Economists Jérôme Mathis and Daniel Ouedraogo argue that the continent’s authorities must take a stance on decentralized digital currencies.
stands. The African continent has shown incredible enthusiasm for Bitcoin. Nigeria alone accounts for 8% of global transactions. This new payment method is also gaining popularity in other countries such as South Africa, Egypt, Kenya and Sudan. Its adoption is the result of personal choices involving African monetary authorities. Should we be happy or worried?
The African Union is committed to a continent-wide monetary integration project by 2063. The problem has to do with the use of a common currency within a continent where no less than forty official currencies are real. Trade flows between countries are hindered by changes in exchange rates and the vagaries of switching costs. Monetary integration in Africa will boost trade in the same way that the euro boosts trade within the euro area, thereby boosting the continent’s economies.
The challenge of adopting a common currency is also political. The formation of a currency union requires the political stability of the member states. This is the case with the current constitution of the Economic Community of West African States (ECOWAS), which provides for the monitoring of election deadlines in member states, even if it means resorting to military intervention in conflicts that occur after elections, such as the January 2017 Gambia. This is the case with Action to Restore Democracy.
Double or triple digit inflation
From time to time, regional milestones emerge from the continental integration agenda. Like the adoption of the West African Financial Community franc zone and the common currency of neighbouring countries including Ghana and Nigeria, the ECOWAS Commission is currently working on its project to merge the Economic and Monetary Union of Africa (UEMOA) with the West African Monetary Union District (ZMAO).
Integration also makes it possible to speak with one voice on the international stage. It is a diplomatic tool and an expression of power, especially in a global context marked by major technological and economic changes. The bloc makes it possible to build a defense of mutual interest against powerful trading partners such as China, India, the United States or France.
While waiting for monetary integration, many citizens of the continent have no choice but to endure rash national monetary policies that lead to double-digit inflation year after year, as is currently the case in Egypt, Ghana, Nigeria, Malawi, Mozambique and Zimbabwe. Even triple digits, such as in South Sudan, where inflation exceeded 500% between 2016 and 2017, especially due to falling oil revenues in the context of civil conflict.
Bitcoin is accepted as a means of preventing runaway inflation. Sometimes local demand is so great that its exchange rate level is greatly appreciated relative to its world exchange rate, as in Zimbabwe, where it doubled before the monetary authorities decided to simply ban it. In a decision inspired by Algeria, its 2018 finance law prohibits “Internet users from using” any currency over the web.
In addition to moving away from inflationary monetary policies that mechanically erode savings, cryptocurrencies also save on high transaction costs. Sub-Saharan Africa is underserved by banks and lacks banking infrastructure, with more than 80% of households unbanked, resulting in higher financial transaction costs. When a person working in South Africa wants to send money to his relatives in neighboring countries like Mozambique, he has to pay financial intermediaries more than 20 percent of the transaction fee. With Bitcoin, these costs are practically zero.
Volatility and hacking
However, using Bitcoin on the African continent is not without its dangers. The first weakness of the most popular cryptocurrency is its rollercoaster volatility. Bitcoin is now worth more than ten times what it was three years ago and five times less than it was a year ago. Converting your savings to Bitcoin is like playing them at a casino, so to speak.
Another major disadvantage has to do with security. Like other digital payment instruments, Bitcoin is subject to ruthless hacking. Virtual currency is encrypted. However, among the world’s leading experts in the process, there are also some big names with bad intentions. The trial of Alexander Vinnik, the Russian hacker suspected of embezzling 650,000 bitcoins, for which France recently obtained his extradition from the Greek Supreme Court, should spark a massive flow of ink when opened.
Due to its volatility and appeal to hackers, Bitcoin is not good enough for the African continent. People use it for lack of something better, but there is still a need for a more stable and secure cryptocurrency. Blockchain technology is a cryptocurrency-based decentralized authentication system that allows for many innovations, some of which may be associated with projects that directly serve the population. For example, imagine a cryptocurrency backed by a register that authenticates counterfeit medicines. This is the potential currently being developed by the Afro cryptocurrency, which was launched in December 2018 to replace Bitcoin on the African continent.
Africa is in the midst of technological change and innovation is hardly on the policy agenda. Monetary authorities currently feel threatened by the adoption of decentralized digital currencies. At the risk of being overwhelmed, they will have to take a stand quickly. Cryptocurrencies will at least play a role in advancing the process of monetary integration in Africa.