Less than 5% of Africa’s 54 countries actively support the use of cryptocurrencies. Why do the rest of them still disagree? Here are five problems with using cryptocurrency in Africa right now.
Different countries are home to the headquarters of cryptocurrency companies. Virtual Asset Service Providers are based in places like Malta, Mauritius, Dubai, and the Bahamas, to name a few (VASPs). Each of these has its own set of rules that make it possible for VASPs to work all over the world. Nation-states find it hard to regulate crypto when there are different rules in different places.
To put it another way, one country can’t control over 21,000 different cryptocurrencies.
By default, the skills and money to do this are used for other things. The main goals of any government are to grow the economy and keep its people safe. For many people who think cryptocurrencies are temporary or based on speculation, regulating them is not a top priority.
Because of this, the most common choice is to either ban them or leave them in a gray area.
Occurrence of Scams
When things go wrong, governments are forced to join the crypto trend. This happened when a big scam failed or a crime happened. In recent cases where cryptocurrencies were used to commit crimes, law enforcement often has to follow the money. It can take five years or more to follow these money trails. Even though crypto isn’t the problem in and of itself, few governments have the tools to track down all the criminal activity it is linked to.
For example, between 2018 and 2019, Velox 10 Global did business in Kenya. It said that if people put in $100 and added another $200, they would make $4,000. It goes without saying that it was a Ponzi scheme that never paid back what it said it would. Investors didn’t know what was going on because the “founders” stole $3.6 billion. In the same way, Dunamiscoin and Aficrypt stole $2.7 billion and $3.6 billion from Ugandan and South African investors, respectively. Regulators were later called upon to address the mess.
These are just a few of the things that regulators don’t like about cryptocurrencies, but there are many more.
Ghana, Nigeria, South Africa, Kenya, and most recently the Central African Republic have all said they want to look into how digital currencies are used. In a surprising move, the Central African Republic made BitcoinBTC 0.0% a legal form of currency. It can be used for trade along with the CFACFA +0.3% Franc.
This is an ongoing concern for discussions of sustainable use cases. Individuals should speculate on cryptocurrencies, but governments should not. They are tasked with maintaining economic stability; consequently, instability is incompatible with this duty. For example, the Governor of the Central Bank of Kenya stated that he should be prosecuted if he permits the country’s reserves to be invested in Bitcoin.
Putting national reserves into crypto is a complicated process. But since they have both made Bitcoin a legal form of payment along with their own currencies, the Central African Republic and El Salvador could share their lessons and problems. Volatility will always be there. Studying the risks of cryptocurrencies could help us figure out how to handle risks better in the future.
Control is low to none
Most cryptocurrencies do not have a central authority. Few of them are run by a central authority. Some are tokens, and others are used for different things. They were made to let people pay each other. In reality, they are also a way to save money. Governments can control the supply of money through monetary or fiscal policy, but this doesn’t work for cryptocurrencies.
Cryptocurrencies are different from fiat currencies in many ways. The supply is one difference. Governments decide how much money is available, but algorithms decide how much cryptocurrency is available. Cryptocurrency is a digital ledger, while fiat money is cash and debt. Usually, this ledger doesn’t have any debt financing. Also, fiat money makes prices go up, while crypto makes prices go down.
Because of this, governments don’t control the supply, distribution, or backing of crypto. No government in Africa has anything to do with cryptocurrency mining. They can’t use it to get loans or credit. Also, they can’t put limits on those who make new tokens or use supplies that are already there. So, how can they control it in a good way?
The Question of Legal Tender
Except for El Salvador, Bitcoin is now a legal form of payment in the Central African Republic. At the moment, these two countries are used as examples of how Bitcoin can be used in this way in other countries. Even though it’s good that they’ve chosen that path, there’s no guarantee that they’ll be successful. Interoperability and support for users are already hard in El Salvador. Undoubtedly, it will take a few years to get things running smoothly on a national level. Other countries are taking a wait-and-see approach while they look into Central Bank Digital Currencies (CBDCs) as an alternative.
Crypto isn’t trusted, thus the government won’t employ it soon.
It is, however, being used in retail as people start to use cryptocurrencies as a way to pay. As VASPs help people, governments can learn from them about best practices, problems, and better ways to help this new industry. Maybe it needs more help from people on the ground than full regulation. After all, if you talk to current users and service providers, you’ll learn more about the industry’s risks and opportunities. Giving more partnerships to people in the crypto industry will also provide a way to warn people early about scams.