Tuesday, January 31, 2023

The solutions offered by crypto in sub-Saharan Africa include preserving savings in periods of economic volatility and aiding cross-border remittances in places with strict capital controls.

  • Sub-Saharan Africa’s crypto retail market and overwhelming use of P2P networks have set it apart from other regions.
  • Cross-border remittances have remained central in Sub-Saharan African economies.
  • Many businesses and traders relying on international suppliers have turned to crypto for payments.

Sub-Saharan Africa has the lowest crypto transaction volume of any region. According to Chainalysis, $100.6 billion in on-chain volume was received between July 2021 and June 2022, representing 2 per cent of worldwide activity and 16 per cent growth in the previous year.

A deeper examination demonstrates, however, that Africa has some of the most established cryptocurrency marketplaces of any region, with extensive integration and penetration of crypto into daily financial transactions for many users. Nigeria and Kenya lead the way, ranking 11th and 19th on the Chainalysis Global Crypto Adoption Index.

READ MORE: Africa’s crypto market resilient amid bear market challenges

When the buying power and population are considered, both nations experience significant adoption, particularly on peer-to-peer (P2P) exchanges, which experts affirm are critical to the region’s crypto economy. South Africa ranks 30th on the index while leading the region in raw trading volumes.

P2P transactions crucial in the sub-Saharan crypto economy

P2P exchanges account for 6 per cent of the total crypto transaction volume in Africa, which is more than twice the value of the next-closest region, Southern and Central Asia and Oceania. According to Roy Youssef, the CEO of Paxful, a popular P2P crypto platform, they needed clever hacks like gift cards to initially get hold of Africa’s crypto market.

Paxful connected Nigerians with Chinese gamers interested in purchasing app store gift cards. That move introduced Bitcoin to Nigeria and the rest of West African regions. Consequently, P2P transactions drove early crypto activity in sub-Saharan Africa. The services have since become a mainstay within the region’s crypto ecosystem.

Regulations that limit crypto transactions have also driven the popularity of P2P exchanges in sub-Saharan Africa. Mamadou Buhari’s administration instructed banks to keep off crypto business dealings in 2021. While this move did not dampen the overall crypto adoption and transaction volumes, it affected usage patterns.

A Nigerian Financial Intelligence Unit expert confirms that the government restricted the use of the Naira for crypto purchases in 2021 amid concerns of tax evasion and fraudulent dealings. As a result, many users reverted to P2P crypto trading.

However, that activity goes beyond conventional P2P platforms. Many Africans also trade cryptocurrency directly with one another, sourcing deals through group chats on apps like WhatsApp and Telegram. Research geographic data does not reflect this activity since it takes place through private wallet interactions, but it remains a big part of Africa’s cryptocurrency economy.

According to Adedeji Owonibi, Founder and COO at Convexity, these groups have thousands of people worldwide trading crypto with each other. The groups are where the most significant crypto transaction volume is found.

READ MORE: Africa: stablecoins offer an efficient solution for cross-border remittances 

Small retail crypto transactions

Sub-Saharan Africa’s crypto retail market and overwhelming use of P2P networks have set it apart from other regions. Retail transactions of less than $10,000 account for 6.4 per cent of total transaction volume, more than any other region. When considering the number of individual transfers, the significance of retail becomes clearer. Retail transactions account for 95 per cent of all transfers, and when small retail transfers under $1,000 are included, the proportion rises to 80 per cent, the highest globally.

The trend mirrors the pattern of many young people in Sub-Saharan Africa resorting to crypto to preserve and build wealth in the face of limited economic opportunities. This pattern contrasts with other regions where many people use cryptocurrencies to bolster their existing wealth.

According to Owonibi, a significant number of daily crypto users are trading to make a livelihood. Sub-Saharan Africa lacks large, institutional-level traders. Youthful retail traders are the force behind the African crypto market growth. For instance, Nigeria has tons of unemployed graduates who turn to crypto as their rescue.

Crypto use motivated by daily necessity, rather than speculation by the rich, explains an intriguing development in Sub-Saharan Africa this year: small retail transfers rose at the beginning of the bear market in May, while other transactions decreased.

Many users carrying small retail transactions trade cryptocurrency out of economic necessity, especially in nations where local currencies are plummeting, as seen in Nigeria and Kenya. As a result, those people may be more willing to continue trading despite price drops. And, of course, users buying stablecoins like Tether would be unaffected by crypto price drops.

Trade and cross-border remittances

Cross-border remittances have remained central in Sub-Saharan African economies. Inflows to the region grew 14.1 per cent to $49 billion in 2021, following a decline the previous year. However, these payments remain complicated and expensive.

Youssef observes that making an international payment in countries like Senegal, Cameroon, and Nigeria is almost impossible since there is no pan-African payment solution. Whereas there are thousands of payment networks in Africa, only a few interact.

Commercial transactions represent another use case. Many businesses and traders relying on international suppliers have turned to crypto for payments, as sending funds abroad is difficult due to tight capital controls. As Owonibi observes, companies need to buy materials from abroad but lack the means to make payments. China and the United States are the popular trading partners for these crypto-based commercial transactions.

Overall, the growth of crypto in Sub-Saharan Africa will continue, provided inhabitants continue facing challenges that crypto has demonstrated it can solve. The solutions offered by crypto include preserving savings in periods of economic volatility and aiding cross-border remittances in places with strict capital controls.

READ MORE: The wave of crypto adoption and usage in Africa is unstoppable

 

 

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