Soona Amhaz, general partner at Volt Capital, and Yele Bademosi, founder of Microtraction, explain why they believe Africa is poised to become a hub for crypto development. They give some interesting stats on how crypto is currently used and traded on the continent, plus talk about how these factors interplay with the region’s unique demographics and the status of some of the continent’s fiat currencies to create what could be a unique environment for increased crypto activity. They end with what they think crypto entrepreneurs should be working on to help further that development.
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Soona Amhaz: https://twitter.com/soonaorlater
Yele Bademosi: https://twitter.com/YeleBademosi
When you think of crypto development and entrepreneurship, you may think of activity in the US, Europe or Asia. But it’s actually Africa that has shown some of the strongest organic demand for Bitcoin.
In 2018, the top three countries with the most relative interest searching for Bitcoin were South Africa, Ghana, and Nigeria, respectively. By 2019 Nigeria had risen to the 1st place with South Africa and Ghana also rounding out the top 5.
Unlike the West and Asia where users access cryptocurrencies via exchanges, there is a significant and rapidly growing amount of activity via peer-to-peer trades in Africa. Users in Africa are sending and receiving digital assets the way Satoshi envisioned: peer to peer.
Not only are Africans using cryptocurrencies in their intended manner, but the continent also has several other characteristics that make it a prime spot to become the next major hub for crypto development.
First, numerous economies on the continent are seeing rampant hyperinflation, making cryptocurrencies an attractive option in these countries. Second, there’s already a lot of fintech activity in Africa, so much of the financial system already works on digital rails rather than the legacy banking system. And finally, the population is younger and more digitally native than elsewhere, making them a natural fit for the adoption of crypto assets. That’s why we strongly urge crypto investors and entrepreneurs to look at the opportunities on this continent of 1.2 billion people to start investing in and developing with and for them.
Failing Fiat Currencies
Stears Business is a thoughtful business publication based in Lagos, Nigeria that covers Nigerian finance, economics, and development. One newsletter they sent out was endearingly titled: Why Earning Naira (₦) Sucks. The article never mentions cryptocurrency or bitcoin, but some of their points sound familiar. Just gleaning a few thoughts from the article we learn:
- About 30 or so years ago, ₦5,000 used to get you a new Volkswagen Beetle with a good sum left over. Today it’s equivalent to about $13.80. This is the Cantillon effect on steroids. For those who aren’t familiar with the concept, the Cantillon Effect is observed when new supply of money is printed and circulated in the economy. For example, in the US, those who are the first to receive new dollars (which are usually banks or government) benefit from the fresh supply as they use it in an economy where prices are already still set by the existing supply of money. By the time the new supply makes its way to the hands of the middle class worker, prices have been adjusted to account for inflation. What this means is that the worker’s purchasing power is shot. And it explains why the banking sector and the government, as the first recipients, often appear insulated from the recession.
- Inflation was over 11% in Nigeria at the time the newsletter was published, meaning that the prices of goods will be at 6x their current price by 2035, if the same rate is held constant. To contextualize this, you’d have to earn six times your present salary in 15 years just to maintain your current standard of living.
- The punch line states: “For everyone else, don’t hold on to your nairas for too long, it will not be worth much in a few years.”
To be clear, this is not a country that has implemented a multiple currency system. Naira is the default method of payment in Nigeria, and here is a publication on finance warning Nigerian citizens that the most fiscally responsible thing they can do right now is get rid of it. Exchange naira for what, exactly, the team doesn’t say.
It’s important to note that the hyperinflation we see in Nigeria is not isolated to the country. It’s part of a broader trend across the continent: South Sudan’s inflation rate is the third highest in the world at 56%, with Liberia following close behind at 23%.
In Sudan, the gravity of the problem can be best observed not through the population’s eagerness to trade out of the Sudanese Pound but by the banks’ attempt to stop it, as evidenced by their restrictions on US dollar deposits.
If we look to Zimbabwe, we see the country not only has the highest rate of inflation in Africa but also holds the record for one of the worst cases of hyperinflation in history. The rampant devaluation of their currency has forced some Zimbabweans to look to alternative currencies. In an interview with Reuters, Arnold Manhizwa, who works for an IT and telecoms company in Harare, says “I have now changed all my reserves to bitcoin because that is the only way I can protect my investment…If I have $500 in the bank I won’t get it back and I will be losing value.” As the journalist who interviewed Arnold puts it, “For Zimbabweans, [bitcoin] seems to offer rare protection from the onset of hyperinflation and financial implosion.”
What Africa’s Fintech Activity Can Tell Us About Its Crypto Future
Understanding the state of African fintech today, and how it developed, is a strong indicator for crypto’s future on the continent. The macro tailwinds that catalyzed fintech growth on the continent are very similar – if not the same – to the macro tailwinds around crypto in Africa. In fact, some even consider cryptocurrencies to be the last leg of fintech. Fintech companies unbundle all the standard economic functions of banks via more streamlined digital interfaces – with one exception of course: monetary policy transmission. Cryptocurrencies like Bitcoin facilitate this separation of money from central banking. Fintech companies attempt to bridge the gap where fintech’s economic possibilities end – and where crypto’s begin – by building support for digital assets. We’ve already seen this with Square, Revolut, and Robinhood, among many others.
Fintech adoption in Africa is soaring. According to the Ernst & Young 2019 Global FinTech Adoption Index, emerging markets are leading the way in fintech adoption: the top adoption rate is in both China and India at 87%. Right after that is South Africa, at 82% adoption. This is more than Japan, France, and the USA which are at 34%, 35% and 46%, respectively.
What’s more, according to the IMF, Sub-Saharan Africa has become the global leader in mobile money transfer services, with East Africa leading in mobile money adoption and usage.
Higher internet, telecommunications, and mobile penetration, coupled with a lack of legacy financial systems, means banks and financial institutions have had to develop innovations like mobile money, chatbots, and digital bank apps to deliver financial services.
The rapid proliferation of mobile phones in a short amount of time allowed Africans to skip the landline phase of development and jump straight into the digital age. Since the market is not plagued by legacy financial infrastructure, the activation energy required to get mobile-native payment solutions integrated is much lower than in other parts of the world. Many countries in Africa have mobile usage rates that hover around 90%-93% (in context for American listeners, US mobile usage is around 96%). And the third-most common use for phones in Africa (right behind sending texts and photos) is payments. By investing in the development of vast agent networks, telcos have laid down infrastructure that serves as an onramp for mobile money to explode.
In fact, according to the Brookings Institute, “Sub-Saharan Africa leads the world in both per capita registered and active mobile money accounts…and volume of mobile money transactions…the number of mobile money accounts in Sub-Saharan Africa has now surpassed bank accounts.” Products like M-Shwari and M-Pesa lead the way in terms of mobile money innovation here. M-Pesa and M-Shwari are mobile platforms that allows users to store and transfer money through their mobile phones. M-Pesa is the market leader in mobile payment services, boasting over 25 million users.
This “self-serve” behavior around mobile payments allows a more seamless transition to internet-native solutions like crypto, which is primarily accessed via phones and desktop. In order to reach more of these users, some crypto companies are acquiring fintech mobile money platforms. For instance, a little over a year ago, Aza, an African blockchain payments company, acquired TransferZero, a mobile payments fintech platform that services over 200 countries.
Technical infrastructure is, of course, not enough to change the existing system at scale. In order to effect change, you need capital. Investors are now waking up to the fact that Africa could drive global growth over the next several decades.
Half the population is under 30 and they’re enterprising. Not only are they getting actual capital but they’re accumulating social capital as well. Today, there are over 81,000 African students studying in Chinese universities who are coming back to the continent equipped with skills, equipped with information, and new relationships.The Brookings Institute forecasts that, over the next five years, about “half of the world’s fastest-growing economies will be located [in Africa], with 20 economies expanding at an average rate of 5% or higher, faster than the 3.6% rate for the global economy.”
As populations in African countries climb, but dwindle elsewhere, capital allocators cannot afford to ignore the vibrant, burgeoning startup community on the continent. This awareness largely explains the change we’ve seen in China and US financing activity in Africa.
Last year, China committed $60 billion in aid, credit, and loans to Africa. Some of the largest investments have gone to fintech startups like OPay, which is a platform that enables users to shop and pay for services and products through their mobile or web browser, and PalmPay, which is a payments app that gives rewards for spending. In aggregate, the companies closed something to the tune of $240 million in funding from over 12 different Chinese investors including Hillhouse Capital, Source Code Capital, and IDG Capital.
Historically, the US has aligned with Africa as a foreign aid partner instead of investing in large infrastructure projects, barring a few exceptions. If we look at the last few years, though, we can see that this trend is changing. The largest investors by number of projects in Africa are the United States, France, and the United Kingdom, respectively. However, China is still the largest investor in terms of total capital.
Many young entrepreneurs are stepping up to design mobile payment solutions and getting the funding to do so. In 2019, 234 African start-ups raised $1.3 billion. Forty-one percent went to companies in Fintech, the largest single sector into which investment is funneled. This is 30 times as much than what was raised in 2012 and the trend doesn’t show any sign of slowing down soon. Given that about half of venture capital raised in Africa goes into fintech, it’s no surprise that the sector distribution of blockchain projects also mirrors the traditional startup ecosystem – with 50.3% of blockchains projects falling into the financial category.
Africa’s Fintech Landscape
If we look to the top 10 African fintech companies that have been funded in the past two years, we can see they fall squarely into a few buckets: Lending, Payments, and Point of Sale, which are programmed to execute retail transactions at a specific time and place. Payments includes remittances and is arguably the largest category with companies like Opay, Cellulant and Interswitch. When we later dig into crypto investing activity in Africa, we’ll see that some of the top funded crypto companies mirror fintech investments in that they also largely fall into the Lending and Payments category.
Why Africa Is Ripe for Crypto Disruption
Consider for a moment that the average age of the African population today is 19 years old. In 15 years, the number of working-age people joining the workforce from Africa will outnumber that of the rest of the world combined.
Why does this matter? As John Githongo, a former Kenyan journalist who investigated bribery and fraud in his home country, puts it, we now have “a young generation [of Africans] below the age of 35 realizing that, for them, secure livelihoods, health, education and security for themselves and for their children is precarious and they are willing to challenge the institutions that have led to this reality.” The desire to adopt new solutions and challenge existing institutions from at least half of the population bodes well for frontier tech like cryptocurrencies to be used and developed further.
One of the reasons for young Africans interest in cryptocurrencies, is because of its potential as a store of value. In the last three to four years, one of the mega-trends in financial habits for millennials is savings and investments apps such as Cowrywise and Piggyvest. With banks offering 0% interest rates on saving accounts, these apps have grown in popularity because they allow their users to earn anything from 10 -15% per annum in interest. They are able to do this by aggregating the savings of each individual user and using it to buy treasury bills which are usually out of the reach of millennials because of the required investment minimum, and this effectively democratizes access to this asset class.
However, because the rate of inflation in most African countries is low double digits, the effective interest rate is about 0-3% per annum. This is why digitally-native African millennials are drawn to Bitcoin — because it’s both a hedge against inflation and has outsized dollar-based return potential. We are seeing an increased uptick in the awareness level of Bitcoin. Tomiwa Lasebikan, co-founder of Buycoins, a fiat-to-crypto app for Africa told us this, “Even amongst millennials, there is increasingly a savings and investment culture…They are probably willing to take more risk than the average Westerner because they are more used to the downside anyway.”
The downside he describes is primarily due to the consistent de-valuation of African currencies against the dollar as well as weak performance of other investment opportunities. For instance, Nigeria is Africa’s largest economy and The All-Share Index, which is the S&P 500 Index of the Nigerian Stock Exchange had a negative return of 7.83% over the last 5 years. In comparison, Bitcoin during that same period has shown a return of 3,864%.
Another driver is the low transaction costs of cryptocurrencies compared to the fees in legacy systems. According to Elizabeth Rossiello, CEO and Founder, AZA Finance, “Small businesses in Africa often pay nearly 200% more than larger businesses [in transaction fees]”. The use of the US Dollar as an intermediary settlement currency results in transaction fees that can range from 3% to as high as 10% and cross-border transactions usually take three days to settle and at worst two weeks.
With small and medium businesses accounting for 90% of all businesses on the continent, this grossly impacts intra-Africa trade, evident by the fact that intra-Africa exports is only 17% of total African exports, in comparison intra-EU exports and intra-Asia exports are 68% and 60% respectively
Across the continent, access to the US Dollar is controlled centrally, becoming scarce and it’s only available to the largest companies or those who have political connections, making it very difficult for small and medium businesses to get foreign exchange needed to transact.
Bitcoin is fast becoming an alternative intermediary currency that is faster, easier to transmit and more accessible to the average small business. These transactions are typically done in a peer-to-peer manner through informal channels like WhatsApp groups with about 100 to 200 members run by trusted admins with minimal KYC. This behavior mirrors what we see in the FX market on the continent. Another unique difference is that unlike in advanced economies, peer-to-peer bitcoin marketplaces like Paxful & LocalBitcoins are more popular than simplified fiat-to-crypto mobile apps like Luno. Paxful reportedly traded $1.6B in 2019, with the Nigeria Naira being the second largest currency by trading volume and Kenya Shilling rounding out the top ten. Some popular African alternatives to Coinbase include but are not limited to Luno, Coindirect & Buycoins, a YC-backed fiat-to-crypto on-ramp.
However the number of crypto exchanges is on the rise. Our primary research tracked over 47 exchanges across Africa, with at least 15 exchanges being launched in 2018 alone. Nigeria leads the pack with 12 exchanges, followed by South Africa with 7, and Kenya, Ghana, Uganda all coming in at 3rd with 5 exchanges each. Global exchanges are also moving into the continent, Binance launched its first fiat-to-crypto exchange in Uganda in 2019 and the very first fiat currency to be added on Binance.com was the Nigerian Naira. One factor that enables entrepreneurs to build these products is the crypto-friendly regulatory landscape in Africa.
Regulatory Landscape and Project Distribution
To date, apart from Namibia and Morocco that have outrightly banned cryptocurrencies, in most countries, there is no existing regulation that encumbers the experimentation and development of crypto and blockchain projects on the continent. This has been an important factor in enabling the incredible growth in the number of blockchain or digital asset related projects. Our research found 120+ projects across the continent, showing an increase of about 373% in under 2 years, covering a broad range of sectors, from Financial Services, Agriculture, Education, Supply Chain, Energy and so many more.
Crypto Investing activity
Overall, information on investing activity for blockchain-startups in Africa is hard to come by, as it’s currently not the norm to announce investment deals. From private conversations we know that many companies have raised capital usually, between $100k to $1m, with most investments focusing on crypto-inclusion i.e. on-off ramps for crypto to fiat such as Buycoins and Bit Sika. With other companies falling into the Exchanges category – they include CoinDirect which raised a little over $1m from MakerDAO and Blockchain.com as well as VALR which raised $1.5m from Bittrex. Lastly, various companies servicing remittance corridors such as AZA (which was formerly known as BitPesa) raised $15m.
Request for Products
In addition to all of this activity, we think there’s still a lot of room for growth. The crypto community has an especially strong opportunity to do what many entrepreneurs in the space say they care about — which, in a nutshell, is to provide access to better, smarter, cheaper financial services and help individuals who need it most to achieve financial freedom — starting with Africa.
Here are some of the top products we think teams should be working on:
Cambridge Benchmark Study for 2018 Q1 to Q3, estimated that Cryptoasset Service Providers had at least 35 million ID-verified cryptoasset users and only 4%, approximately 1.4m users, are in Africa, meaning the majority of African users are using informal methods, like messaging apps, to buy and sell crypto. In order to onboard 100 million-plus new, everyday African users and drive crypto inclusion on the continent we must build applications that feel simple and familiar. That’s where fiat-onramps like Buycoins come in.
In addition to fiat onramps, white label software that can provide the technical architecture to set up a “Buycoins in every country in Africa” is a huge opportunity. This plug-and-play solution would lower the friction to set up digital asset onramps in various countries which means, instead of worrying about technical challenges, the entrepreneur can focus on customer acquisition, payment integrations, and regional regulatory compliance.
The informal economy is the part of any economy that is neither taxed nor monitored by any form of government, it’s a complex adaptive system that uses digital means to trade and exchange value on its own terms. In Africa, the informal economy is about 85% of total employment in Sub-Saharan Africa and accounts for about half of the continent’s GDP, conservatively estimated. Since the majority of Africans are currently unbanked, the informal economy is currently larger than the formal. Over time, informal economies in Africa will become more formal.
Digitization without decentralization, in the wrong hands, can lead to an imbalance and abuse of power, especially within nation states where there’s a lack of good governance and institutions are weak. To counterbalance this, we must build a parallel and open digital payment infrastructure through fiat-backed stable coins such as a Nigerian Naira issued onchain backed by another fiat stablecoin such as BUSD or USDC. These are further along the spectrum of current African fiat stablecoins such as Naira Token (NGNT) or Africa Stablecoin (ABCD).
In order for the average African to use these alternative forms of money, they would need very simple and user-friendly non-custodial wallets that make peer-to-peer payments seamless — not dissimilar to Venmo or Square Cash and will probably use threshold signature schemes that enables non-custodial wallets which don’t require a user to write down their private keys on paper.
Finally, 95% of all retail transactions on the continent are done by cash. One of the reasons why cash is still the most predominant way to transact is that it’s currently too costly in terms of transaction fees to move value digitally. For example, a large part of daily transactions in Nigeria are under N500 (equivalent of $1.38), it currently costs N52 (about 14 cents) to send money digitally, that’s a 10% tax on micro-payments. For cryptocurrency to be adopted as a daily alternative, it’s important that transaction fees are negligible and wallets have layer-2 scalability solutions like Celer and Matic, they make micro-payments of 30 cents feasible on-chain.
Our Future Outlook
There are a few macro social, economic, and regulatory trends on the continent that give Africa an edge in creating a fertile environment for the digital asset ecosystem to grow.
What this means is there’s a large opportunity here for peer to peer solutions to thrive. Investors and founders need to think carefully about the market and prioritize solutions that are relevant to the largest segment of the population. Yele and I largely believe these solutions will come in the form of digital assets and the intermediaries that best leverage them.
Buycoins founder Tomiwa agrees, stating: “I see more [African] developers being proficient in blockchain-related software development and getting better access to decentralized financial apps (for example timelocking bitcoin, saving into dollar-denominated stablecoins, earning interest by loaning crypto-assets to people all over the world).”
Interested in learning more?
If you are a developer, entrepreneur or investor who’s interested in building products or joining a startup in Africa’s vibrant ecosystem, don’t hesitate to reach out to us at firstname.lastname@example.org or email@example.com. We would love to hear from you.