Crypto beds down in Africa despite global scandals

Prices for cryptocurrency assets have remained far away from the record prices achieved during the bull run of 2021.

Bitcoin, the world’s most prominent crypto, is currently down almost 60% from its peak, while Ethereum has declined by nearly 65% from its all-time high.

Meanwhile, the high-profile arrests and prosecutions of crypto executives around the world – headlined by the ongoing court case of FTX mogul Sam Bankman-Fried – have further soured the mood this year.

Despite the generally gloomy outlook, researchers say it has been a different story in Africa, where the adoption of digital assets has continued despite price volatility. Research conducted by the global crypto consultancy firm Chainalysis has showed that “although Sub-Saharan Africa has consistently been one of the smallest cryptocurrency markets, a closer analysis reveals that crypto has penetrated key markets and become an important part of many residents’ day-to-day lives.”

According to Chainalysis, Nigeria is the world’s second largest market for digital assets in terms of grassroots adoption, with other African countries, including Kenya, Ghana, and South Africa also seeing high levels of uptake. What explains crypto’s appeal despite market volatility and sharp depreciations in asset prices?

Different role in Africa

Oluwatobi Ajayi, co-founder and CEO of crypto payments firm Ivorypay in Lagos, argues that cryptocurrencies play a different role in Africa compared to other regions. 

“They serve as a solution to many financial challenges prevalent in the region – high transaction fees for cross-border payments, limited access to traditional banking, and the ability to preserve wealth amidst fluctuating national currencies,” he says.

Proponents like Ajayi argue that crypto offers consumers the ability to transfer funds across borders quickly and cheaply compared to national, or “fiat”, currencies. 

Furthermore –  despite the volatility on crypto markets this year – it is argued that digital assets are perceived by some consumers as a more attractive option than currencies such as the Nigerian naira or Kenyan shilling, whose value has been eroded by depreciation.

Daniel Arok, the national representative for South Sudan on the Africa Blockchain Council, says that “cryptocurrencies are used more in cross-border transactions and as a store of value given that, for most African currencies, the depreciation rate is high.”

“They are also used in trade finance by small-scale businesses to make payments to their suppliers through peer-to-peer [P2P] transactions,” he adds.

Arok believes that these practical applications mean that crypto will remain an attractive option for many consumers and businesses in Africa, notwithstanding any price fluctuations.

Burden of scandal

Still, there are major challenges. Arok tells African Business that the international prominence of crypto-related scandals has increased the levels of scepticism towards digital assets. In October, the trial of crypto mogul Sam Bankman-Fried began in New York on charges of wire fraud relating to the collapse of his crypto exchange FTX in November 2022.

“The collapse of FTX, for example, massively impacted Africa’s cryptocurrency and fintech ecosystem,” Arok says.

However, Arok says that educational outreach programmes and demonstrations are helping to provide a counter-narrative.

“A lot of scams have been done in the name of crypto in Africa – people have therefore been sceptical of crypto in Africa, and this was heightened by the controversies. But this is being solved through crypto and blockchain grassroots education initiatives.”

The result is also being seen in the adoption of crypto assets that are considered less volatile.

The Chainalysis report notes that some market participants in Africa “have turned away from Bitcoin and towards stablecoins of late, as these generally see less price volatility than Bitcoin, whose price is well off all-time highs.”

Stablecoins are a form of digital asset which purport to be backed by underlying assets – for example, some advertise themselves as being backed 1:1 by US dollar reserves and are therefore designed to maintain a peg with the greenback. In August, US financial technology giant PayPal launched a US dollar-backed stablecoin known as PayPal USD, which it said is “100% backed by U.S. dollar deposits, short-term U.S. Treasuries and similar cash equivalents”.

Ajayi says that stablecoins are seen by some as a proxy for holding the US dollar and are attractive for this reason.

“Stablecoins are increasingly viewed as a hedge against currency depreciation and inflation because they offer a more stable store of value and medium of exchange for both individuals and businesses,” he says.

Given some stablecoins are linked to the US dollar, “they help preserve the value of people’s money without being subject to the same inflationary pressures as local currencies,” he argues.

He also notes that in countries with scarce foreign reserves and a shortage of actual US dollars, including Nigeria, “foreign exchange scarcity and restrictions also play a major role in crypto adoption.”

“People are constantly trying to find dollars to facilitate international transactions, and this can be difficult – in these situations, stablecoins can become more attractive,” Ajayi says.

Arok similarly notes that stablecoin adoption is on the rise for these reasons, with many consumers seeking to “diversify away from Bitcoin”. He highlights that “the pan-African exchange Yellow Card has overseen $1.7bn worth of transactions, mainly through stablecoins, while P2P platforms such as Binance have also seen a rise in stablecoin transactions.”

Regulation on the horizon

The continued uptake of digital assets is likely to prompt regulators across the continent to think more carefully about how the nascent industry should be managed.

“Africa is bracing itself for stricter regulation as governments are starting to take notice of this emerging technology and how it will disrupt traditional financial systems,” says David Otieno, lead blockchain researcher at Chaintum Research in Nairobi.

“Government legislation, such as the proposed Digital Assets Tax (DAT) in the Finance Act in Kenya, and progressive regulatory proposals in Namibia and Mauritius, have legitimised and authenticated digital assets, encouraging more people to adopt them. However, most African governments are not aware of how to go about it.”

To overcome this, Otieno believes that Africa requires “conversations and collaborations between the lawmakers and the blockchain tech stakeholders”. In his opinion, such discussions could help to ensure legislation supports the development of local crypto industries while allowing governments to protect consumers effectively.

Regardless of the regulatory developments that may or may not be in store, for now the trajectory of crypto adoption in Africa is on the up. While the turbulence of the last 12 months has proved that crypto use is not risk-free, Ajayi believes that “the adoption trend of cryptocurrencies will remain strong” for the simple reason that the traditional finance system is far from perfect itself.