Analysis in brief: Cryptocurrencies are at the stage that the automobile was a century ago: recognised as an important innovation that is here to stay. African governments are working to protect consumers in the digital money age, while also entering this new financial field to bring a host of benefits to their citizens.
The growing acceptance of digital currencies
They exist only as electronic impulses. A digital currency is any asset that calls itself money and is managed, stored or exchanged on digital systems, using the internet as the means of buying, selling and trading. Digital currencies are called variously ‘cryptocurrency’, ‘virtual currency’ and, when they are issued by governments, ‘Central Bank Digital Currency’ (CBDC). Some digital currencies can be used to purchase real-life goods and services. Since their introduction, always accompanied by scammers and hype, investment in cryptocurrencies has not been for the faint of heart. Governments have generally cautioned citizens against putting their money in so-called phantom currencies that are not backed by anything tangible like gold or that aren’t guaranteed by the monetary power of a government. That attitude is changing. The digital currencies market has stabilised somewhat in 2023, and their trade has become so widespread that African investors now expect to have them as an option if they choose to make some of their investment portfolios digital. Against the tide of growing demand, governments are taking their first regulatory steps. Some are getting into the cryptocurrency market themselves.
One certain thing in the uncertain world of cryptocurrency is that the days of speculating whether digital money is a fad or substantial are now passed. Cryptocurrencies are here to stay and are available for purchase by any African with access to the internet. African governments can either outlaw digital currencies entirely, which in advanced economies would trigger consumer backlashes – and in any event, prove ineffectual as buyers find numerous ways of making these investments online – or try to protect consumers against fraudsters. There is nothing governments can do to protect consumers against fluctuations in the value of virtual currencies. Like stocks, bonds, real estate and commodities, market forces and external factors cause digital money values to rise and fall. Some owners have made money through loans, called yield farming, whereby individuals function as banks by lending out their cryptocurrency and charging interest rates. Because lending money is something usually regulated by government, as yield farming grows in usage, this area will also be subject to federal rules.
Self-regulation vs government regulation
Free market advocates note that a private sector unfettered by government regulations is the most beneficial for society, with market forces determining which product and service prevails or fails. Government regulations only make the cost of doing business more expensive and hamper healthy competition needed to lower prices and improve products. However, consumer groups note that an unregulated business environment encourages environmental damage and monopolies, and because of this, the financial sector has required government oversight since the 19th century.
Some African nations are willing to give the nascent cryptocurrency industry a chance to police itself, at least initially. South Africa’s Advertising Regulatory Board has amended its Code of Advertising Practice dealing with cryptocurrency products. This is a first step in government regulation, intended to boost consumer confidence in the product while safeguarding consumers against fraud committed through misleading advertising.
There is a parallel movement by governments that is in essence “if you can’t beat them, join them.” CBDC is used by all governments that issue their own digital currencies. Nigeria’s Central Bank was the first in Africa and only the second in the world (behind the Bahamas) to issue a CBDC, called the eNaira. That was on 22 October 2021. In 2022, the International Monetary Fund (IMF) reported that Ghana and South Africa had initiated pilot projects as a stage in the rollout of their own version of a CBDC. The countries of Eswatini, Kenya, Madagascar, Mauritius, Namibia, Tanzania, Uganda and Zambia are also considering policies to enable CBDC. In May 2023, Zimbabwe introduced its own digital currency, backed by the tangible asset of gold, mined in the country itself. The Central Bank is auctioning off its gold-backed digital tokens, selling US$12 million worth of what will be regularly-scheduled auctions. Like Zimbabwe’s CBDC, Ghana’s proposed CBDC advances the concept of digital currency and fits it to the needs of local consumers. The Bank of Ghana is testing a general purpose or retail CBDC called the e-Cedi that can be used by anyone with either a digital wallet app on their smart phone or with a smart card that can be used offline.
Additional benefits give government-guaranteed digital currencies real social value
The IMF is enthusiastic about the particular form of digital currency that is the CBDC. The IMF notes that CBDC promote financial inclusion by bringing financial services to people who do not have bank accounts and cannot afford electronic money transfer systems. The fees for these transfers in Sub-Saharan Africa are very expensive, on average, 8% of the transfer amount. In remote areas without internet access where e-money transactions are not possible, digital transactions using CBDC smart cards can be used.
In their report, the IMF states, “CBDCs can be used to distribute targeted welfare payments, especially during sudden crises such as a pandemic or natural disaster. They can also facilitate cross-border transfers and payments. Faster clearance of cross-border payments would help boost trade within the region and with the rest of the world.”
What began as a craze – a get rich quick scheme that was the impetus for driving investors to buy the first cryptocurrencies – has evolved into a new payment system with real social benefits.
The critical points:
- Nigeria was Africa’s first country to get into the cryptocurrency business, followed by Zimbabwe in May 2023, while other African nations are exploring their own digital money systems
- All African countries have enacted or are researching regulations to protect cryptocurrency investors against fraud, which is endemic to new electronic monies
- The IMF is supporting the expansion of Central Bank-controlled digital currencies as a way to provide financial services to those in need