methods of international payment involve several
intermediaries, which leads to high transaction fees and lengthy processing times. With
cryptocurrencies, transactions can be completed quickly and securely without the need for
intermediaries. This will reduce the cost of cross-border trade, making it more accessible to
SMEs in Africa. Payments are made directly from one party to another, without the need for
banks but through exchange/payment platforms such as Luno, or Machankura (which
operates on feature phones).
Cryptocurrencies are also based on blockchains that provide transparent and secure ways to
record transactions, which will help to reduce border corruption and increase trust in
cross-border trade. The question arises consequently, do African countries have the
infrastructure to facilitate these decentralised currencies? The answer is, these technologies
are already being used. The commercial sector in Africa constitutes a significant portion of
economic activity, and has seen an up-shoot of use of digital payment services. However,
with the advent of cryptocurrencies, there has been a growing shift in the way businesses in
Africa operate, with examples such as SureRemit, which uses crypto to facilitate payments
and remittance. They have a network of over 1,000 merchants and partners, including
Jumia, the e-commerce company, to facilitate payment, without bank accounts. Also, Binkabi
is a supply-chain trading and financing platform for farm commodities, allowing
produce-related transactions to take place via smart contracts on the blockchain, making
trade of agricultural produce a lot more efficient.
However, there are also potential downsides to the use of cryptocurrencies for trade in
Africa. Firstly, the volatility of cryptocurrencies could pose a risk to African economies, as
they are subject to significant fluctuations in value. This can have negative implications for
African countries that rely heavily on exports, as in the event of a sudden drop in the value,
these countries can experience significant economic losses. Secondly, there are concerns
around the regulation of cryptocurrencies in African states. Most African countries do not
have efficient regulatory frameworks to manage cryptocurrencies, which sets the bedrock for
potential issues around money laundering and lack of consumer protection. It is therefore
important for African countries to develop effective regulatory frameworks to mitigate these
risks. Zambia is settling an example with her test-run digital currency regulation, to properly
regulate the cryptocurrency space. The AU can follow the lead of the European Union which
just accented to its innovative crypto regulation - the Markets in Crypto Assets regulation,
and pass such regulations for the recognition and regulation of cryptocurrencies, premised
on the AfCFTA.
Despite the potential challenges, cryptocurrencies can foster and improve free trade in
Africa, although there are nuances that must be considered to ensure that the benefits are
maximised and the risks are mitigated. AfCFTA cannot work in a vacuum, African countries
ought to work towards engaging in innovative and less costly means to support and leap-frog
the continent to achieve the Africa of our dreams. African states should develop effective
regulatory frameworks for cryptocurrencies, while also exploring opportunities to use the
technology to enhance financial inclusion and reduce transaction costs.