The Future of Cryptocurrency – Need, Innovation and Regulation

By Marius Reitz, GM for Africa at Luno

Could cryptocurrency fulfil its decentralised potential in African countries and other developing nations? The experts and the numbers suggest so. While the US and other Western nations account for the majority of global cryptocurrency trading volumes, Africa is increasingly emerging as a leader in cryptocurrency adoption. Nigeria, for example, ranked second in the 2023 Chainalysis Crypto Adoption Index, with the top spot going to India – another developing nation you don’t hear much about in cryptocurrency conversations. The US ranked fourth, behind Vietnam. Africa has a history of leapfrogging technologies, where the adoption of a technology solution in a specific region bypasses older, more established ones. The mobile phone market is a prime example, as are digital agriculture and mobile money services such as M-Pesa. But can it do the same in crypto?

Crypto As an Asset Class in South Africa

Cryptocurrencies currently form a small portion of total investment capital in South Africa managed by fund managers, wealth managers and financial advisors. The recent approval by the Financial Sector Conduct Authority (FSCA) of several financial service provider licences could change this, which is one of the key issues explored in a new report by Luno. The State of Crypto in Africa report asserts that the legitimacy from the FSP licences could open the conversation with fund managers, wealth managers and financial advisors, and this could bring a fresh influx of investors into crypto.

Regulatory changes lay the foundation for greater adoption and crossover from traditional financial institutions into the crypto asset space but do not extend far enough to allow crypto’s inclusion as an underlying investment in collective investment schemes such as unit trusts and exchange traded funds. Further legislative changes are required to enable crypto products to trade on stock exchanges in a similar manner to what we have seen in the United States. 

The State of Crypto in Africa report provides a glimpse of the current state of cryptocurrency in African crypto hubs. It paints a picture of a continent primed for financial innovation and with a huge opportunity to leapfrog other regions, but it also reveals serious challenges moving forward that Africa will need work to overcome.

Opportunities and Hurdles

Africa’s hurdles are crypto’s opportunities. Kayode Babarinde, the Executive Director of the Africa Blockchain Institute, argued in the Luno report that “actual use of cryptocurrency in day-today activities such as payments is generally driven by financial exclusion, high volumes and high costs of remittances.” These are important problems to solve. “By providing a secure platform for financial transactions, decentralised finance applications can extend services to the unbanked and underbanked populations, fostering economic growth and stability,” Babarinde explained.

Philip Adiamah of Chainalysis agreed, noting that “while residents of wealthier nations may buy and sell more cryptocurrency than those of emerging markets, the latter has a greater day-to-day need for cryptocurrency, very much in line with the original vision for Bitcoin and the sector at large.” But does this mean that more people are adopting crypto in these regions? At the moment, the picture is mixed.

The Stellar Development Foundation (SDF) team recently travelled to Africa and met with industry builders in Ghana, Nigeria, and Kenya. According to Jason Chlipala, Chief Business Officer at the foundation, the trip revealed optimism about the technology from the people building these solutions to those using them. “Entrepreneurs said they embrace the opportunity to fail fast and keep moving. On the other side of the equation, customers keep themselves open to financial solutions to find solutions that will work better for them. Whether people realise it or not, this technology is already powering tools that they know and use,” Chlipala noted. “The utility is real.”

The Challenges

Despite the scale of the opportunity and apparent willingness to realise it, many obstacles stand in the way of widespread adoption and use. Some infrastructural challenges are unique to Africa and other developing nations, while regulatory challenges are a global phenomenon. “The absence of traditional financial infrastructure in many African countries has created a demand for alternative financial solutions such as cryptocurrency,” Babarinde explained. “On the other hand, the absence of robust internet and technological infrastructure in certain regions also hinders the widespread adoption and use of blockchain technology. Blockchain networks typically require a stable and reliable power supply to ensure continuous operation. Regions with frequent power outages may struggle to sustain the infrastructure needed for blockchain nodes.”

There’s a growing trend towards Bitcoin and stablecoins for hedging purposes, which may indicate that grassroots crypto adoption in Africa is closer to the decentralised ideals of cryptocurrencies being used for real payments when compared with other regions. So, is Africa primed to be ground zero for the use of crypto in the real world and to lead the decentralised revolution? How close are we to realising this potential? At the moment, the picture is still unclear, but a combination of need and innovation is bringing it into increasingly sharp focus. Luno’s State of Crypto in Africa report aims to track this progress to help investors understand the shifting landscape and what it means for the future of crypto.

Marius Reitz is the GM for Africa at Luno, a licensed financial services provider (FSP) and South Africa’s largest crypto investment app.

“Investing in cryptocurrency may result in the loss of capital as the value can fluctuate. This information is not intended to be nor does it constitute financial, tax, legal, investment, or other advice; nor is it a call to trade. The information is intended as general market commentary for information purposes only. Before making any decision or taking any action regarding your finances, you should consult a qualified Financial Advisor.”

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