Less than five out of 54 countries in Africa are actively supporting the use of cryptocurrencies. Why do the rest still object? Here are five present objections to cryptocurrency use in Africa.
Cryptocurrency companies base their headquarters in various jurisdictions. To mention some, Malta, Mauritius, Dubai, and Bahamas host Virtual Asset Service Providers (VASPs). Each of these has various regulatory systems that enable VASPs to function globally. Creating a lack of synchrony in regulation makes it fundamentally difficult for nation-states to regulate crypto.
To put it differently, a singular country can’t regulate over 21,000 cryptocurrencies.
The skill pool and budget to do so are, by default, prioritized elsewhere. Any government’s key priority is economic growth and the protection of its citizens. For many that perceive cryptocurrencies as transitory, or speculative, regulating them is far from being a key priority.
That leads to the more common option of banning them or leaving them in a gray area.
Occurrence of Scams
Governments are thrown into the crypto bandwagon when things go wrong. This has been when a major scam went bust or a crime occurs. In recent documentation of crimes involving the use of cryptocurrencies, law enforcement often has to follow money trails. These trails can take up to five years or more to trace the money flows. While crypto in itself isn’t the problem, few governments have the instruments to trace all criminal activity connected to it.
As an example, Velox 10 Global operated in Kenya between 2018 and 2019. It promised that investors would make $4,000 if they invested $100 and topped up with $200. Needless to say, it was a Ponzi scheme that never repaid its promise. Investors were left in the dark because the “founders” made off with $3.6 billion. Similarly, Dunamiscoin and Africrypt made off with $2.7 billion and $3.6 billion of investors’ funds in Uganda and South Africa. Regulators were later called upon to address the mess.
These are but a few among others that brought out cryptocurrencies on the wrong side of regulators.
Away from scams, Ghana, Nigeria, South Africa, Kenya, and recently the Central African Republic have announced efforts to investigate digital currency use cases. Remarkably, the Central African Republic legalized Bitcoin
This is an ongoing concern for sustainable use case considerations. It’s good for individuals to speculate on cryptocurrencies, but governments can’t. They do have the mandate to keep economies stable; therefore volatility doesn’t align with that. For instance, the Central Bank of Kenya’s Governor went on record saying that he should be arrested if he allows the country’s reserves to go into Bitcoin.
The dynamics of allocating national reserves to crypto are complex. However, the Central African Republic and El Salvador could share their lessons and challenges since they’ve adopted Bitcoin as a legal tender alongside their currencies. Volatility is there to stay. Studies on cryptocurrency risk could provide insight into better risk management in the future.
Low to No Control
Cryptocurrencies are mostly decentralized. Few have centralized authorities overseeing them. Some exist as tokens, and others as different utilities. By design, they are peer-to-peer payment systems. In reality, they also act as a store of value. While governments can oversee monetary or fiscal policy on money supply, this doesn’t apply to cryptocurrencies.
Cryptocurrencies have different attributes compared to fiat currencies. One such difference is supply. Governments control the money supply, but cryptocurrencies have algorithms controlling the supply. Fiat money exists as cash and debt, but crypto exists as a digital ledger. Often, this ledger lacks debt financing. Additionally, fiat is inflationary, while crypto is deflationary.
Governments, therefore, don’t control the supply, distribution, and collateralization of crypto. In Africa, no government is associated with cryptocurrency mining operations. They can’t claim loans or credit on it. Furthermore, they can’t issue limits on those that create new tokens or use existing supplies. How, then, can they regulate it effectively?
The Legal Tender Question
Apart from El Salvador, the Central African Republic has adopted Bitcoin as a legal tender. These two countries are presently case studies for other countries on the use of Bitcoin in this way. Whereas it’s positive that they have taken that path, there’s no guarantee of success. There are already challenges to interoperability and user support in El Salvador. Undoubtedly, at a national level, it will take a few years to get things running smoothly. Other countries are taking a wait-and-see approach as they look into Central Bank Digital Currencies (CBDCs) as an alternative.
For now, the low confidence in crypto means it won’t see rapid government adoption.
It is, however, seeing retail adoption as people adopt the payment aspect of cryptocurrencies. Governments can learn from VASPs as they serve citizens on best practices, challenges, and better ways to support the budding industry. Perhaps, it needs more ground-level support than full regulation. After all, by interacting with current users and service providers, there will be a better understanding of risks and opportunities in the industry. Granting more partnerships with crypto industry players will also accord a platform for early warnings of scams.