One of the most compelling arguments for digital currency adoption in Africa is its potential to foster financial inclusion. Africa is home to some of the fastest-growing economies in the world, yet it remains one of the most underbanked regions globally. According to the World Bank, nearly 57% of adults in Sub-Saharan Africa remain unbanked as of 2021.
This financial exclusion hampers economic development and perpetuates poverty. Digital currencies, particularly Central Bank Digital Currencies (CBDCs), have the potential to bridge this gap by providing accessible, affordable, and secure financial services to millions of people who have been left out of the traditional banking system.
Digital currencies, especially those facilitated by mobile technology, offer an alternative means for individuals to engage in financial activities without the need for a conventional bank account. For instance, M-Pesa, a mobile money platform, has already transformed the financial landscape in Kenya, where it accounts for 50% of the country’s GDP in terms of transactions processed.
The World Economic Forum (WEF) estimates that blockchain technology, which underpins most digital currencies, could add $1.76 trillion to the global economy by 2030. For Africa, where informal economies constitute up to 85% of employment, digital currencies could bring significant benefits by formalising transactions, thus broadening the tax base and increasing government revenue.
Moreover, digital currencies could enhance the efficiency of cross-border transactions. Africa is home to some of the highest remittance costs globally, with an average fee of 8.72% for sending $200, as reported by the World Bank in 2023. Digital currencies, particularly stablecoins or central bank digital currencies (CBDCs), could reduce these costs significantly, making remittances more affordable for millions of African households reliant on money sent from abroad.
Another area where digital currencies could have a transformative impact is in trade and commerce. The African Continental Free Trade Area (AfCFTA), which aims to create a single market for goods and services across 54 countries, could benefit immensely from a pan-African digital currency. Such a currency would streamline trade by eliminating the need for currency conversions, thus reducing transaction costs and exchange rate volatility. According to the United Nations Economic Commission for Africa (UNECA), the AfCFTA could boost intra-African trade by 52% by 2024 if trade barriers are reduced—digital currency adoption could play a critical role in achieving this target.
The Pitfalls and Challenges of Digital Currency Adoption
One of the primary concerns is the issue of financial stability. Digital currencies, particularly cryptocurrencies like Bitcoin and Ethereum, are known for their volatility. The Central Bank of Nigeria, for instance, banned cryptocurrency transactions in 2021, citing concerns over market volatility and its potential to destabilize the economy. While stablecoins and CBDCs offer more stability, the risk of rapid capital flight remains a concern, especially in countries with fragile economies.
Another significant challenge is the lack of infrastructure and digital literacy. According to the International Telecommunication Union (ITU), as of 2022, only 33% of Sub-Saharan Africa’s population had access to the internet. This digital divide poses a considerable barrier to widespread digital currency adoption. In addition, digital literacy remains low in many parts of the continent, with a report by the African Union (AU) in 2023 highlighting that only 30% of the population has the necessary skills to use digital financial services effectively.
Regulatory frameworks also present a hurdle to digital currency adoption. While some African countries, such as South Africa and Kenya, have made strides in developing regulations for digital currencies, many others lack the necessary legal and regulatory frameworks. The absence of clear regulations creates uncertainty for investors and could lead to increased risks of fraud and financial crime. According to a 2022 report by the Financial Action Task Force (FATF), Africa accounted for 5% of global cryptocurrency-related crime, highlighting the need for robust regulatory measures.
To harness the benefits of digital currencies while mitigating their risks, African governments must explore the potential of CBDCs as a more stable and controlled form of digital currency. Several African countries are already taking steps in this direction. For instance, the Central Bank of Nigeria launched the eNaira in 2021, becoming the first African nation to issue a digital currency. The success of such initiatives could provide a model for other countries on the continent.
