Three reasons behind the remarkable growth of crypto asset use in Africa despite regulatory uncertainty

In traditional barter, mutual integrity and respect was expected of traders in different marketplaces. If the bag of rice was worth the equivalent of three goats, you would expect nothing less, and would probably feel cheated if your fellow trader tried to convince you that you should take two adult goats and a child instead. If such a dispute arises, you hope to find a trusted third party to mediate your conflict. The rise of conflicts in trade agreements gave rise to middlemen and eventually merchants in markets who could be relied upon to maintain confidence in a market set up.

We have come a long way from the age of barter, but the principles are still relevant to this day. Trust, product value and the need for intermediaries are three of these principles that provide insight into some of the reasons why the use of cryptocurrency in Africa has currently grown significantly in recent years despite regulatory uncertainty.

Regulation often lays the foundation for investor protection, which is essential to the growth of an industry. Controls and measures create a sense of confidence in the sense that investors can increase or hold their capital in a particular instrument knowing that its value will be significant in the foreseeable future. Market cycles undoubtedly shake investor confidence from time to time, confounding even the most seasoned analysts and experts, but some form of regulatory support provides some degree of certainty.

A lack of regulatory certainty against an asset class will therefore undoubtedly hinder its growth, if not completely wipe out its existence. Why does the use of cryptoassets in Africa show a deviation from this expectation?

Lower entry barriers

Conventional or established investment options that exist, from property, shares and commodities to mutual funds, have over time defined access to a sense of wealth. They have matured as reliable asset classes, with clear expectations of investment guidelines, investor protection measures and long-term value. It is possible to identify significant examples of investors whose lives changed through the well-known investment routes.

A common denominator is the capital-intensive approach investors often use to invest in property, and for example shares, where some platforms require you to be an accredited investor. Right from the registration process, which can take days to approve, and the comparison of margins on initial capital that vary from USD 10,000 – 100,000, this presents a challenge of excursions for potential investors, who may be in some form of significant debt, which earning minimum wage, or as in current economic times, simply weighed down by the impact of inflation on their purchasing power.

Conversely, with a simple seed capital of $10, a few minutes and less stringent know-your-customer or KYC requirements, that’s all it takes to start your crypto investment journey. This relatively low barrier to entry into the crypto ecosystem makes the young industry attractive, especially for young investors at the beginning of their monetization journey. Africa’s median age is 19 – a significant implication for the economic landscape, as most of it has been tailored to an older demographic.

Perceived value in the ecosystem

New things are often either rejected or embraced because of the novelty. However, the value that someone assigns to something ultimately determines its value. In the wake of the economic downturn caused by supply chain disruptions in 2020-2021 due to Covid-19, the expected job losses painted a gloomy picture of economic growth. It was then, a stark contrast, to observe a 1200% growth in the use of crypto assets between June 2020 and July 2021, according to Chainalysis.

In the face of job losses, capital preservation became a high priority for everyday investors. Where were they going to get the extra coin to keep their families safe, fed, healthy and going? Some managed to shift to other industries or alternative income opportunities; others found their gain in the crypto ecosystem. This period happened to be part of the expected four-year post-2020 Bitcoin cycleBTC
halving event.

Assuming someone invested $1,000 during the first quarter of 2020, when Bitcoin was worth around $10,000 and they stayed through the 2021 price rally where bitcoin peaked at $60,000, their initial capital would be worth between $40,000 and $60,000. compared to the price of Bitcoin in different months of 2021. A rare return on investment, this year’s price rise would certainly put one ahead of the average real estate investor in the same period.

The flip side of Bitcoin’s volatility is a grim reality, where if someone invested at a time when the market was at its peak in the cycle, only to see prices plummet within minutes or months, their security would diminish. It remains that the daily growth in new entrants to the crypto-economy speaks to its increased perceived value, despite challenges such as fraud or uncertain regulation.

Trusted intermediaries

As in the origins of bartering, crypto transactions occur in a peer-to-peer fashion. Two people can send each other money in the form of a crypto-asset or over a crypto-platform, but since there is not yet widespread acceptance among sellers of goods and services for crypto-assets globally, intermediaries are needed to bridge this gap. Given limited regulatory support, or at an extreme, outright ban, intermediaries have worked around this barrier by prioritizing the peer-to-peer model. There are a few exchange services that have made it easy to exchange crypto-assets for cash or fiat, according to traders’ preferences or demand on their platforms.

Arguably a handful compared to the number of banking services, crypto exchanges such as LocalBitcoins, Paxful and Binance have played a significant role in pushing for crypto adoption across the continent. The leading countries, Kenya, Nigeria and South Africa, have a common denominator of regulatory restrictions on the use of crypto in their jurisdictions. They are also leaders in terms of volumes traded daily, from 50 to 100 million dollars. These exchange services offer basic and specialized education on the use of cryptocurrency, and put measures in place to mitigate fraud and protect their customers.

They may well set the lead for regulation, as they are at the forefront of connecting clients to crypto-assets, educating them and collaborating with relevant stakeholders to create an enabling ecosystem to realize greater value.

Understanding crypto asset adoption in Africa remains a unique journey, but one to follow as there are valuable lessons unfolding as adoption continues to reach new levels each week. For every solution found, measure of purchasing power protected, and measure of hope for future value realized, crypto adoption will nevertheless increase on the continent.

Disclosure: I hold bitcoin and other cryptocurrencies.