In an increasingly interconnected world, harnessing innovative solutions to boost economic growth through trade has become paramount. Over the years, Africa has witnessed a lot of innovation to spur intra-African trade. From developing a regulatory framework for trade to removing trade barriers, the continent is gradually taking inspired action needed to increase regional trade. However, cross-border payment and settlement remain a major barrier to trade across Africa. Most of the trade happening across the continent is settled in foreign currency, and limited access to foreign currency has increased the cost of facilitating trade. 

 

One of the main objectives of the digital transformation strategy for Africa (2020-2030) is to foster policies that create an enabling environment for digital trade. In January 2022, The AfCFTA secretariat launched the Pan Africa Payment and Settlement System (PAPSS) to fully address cross-border payment in Africa. The most significant feature of PAPSS is the settlement of transactions in local currency, aimed at reducing dependency on foreign currencies. Since its launch, there has been a continent-wide call for adoption across the African market. However, despite its unique advantage, the PAPSS is not a decentralised system. Traders willing to transact under the system must pass through their resident Central Banks, which often involves some levels of bureaucratic processes. Other challenges faced by PAPSS include differences in payment systems, complex currency conversion and exchange rate risks and integration with existing payment systems.

 

Cryptocurrencies, however, provide an alternative low-cost, effective and decentralised payment system. According to a report by Chinalysis, Nigeria’s volume of crypto transactions grew 9% year-over-year to $56.7 billion between July 2022 and June 2023. In Uganda, crypto use is smaller but growing fast, rising 245% to $1.6 billion in the same period. Internet and smartphone penetration has contributed to the adoption of cryptocurrencies as a form of payment across Africa. 

 

One of the key drivers of economic growth is a swift and efficient payment system-even more so, as it creates trust between trading partners. Aside from instant payment and settlement, cryptocurrencies are cheaper and more effective for cross-border payment. This is due to its decentralised system based on blockchain technology. Payments can be sent and received at either very low cost or none at all, as fees are based on the amount of data sent or the wallet used. Traditional payments on the other hand often involve several intermediary institutions, leading to high transaction charges.

Decentralisation of crypto currency from the financial system is also crucial to the financial inclusion of rural and remote dwellers who do not have access to financial services. In 2021, Forbes reported Africa has the highest adoption of Bitcoin globally. This feast is attributed to the works of different organisations like Machankura, a custodian service wallet committed to removing language barriers by translating Bitcoin literature into the local African languages. They have also developed a less data-dependent way of transaction cryptocurrencies. This decentralised nature of cryptocurrencies opens doors for small and medium-sized enterprises (SMEs) and informal traders to participate actively in intra-African trade, thereby promoting inclusive economic growth.

Cryptocurrency also offers trade financing in a more accessible and affordable way than the traditional banking system. Through blockchain-based smart contracts, cryptocurrencies can facilitate secure and transparent trade financing transactions across the continent. The smart contracts are designed to fulfil the trade requirement before the release of funds, thereby reducing the risk of non-payment. This helps promote transparency and trust which is crucial in fostering trade relationships. Transactions consummated on cryptocurrency are recorded on a public ledger. This helps create an audit trail to minimise corruption and fraud.

Despite the promise of cryptocurrencies to bolster intra-African trade, volatility remains a huge concern in trading with cryptocurrencies. Cryptocurrencies are subject to fluctuation in value, often influenced by supply and demand over a short period. This poses a serious risk to small businesses and growth.

Also, a lot of African countries are still lacking in developing a robust regulatory framework for the adoption of cryptocurrencies. An unregulated cryptocurrency adoption raises valid concerns about terrorism financing, money laundering and tax remittance to the government. In June 2023, the European Union instituted the Market in Crypto Assets Regulation (MiCA)- a uniform market rule for all crypto assets. MiCA provides a regulatory framework for all crypto assets that are not currently captured by the existing financial system regulation. Rather than an outright ban on cryptocurrency trading or inconsistencies in some instances, African countries through the African Union can institute a similar regulatory approach for all cryptocurrency trading across the continent. A unified regulatory framework across the continent will repose the confidence of consumers and investors.

The adoption of cryptocurrencies holds significant potential in strengthening intra-African trade and fostering economic growth. However, crucial concerns on regulation must be duly addressed to unlock the immense economic opportunities and sustainable development across the continent.

Oluwatobi Ojo is a Nigerian writer. You can reach him via email, oluwatobimojo@gmail.com