Digital assets transforming Africa

Elise Donovan is Chief Executive Officer at BVI Finance

The African continent’s impressive economic growth in the last decade is well documented with countries like Ethiopia, Nigeria and Kenya consistently ranking among the world’s fastest growing economies. According to World Bank estimates, sub-Saharan Africa had a collective GDP of just over $1.7 trillion in 2019, which is expected to rise in the coming years.

COVID-19 has disrupted export markets, supply chains, tourism and remittances, nevertheless, the long-term economic outlook for the region is positive and there are compelling opportunities to capitalise on the enormous potential across the continent.

A key opportunity is the rise of digital assets which is transforming the continent and is set to impact the global economy. This does not come as a surprise. We have seen first-hand how the region has effectively leapfrogged the world in mobile money adoption, with 481 million registered mobile money accounts according to industry experts GSMA, which estimated that mobile money processed almost $6.1 billion in international remittances in Africa in 2020.

As well as expanding financial access to previously unbanked communities and fostering inclusive economic growth, the sector is also creating employment opportunities. For example, Safaricom’s M-Pesa was introduced in Kenya in 2007 as a digital system to settle payments, but has since expanded to neighbouring countries and rapidly evolved to include other services. This includes facilitating savings and helping users to build a credit history and access loans.

Elsewhere, other sophisticated platforms are springing up, including Kuda, a Nigerian mobile finance platform, which last year raised $10 million in a seed round.

Digital assets

The region is a well-known key hub for fintech innovations and these are radically transforming the delivery of financial services. Now, key markets in Africa are making major inroads in embracing digital assets, which, as defined by the Financial Action Task Force (FATF), are “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.”

Appetite for this technology is growing with a recent survey by statistics firm Statista showing that in 2020 Nigeria was the leading country per capita for bitcoin and cryptocurrency adoption. According to their research nearly one in three survey respondents said they used or owned crypto assets last year.

The appeal of digital assets is obvious. They have all the advantages of regular assets but also benefit from being fully digital and hosted on blockchain or other distributed ledger technologies. These have the potential to facilitate trade both peer-to-peer but also across borders, quickly and securely without incurring high fees.

Although some digital assets like bitcoin are volatile, there are alternatives like asset-backed digital tokens or stable coin which are pegged to other currencies like the euro or the dollar and provide more stability. The demand and uptake of these innovative technologies has been high and in the absence of legacy systems, innovations, entrepreneurialism, and adoption of fintech has been high in the region.

In the coming years, the digital asset space will only mature, growing in sophistication, backed by secure technological hardware and integrating with mainstream financial institutions

Family offices

The rising wealth in Africa has also swelled the ranks of an increasingly affluent middle class as well as high net worth individuals, leading to the creation of a robust family office sector, where digital assets present an opportunity to transform business models.

Whether it is to consolidate wealth or diversify into a new asset class, digital assets present an attractive alternative to fiat currencies, offering lower transaction costs as well as more stability especially in regions vulnerable to economic shocks or sharp inflation.

Family offices can access this market through industry specialists who have the expertise and track record to mitigate risk. International financial centres, like the BVI, have emerged as leaders in this space, with a network of specialists, robust digital capabilities and bespoke corporate vehicles well-suited for crypto assets.

For example, as well as a number of digital asset exchanges, the BVI’s anti-money laundering rules have been amended and now permit digital ID verification and the receipt of electronic copies of documents, so businesses are able to use a blockchain provider to double check identities. Furthermore, the BVI, along with other key financial centres, is a jurisdiction of choice for Initial Coin Offerings globally.

Aside from this, the BVI’s status as a stable jurisdiction with progressive corporate laws provide important advantages. Factors such expert professional services, robust common law, arbitration and – perhaps crucially – compliance with international law enforcement authorities makes it an ideal destination for family offices.

Structuring investment vehicles in established jurisdictions like the BVI provides stability as well as economic incentives. This was recently highlighted in a report by the Overseas Development Institute (ODI), on international financial centres and development finance, which looked at the valuable role IFCs play in development finance and found that offshore centres like the BVI are excellent conduits for foreign direct investment into emerging markets.

The road ahead

As widely noted, fintech regulation has not always followed the same pace of rapid change and evolution as digital assets. This has led to legitimate concerns that customers may be exposed to risk or that crypto assets are especially vulnerable to money laundering and financial crime.

After all, a system with total anonymity and lack of regulation are not exactly ideal combinations. For some this is understandably a barrier for mainstream adoption. The Central Bank of Nigeria’s (CNB) recent decision to close all accounts with cryptocurrency links is one such example.

Given that the country has the biggest digital currency market in Africa with millions of people who rely on it, the CNB’s decision illustrates just how urgent it is to develop robust regulations and create a system that is financially competitive while providing consumer protection and satisfying law enforcement.

In the coming years, the digital asset space will only mature, growing in sophistication, backed by secure technological hardware and integrating with mainstream financial institutions.

In order to capitalise on this and fully benefit from the opportunities it presents, it is essential that key stakeholders from across the board collaborate to help set international standards. In the BVI, we are taking a prudent approach focused on upskilling and building deep expertise in the area and working closely with our private sector to assess new technologies for benefits and the right way to regulate them.