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Informally Stubborn- Africa’s Blockchain Yearning for a Better Formal Structure

by David Otieno

The fourth industrial revolution is upon us, bringing with it the remarkable advancements of blockchain and AI technologies that are exceeding all expectations. 

Throughout history, Africans have faced challenges in the production of tools on a large scale since the Stone Age. 

It’s quite remarkable that the continent has yet to experience an industrial revolution, considering that we rely heavily on imported goods, even for necessities like matchsticks and toilet paper. 

In the age of disruption, the digital revolution continues to influence the world economy, with many of the drastic effects of ICT advances and disruptions not yet realized. 

It is in this era that Africa stands a chance to disrupt the status quo. 

In 2016, the African Development Bank (AfDB) projected that two million jobs would be produced in Africa’s ICT industry by 2021. Beyond Web 2, in what is dubbed as Web 3.0, Africans have something better under their sleeves to decentralize governance, transactions, and relationships.

A New Frontier Beyond China’s and Russia’s Influence

We don’t have to contend with “colonial ties” nonsense to achieve economic inclusivity. 

While the focus is only on the coups in Niger and Burkina Faso,  an even greater revolution is occurring in Africa —and it is powered on the blockchain. Between July 2022 and June 2023, the region received an estimated $117.1 billion in on-chain value.  Besides, African blockchain startups raised $474 million in 2022, a phenomenal 429% increase over the previous year.  Here’s the catch! China and Russia are at the forefront of forging new economic ties to break colonial dependence. 

However, will the stars (Africa) ever be bright when the moon is full (China and Russia)?

That is why blockchain has remained the game changer in democratizing tech, systems, and networks to raise productivity and ensure that Africans get paid in the end. The Bitange report noted that governments play a crucial role in establishing policies that balance regulation and innovation.  They have dual roles as customers and regulators of technology. Amidst heightened interest in Africa, effective co-designed solutions through public-private partnerships are desirable. Here, the government can develop solutions ranging from service delivery to digital currencies to solve its systemic problems. This means that blockchain and cryptocurrency must become mainstream. 

African Governments Still Myopic

A World Bank technical report showed that the informal structure of the Kenyan crypto asset market hinders the development of a domestic market infrastructure.  Nevertheless, the government’s understanding of its role in ensuring a smooth “formal transition” remains insufficient. Here, I don’t mean that African governments should not align with international frameworks like the IMF/World Bank Bali Fintech Agenda, IOSCO Policy Recommendations, and FSB Global Regulatory Framework.  They’re in better positions to call the shots than they think.

Take, for example, Mauritius, which introduced bespoke legislation to govern crypto assets and service providers. The Virtual Asset and Initial Token Offering Services Act (VAITOS Act) was passed in 2021, providing a comprehensive legislative framework for virtual asset service providers (VASPs) and issuers of initial token offerings (ICOs). This way, it has been able to lure blockchain innovators with its friendly regulatory environment. Kenya has also caught the wave by asking a lobby group, the Blockchain Association of Kenya, to draft a virtual asset bill. This phenomenon shows that even some governments have begun seeing sense in creating a crypto policy blueprint that is tailored to its local needs.  Predictably, this strategy mitigates the unforeseen implementation challenges that will arise by simply copying and pasting internationally developed rules. 

The Industry has the Nine Lives of a Cat.

The pan-African crypto trends indicate difficulty in determining precise trading volumes due to informal P2P networks. The trend will likely be widespread if African governments continue holding a stringent stance on crypto. Africa already has a large informal sector, and regulations like these are what fuel it. Remember, even in the modern age, there are Africans who still don’t trust banks and put their money under the mattress. In the same spirit, users will turn to unregulated and offshore exchanges. Therefore, the lawmaker should rethink their regulatory activities. There are risks, but the opportunities and loopholes are immense. 

Do African investors want crypto to go formal?

Leave alone Bitcoin Chief OMA JI EGO, claiming that he is the first African to buy Bitcoin since 2011, purchasing it at $35 after being introduced to it by a former business associate in the network marketing industry. Most serious traders remain underground where there are no Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. 

We should not let history repeat itself. Blockchain has the potential to improve financial inclusion. In the past, the traditional banking industry’s prohibitive cost structure discriminated against low-income earners, who now form the informal sector. They are either unbanked or underbanked. In Kenya, these groups belong to “chamas’ and “merry-go-rounds” that the government does not even have oversight over. Cash remained the primary medium of exchange, but economic activity was limited to immediate circles. Similarly, under the nose of crypto bans, retail traders have continued to earn money by informally day trading and trying to find arbitrage opportunities between coins. 

Popular exchange platforms like Binance regularly face regulatory bumps, and P2P platforms like Paxful and Remitano are suitable alternatives. Based on the decentralized nature of crypto, P2P activity is taking place over informal group chats on Telegram, Discord, and WhatsApp rather than on conventional platforms. Here, traders transact several millions with popular OTC merchants. It is not possible to capture the activity of these informal P2P trades.

The Start of Something “Good”

The informal crypto sector will continue to thrive, and it’s up to the government to optimize its economic potential. Even in South Africa, more than 95% of SMEs are micro enterprises with fewer than ten employees, and more than 80 percent of these are informal or unregistered businesses. In Kenya, the informal sector absorbs almost 82.8% of the employed workforce, and what is called the ‘modern’ or formal economy accounts for only 17.8%. This tells you that this informal sector is seeking opportunities in the crypto space. These people have learned to thrive even without government support. Crypto trading has become a day job for youths across Africa looking to make ends meet. The precedents of these economic activities are the prevalent “gig jobs,” such as academic writing that has employed thousands of African youth. The untaxed proceeds of these jobs find their way in crypto rails that the government isn’t even aware of. 

Many African nations have ICT and digital transformation frameworks to promote the Internet economy. The epitome is the  AU Science, Technology, and Innovation Strategy for Africa. Science, technology, and innovation are at the heart of Africa’s socio-economic development and growth agenda. The focus areas include agriculture, energy, environment, health, infrastructure development, mining, security, and water. The above-mentioned issues are possible via blockchain. Even so, some government boardrooms continue to confuse crypto with blockchain. The question is whether African nations will continue to remain “inherently” stubborn. Instead, they should create an environment for thriving crypto and blockchain hubs. We can actually emulate the likes of Turkey, where crypto is viewed as a savior against inflation, wage inequality, and the global divide.  

Why Should We Care? 

Tripple-A research predicts that 11.7 million East Africans possess cryptocurrencies. Again, the World Bank statistics show that youth unemployment in Sub-Saharan Africa is 11%.  The government cannot overlook such numbers, especially when some consider this asset as their hope in crumbling economic systems. 

Picture a scenario where African states agree to transfer their services 100% to run on the blockchain, support building an environment by attracting startups, entrepreneurs, and investors, and become a thought leader in the blockchain sector. All this is not far-fetched. A classic example is Dubai’s Blockchain Strategy, which enshrines the capability of blockchain in fostering economic development. 

A glimpse of hope is the African Union Development Agency (AUDA-NEPAD) actively exploring blockchain’s role in supporting Africa’s development priorities. The body has highlighted opportunities in agricultural supply chains, healthcare data management, financial system efficiency, qualification mobility, and voting integrity. The AU has called for a continent-wide strategy for governing blockchain applications. Foundational to these recommendations are the exploratory studies that have provided empirical evidence of their feasibility in solving African challenges. 

However, as John Walubengo, one of the members of the Distributed Ledgers Technology and Artificial Intelligence Taskforce in 2019, would say: “We tried. Implementation is the problem.” The narrative does not end with trying. Africa needs further actionable efforts, as exemplified by private-government partnerships, to make this thing work. If not, the blockchain story in Africa will remain largely informal and whimsical.

David Otieno is the CEO and Founder, Chaintum Research and Head of Research, Blockchain Association of Kenya.

Image Credit: Hibrida13 / Getty Images / iStock