From Ban to Regulation: Crypto Adoption in Africa

A growing number of young investors are looking at cryptocurrency as a real alternative to gold, the oldest safe-haven investment in the world. In October 2020, a team of analysts at JP Morgan referred to bitcoin as a gold alternative for millennials, and findings from A CNBC Millionaire Survey found that 83 per cent of millennial millionaires own cryptocurrencies. Africa ranked third in Chainalysis' Top 20 Global Crypto Adoption Index with Kenya, Nigeria, South Africa, and Tanzania taking the lead.

A major reason for Bitcoin's widespread adoption in Africa is its ability to bridge the economic gap, fulfilling both personal and entrepreneurial needs, including remittance, e-commerce, payments, wealth preservation, and social good.  Crypto’s ability to bring financial services to anyone regardless of their socio-economic status, where they live or their financial situation is a solution for the unbanked in Africa.

Based on a recent survey by Chainalysis, Kenya ranks 12 out of 27 countries with internet users holding cryptocurrency, making Kenya's share of the market 15.8%, above the global average of 15.5% by December 2021. In fact, Kenya is set to lead the world's cryptocurrency market for the second consecutive year.

According to Finder, Bitcoin is the most popular crypto in Kenya, making up 54.7%, followed by Ethereum at 22% and Dogecoin at 19.8%. At the time Bitcoin was created, its creator, Satoshi Nakamoto, envisioned it as a way to conduct daily transactions. It was intended to solve the problems experienced when using fiat money due to their centralized nature and ensure speedy transaction processing. 

Cryptocurrency is a decentralised payment system, meaning that users can send and receive payments anywhere in the world. Crypto transactions generally do not need approval from external sources unless they are sending or receiving the currency from a regulated exchange or institution.

While  high transaction fees, brokerage fees and commissions are involved when doing business with fiat currency,  with cryptocurrency the middleman and all the extra fees are eliminated. Transactions are made directly between two parties, and with transparency in transactions, it becomes easier to track audit trails, payments and parties to a transaction. 

Another important feature of cryptocurrency blockchain is its immutability. Consequently, blockchain transactions are irreversible and cannot be altered by a third party, such as a government agency or a financial institution. 

Furthermore, digital currency cannot be physically held making it a safe alternative to hard cash. However, cryptocurrency can be stolen if hackers get access to a wallet's private key. Bitcoin, the most popular crypto, has made strides in layering security measures. Its exchange remains largely unaffected by such breaches.

Challenges facing crypto adoption

Risks of scammers, wallet hacks, limited control and general ambiguity of the Crypto space has led to government red tape. Kenya’s central bank issued an advisory in 2015 cautioning Kenyans against cryptocurrencies. It also issued a Banking Circular No 14 2015, cautioning banks not to deal in crypto companies and individuals adding that virtual currencies such as Bitcoin are not legal tender.

While these legislations may have been passed with good intentions, they inadvertently create a vacuum likely to be filled by scammers and criminals when legit crypto companies are stifled. Scammers have taken advantage of the vacuum and lack of regulation to scam unsuspecting victims, this has also led to a host of other nefarious activities. Hence the push by legitimate crypto companies for crypto regulation.

Crypto regulation as a solution

Gains in crypto were made when CBK recognised cryptocurrency as a form of property subject to capital gains tax in 2021 and the Kenya Revenue Authority (KRA) was charged with the responsibility of determining the correct amount of taxes for each cryptocurrency by the government. 

South Africa has also embraced cryptocurrency trade and investment laws, with its financial and capital markets regulators predicting an increase in activity.  The country also recognizes cryptocurrencies as assets liable for taxation, with the aim of fostering transparency and minimizing the abuse of cryptocurrencies for nefarious activities. 

In Tanzania, the government allows people to trade crypto at their own risk and discretion. The continent’s most sophisticated financial sector is in the process of being regulated by the end of 2022. This is expected to boost formal partnerships between banks and crypto companies and the development of crypto products and services.

These new regulations will protect against money laundering and the financing of terrorism by addressing customer identification and verification, customer due diligence, keeping records of clients, and monitoring and reporting suspicious and unusual activity. 

As a result of the shift towards digital currencies, some central banks formulated and implemented regulations to control the usage of cryptocurrencies. Nigeria, for instance, has launched an official digital currency called eNaira. Among the reasons that central banks are interested in launching official digital currencies is the fact that they use blockchain technology to regulate cryptocurrencies. Using blockchain, you can copy, share, and synchronize data across multiple computers, sites, countries, and organizations instantly and securely.

The World Economic Forum is developing a central bank digital currency policy toolkit that will guide central banks on how they can develop digital currencies that suit their monetary policies. These guidelines can help Kenya create its own official digital currency without compromising its monetary policy and financial stability. It would also be necessary for a central bank digital currency to coexist with, and complement, existing notes and coins.

Against the backdrop of an ever-changing global financial market, Patrick Njoroge, the CBK governor, announced plans in 2020 to enter into discussions on digital currencies with other global central banks. He intimated that the bank was working with other global regulators and financial institutions. To this end, the Central Bank issued a Press Release dated February 10, 2022, inviting public participation in the Discussion Paper on Central bank digital Currency.

The central bank could introduce revolutionary innovations by issuing digital currencies, like Nigeria. This could also spur financial inclusion in Kenya because blockchain promotes direct sharing of a network in which an individual can interact and confirm payments without involving any intermediaries. 

It is an undeniable fact that digital currencies/assets and blockchain technology will revolutionize the payments landscape in Africa and change the financial market. Early adopters will have an advantage!