Written by Akachi Obijiaku.
Recently, there has been a rise in discussions concerning blockchain technology and cryptocurrencies. While some have been speculative, blockchain does indeed hold the potential to facilitate innovation and connect people in developing countries who, traditionally, have had limited access to financial services.
In simplest terms, a blockchain is a distributed ledger. Its decentralized nature implies that it does not need to be managed by a central authority. This reduces transaction costs, as the need for an intermediary is eliminated, and people can engage in transparent transactions.
Africa’s Blockchain: Potential Use Cases
The instability of central authorities in various African countries is a serious problem that blockchain frameworks can tackle. Nasdaq, for example, believes Bitcoin is immune to local inflation, which arises due to recurring political conflict, war, or, simply, mismanagement.
Another notable benefit of cryptocurrencies lies in its security. With a cryptographic-oriented protocol, information on the blockchain is highly unlikely to be alterable, as records cannot be retracted. For example, in African countries, SMEs and service providers can enter into agreements with one another on the blockchain without red tape and fear of fraud. A ‘smart contract’ can significantly reduce (or even do away with) settlement times and automatically make payments to either parties when all conditions of the business agreement have been made. Such self-executing financial contracts on the blockchain also imply that counterparty risk is reduced and, thus, they present a novel way of combating fraud and corruption (which are prominent in many developing countries such as Botswana, South Africa and Nigeria). In Africa alone, economic crime has risen by 70% since 2015.
Using cryptocurrencies (such as Bitcoin), people in emerging markets are able to move assets transnationally and escape the relatively heavy costs associated with such transfers. An interoperable system currency such as Bitcoin can make cross-border trade significantly easier. A potentially fruitful use case for this would be in Zimbabwe, where the national currency has collapsed and has engendered the use of US dollars and Chinese yuan locally; it presents an ideal test for Bitcoin as a back-end trading currency. In fact, Zimbabwean bitcoin startup, BitFinance, has just announced plans to test that idea.
However, Africa is home to only 1.4% of blockchain companies globally. There needs to be much more traction in order for such African startups to start making significant social impact. Bankymoon is an example of a company that is exploring the applications of blockchain in frontier markets. Operating out of South Africa, it aims to provide Bitcoin payment gateways to vendors of smart meters and cut out costly local authorities.
From peer-to-peer micropayments to cross-border transactions, blockchain holds hope for a future where there are reduced financial inefficiencies and more inclusive growth. If African nations can support the development of this technology — for example, through building and promoting technology hubs — they will become beneficiaries of transactional security. Nonetheless, it is essential that governments willing to experiment with this nascent financial instrument focus on the practicalities of it, rather than the hype. The functioning of blockchain applications, for example, is energy-intensive. This means that societies with poor power supply are likely to get left behind.
Hence, to really make blockchain inclusive, governments in emerging economies will need to lay a strong structural foundation and work in close partnership with entrepreneurs. Proper institutional buy-in would be needed for Bitcoin to be operational in developing societies, and a good first step would be to clarify its legalities and the extent to which it can be treated as legal tender in various jurisdictions.
Image: ‘Bitcoin‘ by fdecomite