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Digital currency use surges in Africa as providers push for laws to protect clients

Beatrice Wanjiru Wambugu
Betty’s Place Restaurant proprietor Beatrice Wanjiru Wambugu. PHOTO | NICHOLAS KOMU 

When a fourth-year student at Uganda’s Makerere University committed suicide last month after losing Sh500,000 from his digital wallet in what police confirmed to be a cryptocurrency scam, Africa’s fears to endorse digital currencies and blockchain technology were heightened.

Though faced with much controversy, complexity and uncertainty, blockchain and cryptos will keep disrupting the finance sector but experts say the right knowledge needs to be imparted on millions of African youth who ride on the get-rich-quick mentality.

“It is much likely that the Kampala student used a hot wallet that can be hacked. He did not know that the use of a ‘cold’ wallet’ gives the user tight security against the unauthorised transfer of cryptos or tokens,” says George Mwakisha, business and investment manager at Kubitx, a crypto acceleration firm.

With cold storage, the digital wallet is stored on a platform that is not connected to the Internet, protecting the wallet from unauthorised access, cyber hacks, and other vulnerabilities that a system connected to the Internet (hot wallet) is susceptible to.

A Citibank report ranks Kenya among African countries holding the highest amount of cryptos that translate to 2.3 percent of gross domestic product.

When this writer visited Betty’s Place, a restaurant in Nyeri town that has been accepting payments in Bitcoin, Bitcoin Cash and Dash for the past one year, he found an extremely huge misunderstanding of the meaning of cryptos among Kenyans.

Ms Beatrice Wanjiru, the proprietor, who admits losing Sh500,000 to a crypto scam during the initial years of Bitcoin adoption in Kenya, says most local customers think that Bitcoin is a type of food on the menu.

“A good number of customers think that there is some delicious food we sell called Bitcoin. Others avoid the hotel because they believe is for people who eat Bitcoins, which to them, are expensive,” the mother of two narrated.

She adds that some elite customers also have a crypto phobia, labelling Bitcoins as demonic.

“But for the past one year, there has been a gradual surge in the number of customers who pay via crypto platforms. Some come from as far as Germany and Canada to witness crypto payments in Africa,” said the 31-year-old.

Amos Kinuthia, founder of DLBRT, a Blockchain and crypto education start-up, demonstrated the process of paying via Bitcoin to a team of graduands, said no telco network is needed.

“You only need a phone without a SIM card but with a Wi-Fi connection. The Bitcoin Blockchain network acts as the mobile network in money transfers.

“You have to download a Blockchain wallet from PlayStore, which comes with a Bitcoin address to use. You can now get Bitcoins from a friend or crypto exchange platform. But how?”

“You will have to visit an online exchange point and select an authentic seller offering Bitcoins. The seller will transfer the equivalent Bitcoins for the amount you want, say Sh10,000. Payment mode can be bank transfer, PayPal or mobile money.”

Bitcoins are then credited to your account. However, Safaricom’s M-Pesa has been shooting down exchanges for cryptos recently. Bitpesa and Pesamill have been affected.

“To purchase using Bitcoins, you start by getting the Bitcoin address of the seller and then send Bitcoins whose value is equivalent to the goods you want to buy. You key in a description and click ‘send’,” he expounds.

This transaction takes between a few seconds to up to one hour depending on the fees set and the network activity.

“But with the Blockchain wallet, it takes between 10 to 60 seconds to complete the transaction. The transaction fee is between 0.1 percent and three percent of the value being transacted. The faster the transaction, the higher the fee.”

Ms Wanjiru said she receives up to 20 crypto payments per month for food and drinks. She now seeks to create more awareness “to make Betty’s Place a restaurant for the world, and broaden the customer base.”

They help make transactions more secure by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the escrow entity.

The Central Bank of Kenya (CBK) has warned Kenyans several times against trading in unregulated digital currencies. “CBK reiterates that Bitcoin and similar products are not legal tender. The public should, therefore, desist from transacting in them,” a statement on its website reads.

Uganda’s central bank is also sceptical about investing in cryptos, stating that trusting Bitcoin and other digital currencies “is taking a risk in the financial space where there is neither investor protection nor regulatory purview.”

The Bank of Tanzania (BoT) has advised citizens to act with extreme caution when trading in cryptos.

“BoT considers the recent surge in the prices of cryptocurrencies to be driven by speculation. The risk of a sharp reduction in prices is high. Investors should be aware that they risk losing all their capital,” says BoT assistant manager Abdul Dolla.

The case remains the same for fiat currency regulators in Nigeria, South Africa, Zimbabwe and Malawi.

However, Rwanda’s central bank is ‘seriously’ considering the possibility of creating its own digital currency. The country is going through studies conducted in Canada, Netherlands and Singapore, with the ultimate goal of making transactions more efficient and boost economic growth.

As many as seven African countries have cryptocurrencies banned outright while 10 countries are yet to take an official stance on it let alone formulate laws and policies that will enhance its growth.

Kubitx’s Ghanaian chief executive Eric Annan told the Business Daily that efforts to clamp down cryptocurrencies have only yielded a Streisand effect as public interest continues to soar.

“Exchanges in Africa are now factoring in the unique complexities of the African market and creating products to address the problems of tax governance, systemic volatility and insecurity that is associated with African fiat currencies,” he said.

The cautions by central banks have not deterred crypto traders in Kenya, Uganda, Tanzania, Ghana, Nigeria, Benin, South Africa, Liberia and Burkina Faso from transacting.

However, chief executive of global peer-to-peer Bitcoin marketplace Paxful, Ray Youssef, told the Business Daily that such scepticism is acceptable and welcome as Africa faces teething problems with the advent of the Fourth Industrial Revolution.

“When traders get scammed, governments get scared. But such fraud arises from the lack of awareness on the part of users. Regulators should help to educate the masses about safe crypto trade,” he said.

Citing cryptocurrencies as a facilitator of improving social goods, easing payments across borders, boosting e-commerce, preserving wealth and contributing to financial inclusion, Mr Youssef calls for government-backed regulations to protect users.

“I don’t blame them for being cautious. African countries will have to enact solid data protection laws to shield users against cybercrime. For instance, Paxful has more than three million traders with six-figure transactions across Africa. This is the rate of crypto adoption.”

According to him, escrow services help a great deal to prevent crypto fraud and sees cryptos as the future of global exchange and trade.

“Avoid risking your money in cryptos, get the right education first,” he advises.

“If you are selling Bitcoins to a user paying using M-Pesa, the Bitcoins are held for up to 15 minutes to validate the transaction. If the M-Pesa money is not received within that time, the transaction is cancelled. For those who steal from unsuspecting buyers, their wallets are frozen and money reversed in less than five minutes,” says Joshua Mutisya, co-founder of crypto solutions platform Totalcoin.

Escrows are very crucial in the case of a transaction where parties who are strangers are involved and a certain number of obligations need to be fulfilled before a payment is released.

To curb the volatility in the trade of cryptos, stablecoins such as Maker, Tether, Paxos Standard, USD Coin and True USD have been developed but they have not come without controversies.

Tether, for instance, has been accused of manipulating the prices of key cryptocurrencies such as Bitcoin, Ethereum and Ripple during the crypto boom of 2017.

Some researchers claimed that half of Bitcoin’s price in December of that year surged due to the stablecoin.

Stablecoins give owners a safe place to store their assets whenever uncertainty wrecks the global crypto landscape.

Users can quickly convert from unpegged cryptos to stablecoins when they are worried about the future of the markets. This eliminates the stress of going back to a fiat currency.

As a result, Africa’s interest in Bitcoin remains high as 15 West African states now lay the ground for a robust plan to adopt a single fiat currency named Eco. The Economic Community for West African States (Ecowas) is hoping to ride on the new currency to boost regional trade in 2020.

And despite Kenya’s central bank caution, the Distributed Ledger Technologies and Artificial Intelligence task force report presented to the ICT ministry in July recommends the creation of a digital asset framework to enable citizens raise funds through Initial Coin Offers (ICOs) as a strategy to help local investors put their resources in cryptocurrencies underpinned by the utility of local resources.

The task force’s Chairman, Dr Bitange Ndemo, says cryptocurrency platforms make purchases faster and more affordable.

“Kenyans are now using cryptos to buy vehicles from abroad. There is a big capacity for their use in Kenya, especially for citizens in the diaspora who wish to send cash to their families in the rural areas,” he says.

Dr Ndemo adds that the use of digital currencies is a real threat to commercial banks since, just like during the early stages of the Internet revolution, nobody will be able to stop it.

“Early challenges that will be experienced will be the creation of cash out points in remote areas, where people can withdraw money sent from any part of the world.”

hegemonic hold

But more hurdles exist in mobile money integration, scalability, transaction speed, interoperability of different ledgers, data privacy and network security, all of which presents a new set of formidable roadblocks preventing cryptocurrency growth and adoption in Africa.

Cryptos have been unable to unlock the hegemonic hold of the mobile money industry even with benefits such as convenience, simplicity and efficiency, with some corporates now doubting the immutability nature of blockchain technology.

But optimism is in policymakers’ minds across the continent, that eventually, this technology will gain momentum and fuel inclusive economic growth.

“Even with all of these problems the future is bright still. African start-ups have been leveraging blockchain technology into making secure and transparent payment solutions.

“Cryptocurrency’s battle for dominance will not only help central banks in the continent improve and reform but it’s also advantageous for the crypto space and will help catalyse new ideas and innovations,” remarks Mr Annan.

However, the shackles of fraud, ignorance and scepticism in Africa’s crypto space, if not addressed will keep hurting the mass adoption of Blockchain, the technology behind cryptos, and to a big extent cause the continent to lose out on Industry 4.0 as other continents advance their economies.

“An in-depth look at emerging technologies like Blockchain, cloud computing, Internet of Things, data science, machine learning and 3D printing reveals that these technologies will benefit Africa more than any other continent,” says Timothy Oriedo, founder of Big Data firm Predictive Analytics.