- Nigeria, commonly known for its rapid growth in Africa’s digital economy, was the first African country to roll out a CBDC, the eNaira.
- In January 2023, Tanzania’s Central Bank stated that it is working out a new phase to introduce its own CBDC.
- Cameroon, the Democratic Republic of Congo and Congo Brazzaville have all issued the development of a national stablecoin.
The use of digital assets has gradually grown over the past two years in Africa. In less than five years, the CDBC adoption rate in Africa has been steadily growing. Despite the initial rejection, governments are sending out research teams to research how impactful establishing a rapid CBDC adoption rate in Africa will produce. However, some experts argue that the use of stablecoins instead will provide more steady growth within Africa’s ecosystem. There is currently a split decision between the use of stablecoins and CDBC. DeFi in Africa is still growing and finding alternative ways to empower the local African. This begs the question of which of the two would benefit Arica’s digital economy.
Background check on Stablecoins and CBDCs
Before diving into the impact, these digital assets have had on Africa’s digital economy. We must first address the elephant in the room. Stablecoins and CBDCs are fundamentally different despite their stable nature.
Central Bank Digital Currencies are digital assets similar to cryptocurrency and stablecoins issued by a central bank. With the evolution of the financial system of the globe and in Africa, having physical currency has more demerits than ever before. The introduction of a cashless society has caused waves withi various industries in Africa. Soon after, the development of decentralized finance in Africa took centre stage as more African crypto traders flooded the ecosystem.
This lucrative venture caught developers’ eyes, and they asked a vital question; “How to enable governments and economies to profit from using decentralized finance.”
Thus the primary goal of the steady CBDC adoption rate in Africa is to provide businesses and consumers with privacy, transferability, convenience, accessibility and financial security. In layman’s language, a CBDC is a fiat currency of a country represented in digital form. The advantages of CBDC were soon made clear, but unfortunately, only a few African governments saw the essence of its useability.
There are two kinds of CBDCs, namely;
- Wholesale CBDCs – These digital assets are similar to holding reserves in a central bank. The central bank grants an entity an account to deposit funds and use to settle interbank transfers. Like reserves, monetary policy tools apply to these CBDCs to influence various aspects, such as interest rates.
- Retail CBDCs – These digital assets only cater to consumer and business needs. They eliminate the intermediary risk of bankruptcy or sudden loss of customer asses due to their stability.
Stablecoins, on the other hand, are digital assets pegged by a respective fiat currency. It is the merger between fiat and cryptocurrency. Currently, most stablecoins are begged to the US dollar and have the same value as their respective fiat currency. Its creation was to develop a digital asset that would counteract the hurdles of crypto volatility.
Volatility gives Bitcoin its value and can lead to its fall. the amount of demand determines the rise and fall of value for a cryptocurrency since it correlates with its value. The higher the demand for bitcoin, the more value it will gain.
The vice versa is also true; the less demand, the lower the value. Developers then came up with the concept of stablecoins as a medium of exchange. This means this digital currency isn’t legal tender and must be relatively stable. The concept behind a stablecoin is to attain a 1:1 value ratio between itself and its pegged fiat currency.
Also, Read about the Crypto market crash and its effect on the broader financial ecosystem.
Stablecoins have extensively served DeFi in Africa by establishing a means to allow cross-border transactions without the fear of value drop.
There are three types of stablecoins:
- Fiat-Collerate stablecoins– these digital assets maintain a reserve of fiat currency such as the US dollar. This serves as collateral, assuring the stablecoin’s value. Fortunately, there are other forms of collateral, such as gold or silver.
- Crypto Collateralized Stablecoins – Another cryptocurrency backs up these stablecoins. This has resulted in several setbacks. This type of stablecoin is over-collateralized to ensure that any slight crypto volatility will not overly affect the stablecoin.
- Algorithmic stablecoins – The third and last stablecoin essentially controls the supply of its stablecoins to manage and dictate its stablecoin value. This is the closest iteration to central banks since both these entities do not rely on reserve assets. The critical difference v between the two is that Central banks contain various policies and rules will well-outlined rules, while stablecoins still maintain their decentralized nature.
Impact on Africa’s digital economy
Like most digital assets CBDC adoption rate in Africa had a rocky start. Digitalizing a country’s fiat currency could have appeared more amusing and beneficial to most African governments. Most initially banned the concept of CBDCs. However, soon after, most governments started having a change of heart.
Nigeria, commonly known for its rapid growth in Africa’s digital economy, was the first African country to roll out a CBDC, the eNaira. This caused a massive ripple effect on other African nations, and soon after, most governments started second-guessing their initial interpretation of digital assets. In addition, DeFi in Africa has also increased due to Nigeria’s headfast track in digital assets.
South Africa, Ghana, Tanzania, and Rwanda are currently running several research and test pilots on the significance of the CBDC adoption rate in Africa. The South African Reserve Bank is experimenting with a wholesale CBDC, which financial institutions can only use for interbank transfers. This initiative is known as Project Khokha, which intends to test the practicability of CDBC.
In January 2023, Tanzania’s Central Bank stated that it is working out a new phase to introduce its own CBDC. They stated that their researchers were helping with issuing different CBDCs, including tokenized and account-based digital currency. The Bank of Tanzania stated that it has no intention of scrapping its dream of improving Africa’s digital economy. Thus it is prepared to research all available ways steadily to initiate a CBDC within the country that will propel its economy.
The Bank of Ghana is testing a general-purpose retail CBDC, the e-Cedi. Anyone can use it with either a digital wallet or a contactless smartcard that is usable offline.
The CBDC adoption rate in Africa is steadily picking up space as more countries turn to digital assets as a form of financial inclusion. Despite its initial remark on CBDC, Kenya may soon join the bandwagon as its new President, William Ruto, has noticed the lucrative venture within digital assets.
Stablecoin is steadily propelling Africa’s digital economy.
Currently, three African countries, namely; Cameroon, the Democratic Republic of Congo and Congo Brazzaville, have all issued the development of national stablecoin. The Open Network, a decentralized blockchain designed initially by Telegram, powers this initiative.
DRC has already confirmed its intent o utilize the capabilities of stablecoins. According to TON, all three countries will be independently engaged to deliver the necessary blockchain infrastructure and tools they require. Adopting a stablecoin will ensure easy transactions between consumers within and outside their borders. DeFi in Africa can heavily benefit from this initiative.
It can easily facilitate cross-border payments in Africa’s digital economy. Eversend is a budding fintech and stablecoin wallet in Uganda to deepen its currency exchange offering. Eversend is steadily approaching the “super-app” status for cross-border payments and crypto buying and selling in under three years. The co-founder Atwine has described the company as the top DeFi in Africa and its leading FX startup. Aside from stablecoins, they also offer USD, Euro and GBP wallets and virtual cards.
Although its new nature, Stablecoins have taken a majority of the total transaction rate in Africa. This is because most Africans prefer its accessible t use facilities to send money beyond Africa’s borders. Aside from propelling Africa’s digital economy, stablecoins can fund business trips abroad. Tochi Onyia, a blockchain researcher in Nigeria, often uses stablecoins when trying to save money. He stated, “Whenever I get paid at work, I take out the money I will use for the month or two weeks. I leave it in my account. Then whatever [money I have set aside for] savings, I store it in a stablecoin.”
Also, Read The case for and against CBDCs.
Many business people are currently looking to import goods from abroad countries such as China. Through stablecoins paying and transacting between both entities is made much more straightforward. Buy a stablecoin and exchange it on P2P or over-the-counter traders for the desired fiat currency. Users then pay for their purchases.
Stablecoins and CBDCs are different digital assets, but their stable nature has numerous advantages. Africa’s digital economy owes a lot to the rapid CDBC adoption rate and DeFi in Africa. With both entities providing stability, most investors and businesses would have significantly recovered.