Blockchain is still popular

Cryptocurrencies: Africa's Quiet Revolution

Africa is in the middle of an economic revolution: Last year, the number of transfers in crypto currencies to and from Africa increased significantly - by 55 percent for sums of less than 10,000 US dollars (8500 euros). According to the US analysis firm Chainanalysis, the peak was reached in June with 316 million US dollars.

The numbers are likely to continue to rise. While cryptocurrencies are mainly used for financial speculation in other parts of the world, a different trend is emerging in Africa. Here the virtual money is mainly used in trading. Individuals and small businesses in Nigeria, South Africa, and Kenya are responsible for most of this activity.

What is a cryptocurrency?

Put simply, cryptocurrencies are virtual money that can be used like real money: for example, to make transfers to other people or to buy goods and services. The "crypto" in cryptocurrency comes from the complex cryptography (encrypted codes) used to create and record transactions.

Ethereum is one of the cryptocurrencies that is enjoying growing popularity in Africa

Cryptocurrencies aim to bypass intermediaries such as credit card companies or banks. This makes it cheaper to transfer money from one virtual wallet to another. Cryptocurrencies are also not controlled by a central authority, which theoretically protects them from any interference by governments.

Over 6000 cryptocurrencies worldwide

"When it comes to cryptocurrencies, most people just think of online money," says Elisha Owusu Akyaw, a Ghana-based cryptocurrency marketer and founder of BlockNewsAfrica. "Basically, cryptocurrencies use technology to make money more transparent and less centralized, so that everyone can help shape the future of finance," Akyaw said in an interview with DW.

Bitcoin - the first and by far the most popular cryptocurrency - was created in 2008 by an unknown person or group under the pseudonym Satoshi Nakamoto. There are now more than 6000 other cryptocurrencies, including popular options like Ethereum and Litecoin.

Starting advantage for Africa

For the Ghanaian tech entrepreneur Emmanuel Tokunbo Darko, it comes as no surprise that cryptocurrencies are so well received in Africa. After all, virtual money would work on a similar principle to mobile payment services, which have long enjoyed great popularity on the continent. "This makes it easier for Africans to understand cryptocurrencies than people in the West, who have better access to banking systems," Darko said in an interview with DW.

Africa is well positioned to benefit from the cryptocurrency boom. The continent has a growing pool of trained professionals and potential entrepreneurs. In addition, the high unemployment in many African countries is causing young people to ignore traditional areas of the economy and look for new ways to earn money.

Mobile payment services like M-Pesa have long been part of everyday life in many African countries

Cryptocurrency marketer Elisha Owusu Akyaw believes that young people are also interested in virtual money because there is hardly any work for high school and university graduates. "Thanks to cryptocurrencies, these people are able to start their own businesses and enable them to work for big brands outside of their own country and thus make a living," says Akyaw.

Avoid currency instability

Unreliable local currencies and hyperinflation would also contribute to the boom in cryptocurrencies, says Chris Becker, who works as a blockchain expert for the South African banking group Investec. When the Zimbabwean dollar plummeted in 2015, some Zimbabweans turned to Bitcoin. "There is now this alternative to the traditional, government-administered currencies that have had problems and negative side effects in the past."

In the best case scenario, the emergence of cryptocurrencies could even help some African economies, Becker believes. "These competing currencies coexist with local currencies, which I believe will give these economies a higher level of resilience."

Are Bitcoin & Co. suitable as an alternative to currencies that are plagued by hyperinflation?

Crypto for the diaspora

Members of the African diaspora all over the world have also discovered cryptocurrencies for themselves. They use the virtual money to support their families on the continent. A logical step for Emmanuel Darko. "The cost of transfers to Africa is astronomical, sometimes up to 20 percent of the transfer amount. But there are cryptocurrencies that allow people to send money to Africa for virtually free," said Darko.

One company that offers such money transfers is BitPesa. The company, founded in 2013 and based in Nairobi, Kenya, uses Bitcoin as a medium for international transfers. This avoids bank and exchange fees between different currencies.

Risky Endeavor?

However, cryptocurrencies also have their risks - for example due to the high volatility of prices. In addition, virtual currencies are still unregulated in most African countries and their legal status is often unclear. This means that there is no safety net in case funds are lost. Short-term investors in particular can be hit hard by sudden price drops.

Darko therefore urges caution: Anyone who wants to trade in crypto currencies should inform themselves first. "Due to a lack of knowledge, some people fall for scams that have nothing to do with crypto. So you should inform yourself," said Darko. At first glance, the principle behind the currencies is very complex. "But if you take the time to understand it, the truth is that it's very simple."

Marketers like Akyaw warn that people with little experience are most likely to fall for scams or invest in the wrong markets. "Cryptocurrencies and blockchain technology are easier to understand for young, educated people," says Akyaw. Older people in particular find it more difficult to understand the function of the technology.

What does the future hold?

Meanwhile, some African countries are trying to adapt their laws to a future where cryptocurrencies may become normal. The pioneer is Africa's largest economy, Nigeria, which recently legalized cryptocurrencies and issued guidelines for digital currencies and crypto-based companies.

Cryptocurrencies offer many advantages for the young, tech-savvy population in Africa

Other countries also become active. South Africa's financial authorities, including the central bank, published a policy paper in April with recommendations on how cryptocurrencies could be regulated in the future. Kenya, on the other hand, wants to experiment with a digital tax from January 2021 and could possibly open the door for more stringent regulation of cryptocurrencies.

It is still unclear to what extent cryptocurrencies will actually prevail in Africa. For marketer Akyaw one thing is clear: young Africans should definitely deal with it. "It makes sense because the financial system is going in that direction," says Akyaw. Many large companies initially did not take the potential of crypto currencies seriously and prophesied that it would end soon. "That was ten years ago - today there are still cryptocurrencies and they are growing faster than ever."

Adaptation: Jan Wilhelm