This is an excerpt from The Future of Fintech in Africa 2023 report.

Africa’s crypto market is surging, but it is still early days for the continent’s overall crypto landscape, and the region’s fundamental appetite and need for the sector lies in the underlying blockchain upon which many believe the future digital payments is being built.

Africa is one of the smallest, yet fastest-growing crypto markets

According to Chainalysis, Africa is one of the fastest-growing crypto markets in the world, but remains the smallest, with crypto transactions peaking at $20 billion per month in mid-2021.

Kenya, Nigeria, and South Africa have the highest number of users in the region. Many people use crypto assets for commercial payments, but their volatility makes them unsuitable as a store of value.

The observation has also been made by Adedeji Owonibi, founder of Nigeriabased blockchain consulting company and product studio, Convexity, who explained in an interview with Chainalysis that there aren’t big, institutionallevel traders in Sub-Saharan Africa. “The people driving the market here are retail. Nigeria has a ton of highly educated young graduates with high unemployment rates, no jobs available – crypto to them is a rescue. It’s a way to feed their family.”

In fact, Sub-Saharan Africa accounts for the smallest cryptocurrency transaction volume of any region examined by Chainalysis, with $100.6 billion in on-chain volume received between July 2021 and June 2022, which represents 2% of global activity, and 16% growth over the year prior.

Africa is embracing blockchain-based payments

Rajesh Savji Parmar, CEO and co-founder of Cloud Africa, explains that “the African financial services industry and fintechs are embracing blockchain to optimise their services by leveraging its inherent features such as immutability, decentralisation, and transparency.”

Blockchain-based platforms are being used for remittances, supply chain financing, digital identity verification, and peer-to-peer lending, and is also being employed to streamline the regulatory compliance process and enhance the security of financial transactions, Parmar adds.

Parmar also observes that African nations don’t seem to face the same challenges as nations in more developed regions because of its lack of legacy infrastructure to overcome. “Developing markets are better positioned in my opinion to benefit from these technologies because legacy is not such a historical challenge. The biggest winner in this maybe yet to come as the African Continental Free Trade Area (AfCFTA) develops.”

Steve Haley, director of market development and partnerships at the Mojaloop Foundation observes that financial services and fintech have been synonymous with payments since the launch of mobile money more than 10 years ago. Consequently, most fintechs have built their business models on competing in that space or connecting to various mobile money solutions.

“However, more and more fintechs are realising that the requirement for bilateral relationships with each mobile money provider is inefficient and crowds out smaller startups. It also puts them into unbalanced commercial relationships. Many countries, like Rwanda, are building national payments utilities that open the space for innovation,” Haley explains.

Rwanda is a unique country in the African payments space, with the government having committed to the Rwanda National Payment System (RNPS) Strategy 2018 – 2024, which aims to make Rwanda a cashless economy by 2024. During 2020 the Rwandan government issued free motor meters to 20,000 taxis in Kigali, to ensure that drivers who’d been without work due to Covid-19 were able to return to work with digital payment mechanisms. During the pandemic, the government also removed transaction fees for mobile payments, leading to a rapid surge in digital payments uptake.

The World Bank also injected $14.25 million in International Development Association (IDA) credit to support Rwanda’s response to Covid-19 pandemic during 2020. The Rwanda Covid-19 Emergency Response project aimed to harness digital solutions and data analytical tools that will improve the management and containment of the Covid-19 response.

Hannes Wessels, country head, Binance South Africa, offers the example of Binance Charity, which he notes is the first-ever blockchain-enabled transparent donation platform. Since its inception in 2018, Binance Charity has donated more than $10 million in support of projects from helping in the wake of global disasters to tackling complex social and environmental issues.

Appetite for regulated cryptocurrency use in Africa is expanding

According to a policy briefing by UNCTAD, a United Nations agency, digital currency ownership in developing countries is expanding. African nations including Kenya, South Africa and Nigeria, are showing a high proportion of cryptocurrency ownership across their populations – at 8.5%, 7.1% and 6.3% for those countries respectively.

The report warns that the benefits that cryptocurrencies may bring to some individuals and financial institutions are overshadowed by the risks and the costs they entail – particularly in developing countries. A key concern the UNCTAD cites is that of macroeconomic stability and the possibility that the use of cryptocurrency could lead to a financial instability risk.

It reads: “If prices plunge, monetary authorities may need to step in to restore financial stability. Importantly, in developing countries, the use of cryptocurrencies provides a new channel for illicit financial flows.” The report continues that crypto use could undermine the efficacy of capital controls, and, if left unchecked, could become a widespread form of payment which replaces domestic currencies – jeopardising the monetary systems of developing nations.

UNCTAD recommends ensuring comprehensive financial regulation by:

• Requiring the mandator registration of crypto-exchanges and digital wal - lets, while making the use of cryptocurrencies less attractive by charging entry fees or transaction taxes for instance;
• Banning regulated financial institutions from holding stablecoins and cryp - tocurrencies, or offering similar products ts to clients;
• Regulating decentralised finance (DeFi).

The report adds that restricting or prohibiting advertisements of cryptoexchanges and digital wallets in public and on social media, and, creating a public payments system to serve as a public good (such as a central bank digital currency), would also be important considerations for policymakers.

While UNCTAD recommends active policy management of cryptocurrency use across the region, several countries have moved to ban its use altogether. As can be seen in the IMF graphic below, around 20% of Sub-Saharan African countries have banned crypto assets.

However, banning or refusing to allow the use of crypto and other blockchain based technologies seemingly is not enough to slow uptake of crypto services in the region, particularly by retail customers.

Cloud Africa’s Parmar notes that banning or refusing to permit the use of crypto and other blockchain-based technologies has failed to slow the uptake of crypto services in Africa due to the high demand for alternative financial solutions and the potential benefits offered by these technologies. Specifically, he explains that cryptocurrencies offer faster and cheaper crossborder payments, and blockchain-based platforms provide greater financial transparency and security.

“Moreover, the decentralised nature of these technologies makes it difficult for governments to effectively ban or regulate them. For instance, companies like Paxful and other P2P platforms are thriving where parallel markets dominate. Remember, cash is still prevalent despite the boom in mobile money and surge in fintech investment in Africa. Infrastructure is still a problem that needs to be fixed,” states Parmar.

As can be seen in the Chainalysis graph below, P2P exchanges account for 6% of all cryptocurrency transaction volume in Africa, which is more than twice the share of the next-closest region.

Roadblocks in the way of investment in African blockchain and crypto

A combination of the lack of legacy financial systems and very large populations which are (for the most part) unbanked, has significantly contributed to the growth of cryptocurrencies across the African continent. Figures from the African Blockchain report for 2021 by CV VC show that African blockchain companies raised $91 million in Q1 of 2022, a 1,668% year-on-year increase from Q1 of the previous year. Furthermore, while Africa is the fastest adopting crypto continent globally, yet it has only a 0.5% share of total global blockchain venture funding, which stands at $25.2 billion.

According to Parmar, African crypto blockchain-based fintechs are attractive to investors due to the significant market potential and the high demand for alternative financial solutions across the continent. Moreover, these fintechs often operate in an environment of limited competition, providing them with a unique advantage.

He caveats, however, that crypto alone is not enough: “All PSPs are still at the behest of the regulators. So it is a hybrid approach to blockchain and fiat that will likely thrive. For investors, security in their investments especially into Africa is still an issue.”

In addition to offering Africans financial inclusion, Wessels states that cryptocurrencies have been shown to generate employment opportunities. “Furthermore, cryptocurrencies are decentralised, meaning, they are not subject to government regulation, and governments do not have access to a citizen’s acquired cryptocurrency.”