Africa continues to have an enormous cash and informal trade economy. Promoting financial inclusion is critical, with banks playing a pivotal role in facilitating economic growth and financial inclusion across Sub-Saharan Africa. Cryptocurrencies have the potential to redefine the banking landscape, unlocking a new approach to supporting financial inclusion. However, to fully embrace cryptocurrencies and leverage their benefits, certain key risk factors and unique challenges need to be addressed.
Why consider cryptocurrencies?
While challenges remain, the cryptocurrency ecosystem has shown signs of maturing, driven by innovative use cases, importantly, growing support from some governments and financial institutions. Several governments have acknowledged the potential of cryptocurrency and blockchain technology, and according to a recent report by Chainalysis (a blockchain data platform), Africa is one of the fastest-growing crypto markets in the world. Kenya, Nigeria, and South Africa record the highest ratio of crypto users, with Kenya being at the forefront of cryptocurrency adoption on the continent.
The South African Reserve Bank has taken a relatively progressive stance in recognising cryptocurrencies as legitimate digital assets, allowing individuals and businesses to transact and hold cryptocurrencies. The Nigeria and Kenya regulators have issued warnings pertaining to the risks associated with digital currencies, resulting in banks not being allowed to hold cryptocurrencies or provide direct cryptocurrency-related services. Despite this stance, the respective regulators have acknowledged the potential benefit of blockchain technology and are exploring appropriate regulatory frameworks to oversee the effective use of cryptocurrencies. Other African countries, such as Uganda and Tanzania, have not developed regulations to address cryptocurrency usage, albeit individuals and businesses in these countries continue to engage in cryptocurrency-related activities within the constraints of the respective country’s general financial regulations and guidelines.
Despite cryptocurrency gaining traction, African banks have been cautious in embracing cryptocurrencies. Regulatory and structural challenges must first be addressed to create a conducive environment for the full integration of cryptocurrencies into the banking systems across Africa. A key impediment to banks adopting cryptocurrencies is the regulatory uncertainty surrounding these digital assets. The absence of regulatory clarity makes it challenging for banks to assess the risk related to digital assets and, by inference, comply with anti-money laundering (AML) and know-your-customer (KYC) requirements
Determining the right time to embrace cryptocurrencies
Determining an appropriate timeframe for banks to adopt cryptocurrency is complex, requiring careful evaluation of risk, regulatory environment, technology capabilities, customer demand, and collaboration opportunities. A comprehensive regulatory framework is essential to protect consumers when considering widespread cryptocurrency adoption. Clear standards are also necessary to ensure stability and integrity within the financial system of a country and to mitigate the risk of fraud, money laundering, and terror financing.
The successful integration of cryptocurrency into the African banking landscape relies on a robust technology infrastructure and thus the pace of change for many African banks will remain a challenge due to dated technology infrastructure. As banks move toward modernised systems in support of digitalisation, the integration of cryptocurrencies within the various banking sectors will become a reality. Notwithstanding the required technology modernisation, cryptocurrency adoption brings with it additional cybersecurity challenges. With cyber threats and hacking attempts on the rise, banks will need to assure customers that their digital assets remain secure. Risk management frameworks, tailored to the unique characteristics of cryptocurrencies must be developed, and banks undertaking the crypto journey will have to invest in training both staff and customers.
Recent developments in technology, and cooperation between private and regulatory bodies, will provide financial institutions with the tools and frameworks to enhance their ability in managing the risk associated with crypto. Collaboration between reputable cryptocurrency exchanges, banks, and fintechs is improving rapidly. Blockchain tech firm Gluwa committed USD 35 million to the growth of indigenously owned crypto exchanges in Africa in April 2023 and has indicated its readiness to collaborate with the Nigerian regulators’ with the aim of developing a policy framework permitting the adoption of cryptocurrencies in Africa’s largest economy.
Cryptocurrencies into the Future
While no one can predict the speed of change and future of cryptocurrencies, crypto is expected to continue to shape the future landscape of banking. Early adoption of cryptocurrency may present a transformative opportunity for the African banking sector and has the potential to bridge the gap of financial inclusion in Africa. This may include providing cryptocurrency wallets, facilitating cryptocurrency exchanges, and offering secure custody solutions for customers interested in adopting digital assets. The opportunity for banks lies in finding the balance between embracing innovation and ensuring the safety and stability of the financial ecosystem within which they operate, while adapting to the changing regulatory landscape.
By Carla Bester, Head of Risk and Compliance